How to Apply Revenue Management for Apartments and Vacation Rentals
Revenue Management for Apartments and Vacation Rental Businesses
By Remko West, COO & co-founder at Xotels
In our last post, we went over some of the successes and challenges of revenue management in the apartment rental business. We came up with a number of elements that we believe need to be applied to take revenue management to the next level.
Horizontal Analysis vs. Vertical Analysis
Given that you can sell each apartment only once, there's simply no solid way to measure pick-up accurately. The view on capacity has to be adjusted from a vertical point of view (on day X I am selling fast, therefore I can raise my price), to a more horizontal view (this apartment is selling faster for period X, i.e. the month of December, than others).
Obviously, if you have a lot of apartments in a single area, you are able to measure pace in more depth, however it is crucial that the horizontal analysis is adapted effectively. You simply can't afford to have low sales on specific units, or be fully booked too early and always for better performing units.
As a result of the horizontal analysis, it's a must to develop methods to calculate:
- Pick-up per booking window per individual apartment
- Lowest performers within a group of apartments
- Highest performers in terms of percentage of availability sold
Hence this is an occupancy by apartment exercise: apartments that are too high in occupancy are likely priced too low. And apartments that are too low in occupancy are possibly priced too high.
Your reporting should be designed to keep control of the concrete mass of all apartments, by managing your extremes in detail. By getting better at yielding whilst improving your underperformers and overperformers consistently, your overall performance will improve. Via strategic, longer term price adjustments for specific underperformers and overperformers you will create a healthy format that reduces the extremes.
And not unimportantly all owners will hopefully remain happier. If apartments overperform or underperform, it's not unlikely that you'll be challenged frequently by unhappy owners.
Leisure vs. Business
Standalone apartments in cities tend to have solid leisure demand, but far less business demand. This may change since the apartment rental industry has increasingly received mainstream attention. In addition, multiple industry players have made moves to actively sell towards a corporate clientele.
The movement is very similar to what happened in the OTA industry. And most OTA's are significant players in the corporate travel playfield nowadays.
The impact for revenue management is obvious: leisure events and leisure periods offer more opportunity for revenue maximization than periods of corporate demand.
Events will influence demand. The question often is which event truly impacts the demand for your property to the extent that it creates a yielding opportunity. For most apartment rentals I have seen, leisure demand has more impact on opportunities than business demand. This still does not make it easy to understand which events will impact you. AirDNA is possibly one of the better solutions on the market for apartment rentals to understand when demand is up and when it's down. Solutions like this also make it easier to understand basic demand fluctuations (week, weekend, holidays vs corporate seasons, true low seasons and big events.
Availability Management & Reporting
This is an additional challenge and I have not seen systems yet, that have a solid solution for this.
Units made available for sale represent a unique value. When units are not available for sale, in the hotel industry rooms can simply be put out of order, and these rooms will be taken out of capacity for sales. Most hotel systems do not have adjusted reporting to take unavailable rooms into consideration, and all reporting is done on full capacity.
Different story when looking at an individual apartment. You can't measure an apartment's performance as in revenue per available unit well if this availability value is not taken into consideration correctly.
Hence availability needs to have 3 statuses:
- Capacity (and appear in reporting if a new apartment is added to a portfolio)
- Open for sale, or manually closed
- In many destinations, your inventory can only be made available for sale for a maximum amount of days per year
- On top, owners will often block availability for a multitude of reasons
- And booked or not booked
These 3 items must reflect in your actual availability - in order to be able to report correctly.
Sold or not sold vs. only those rooms made available, is another parameter required in reporting.
Restriction Management Automation
Restriction management is surging in importance. Plenty of apartment owners have been slapped with sky-high fines for illegally renting apartments when not meeting the legal restrictions.
In plenty of destinations, your holiday apartment inventory can only be made available for sale for a maximum of 60 days or 90 days per year. Berlin, Barcelona and London are examples where restrictions are applicable by law on how many days you can rent an apartment out per year.
This means that you need to have automated sales restrictions that measure your sold rooms versus your rooms still available for sale.
Once you approach that legal limit of i.e. 90 days, a maximum length of stay restriction should apply automatically when guests are looking for more nights than you are legally allowed to book. Hence this calls for maximum length of stay restrictions to protect apartment owners.
Another important element is that minimum stay restrictions are regularly applied for cost control reasons. Cleaning cost, key control processes (check-in and check-out) and finance can be quite hefty due to the number of detail and exceptional handlings in the process.
To ensure a healthy margin many apartment management companies resort to minimum length of stay restrictions.
And don't underestimate the consequences of having such a minimum length of stay policy.
If guests can only book for 3 nights or more, and gap in available room nights between 2 stays of 2 nights and 1 night is no longer bookable. If restrictions can be lifted here in an automated fashion, the impact on revenue potential is significant.
Multiple Rate Levels
Ideally pricing systems allow you to apply multiple rate levels for a single apartment. This allows for great solutions for the difficulty of cost control vs. length of stay. Take the following example into consideration:
- Fixed cost per night: €100
- Cost for check in, cleaning & check out: €50
- Price 1 night, standalone, has to be 151 or higher.
- Price with a length of stay restriction of 3 nights can be as low as €117 per night, and still cover all costs.
This can only be implemented if multiple rate levels can be applied per apartment for different lengths of stays.
In similar fashion you could then also start playing with for example:
- Per person add on pricing
- Extra beds
- Packaged elements
- Prepaid savings vs. pay upon arrival
And that's just providing you with a couple of examples.
Revenue Management vs Events and Legislation
With legislation rapidly increasing pressure on maximum sales per year, ensuring owners provide availability for spaces that are only temporarily available, is jumping to the key issues to solve for aggregators.
The obvious solution is to provide an extranet where owners provide availability as they deem correct and feasible.
The basic functionalities should be:
- Performance Reporting
- Smart calendars for availability, rate and restriction management
- Opportunity identifiers for events
- A regular push is required towards owners to ensure they provide availability during the high demand periods. Not only is this lucrative for owners, it's also highly necessary against the light of legislation kicking in hard in many destinations, restricting availability in so many destinations
As it's impossible to provide training to relatively inexperienced individual property owners, an intuitive extranet is crucial.
Big players are best approachable in an organized fashion. Hence as aggregator you must have a solid onboarding system. Whenever you add an apartment, you need to be able to get it online onto different sales channels. Efficiency in terms of content creation, content management and sales channel loading is paramount here. Procedures working out all of the nitty gritty requirements are unavoidable.
Said easily. Establish a base price and work from there. Add a minimum rate and a maximum sell rates. Done.
Yield from that base rate, take that rate up and down. You make large quantities of apartments yieldable on a large scale and in groups. Yield based on actual sales, and sales trends.
This probably does not sound that crazy to you. The real question is how to establish a base rate. We have come to simple grids where a number of factors play a role, such as:
- Location / borough
- Review score (if available)
- Number of rooms and max. number of guests
- Direct competitors (if clear), check on the major OTA's like booking.com and Airbnb
- In room amenities
The first 4 elements are the core of the exercise. Based on this you will create a starting rate. It's never right. Fortunately this is common practice in yielding. We know our price is never 100% right. We have to sell at the wrong rates and we must test in order to figure out which test is actually right.
Ensure you also understand your cost of business. Both your fixed and flexible costs may influence how far you are willing to go moving prices up or down of your property. And don't forget to add your cost of sale in your cost picture. Commissions payable to third parties for marketing and selling your property can significantly impact your flexibility.
RevPAU - Revenue per Available Unit
Measuring property performance I tend to do via a hybrid performance indicator.
This because not every apartment is available for sale throughout the year, I measure revenue performance by combining occupancy percentage and average rates per number of days an apartment is available for sale.
This formula allows you to work with a fast expanding portfolio of apartments, but also allows to deal with periods that apartments are not being made available for sales, and gives a realistic and comparable figure to measure performance.
Need help with the implementation of your revenue management strategy? Feel free to reach out!
Remko West @ Xotels