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New Revenue: Raise Fees, Lower Commissions

Looking for new revenue? Consider implementing a fee structure that allows you to control cost creep, improve your bottom line and keep homeowners happy.


This is the third piece in a three-part series covering New Revenue: Innovative Revenue Models from the Vacation Rental Industry and Beyond. This series is based on the successful session at the 2014 VRMA Eastern Seminar with the same title, and will also be provided at the Western Seminar next week. The first piece in the series covered how to grow your inventory. Part two took a deeper look at how to expand your services beyond your inventory. This piece will cover how to grow what you get from your inventory by raising fees and lowering commissions.

 
 


Why We Like Fees 

It is better if 50-70% of revenue comes from fees (where you keep 100% of the revenue) and a smaller portion comes from commissions (where you keep just a percent). Fees:
  • Insulate you from seasonal or ad hoc discounting;
  • Remove new revenue initiatives from the homeowner’s radar ;
  • Position you to take all or just a portion of a modest rent increase.

The Power of Fees 

Assume that your company is able to increase one or more fees by $50 per booking. Multiply your company’s last year’s reservations by $50 to project the potential new revenue/profit.
  • 1,000 reservations x $50 = $50,000
  • 2,000 reservations x $50 = $100,000
  • 4,000 reservations x $50 = $200,000
If, for example, your typical rent is $1,650, $50 in new fees nudges rent to $1,700, just 3%. To gain the the same $50 through a 20% commission, you would have to raise rent to $1, 900, driving some renters away.

Why Lower Commissions? 
We might not consider lowering commissions if we could increase fees without losing a homeowner or a renter.  But commission reductions are effective where:
  • Competitors’ pricing precludes us from asking more money from renters this year;
  • The homeowner won’t tolerate reduction in her annual revenue;
  • We are positioning the company to grow profits in the future.
  • You want to advertise a lower nominal commission rate than competitors.

What Kind of Fees Are We Talking About? 

They can be any of the one hundred or so common fees that you choose. Fees are pricing psychology: an indirect way of increasing your effective commission rate.

Who Should Pay Fees?
To maximize your options, fees should be paid by the renter.  When they are later increased, you are effectively raising the rent without reducing the homeowner’s revenue.

Should Fees be Visible or Buried in the Rent? 
Mostly buried. We label them “fees” so the homeowner (1) knows they come off the top before the commission split, and (2) preauthorizes periodic increases.

What Fees Should be Separate Line Items?
Renters don’t like last-minute fees but grudgingly pay them. The key is to prevent the advertised rent from appearing higher than a competitor’s rent.

Guidelines
The basic guidelines in changing fee structure are these:
  • Your listing agreement with homeowners should specify that:
    • Some fees will be buried in the advertised rent and some won’t;
    • All fees are deemed to be paid by the renter, not the homeowner.
  • Balance the fee increases and commission decrease to insure that, during year one, everyone (renters, homeowner and manager) comes out exactly as they did the year before.
  • Benefits begin in year two, when fee and rent increases can be made in lock step.

Example:
  • Current year rent is $1,000. You take $200 off the top as fee income, leaving $800 for the commission split.  For a 20% commission, your split is $160. Your total take is $360.
  • Next year, you increase fees by $50 to $250, leaving $750 for the commission split. To achieve your 2014 revenue splits, you only need $110 from commissions, so you lower the commission to 14.6%.  You, the homeowner, and the renter all end up as in the prior year, EXCEPT:
    • The homeowner thinks your lower commissions are finally fair.
    • He knows fees are paid by the renter, who should bear the burden of expense creep.
    • He's authorized you to increase these fees periodically to cover cost creep.
    • You are now poised to raise fees every year without the homeowner's involvement.
    • You are now poised to divert any portion of a rent increase into a fee (which you keep 100%) before allocating the rest to a rent increase (of which you keep just 14.6%).
    • If you need another $3 per reservation for cleaning, you are not likely to lose a renter just because you boosted the rent to $1,003.

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