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Pursuit of Profit: When are Call Centers Profitable?

If the Internet and rent by owner sites have taught us anything, it is the importance of responding promptly to renter inquiries. Call centers allow us to catch after-hours or overflow calls without having to add staff. The challenge is in understanding when they increase or decrease profit.


Illustration: three different rental managers are missing calls and worry that they are losing rentals. For purposes of this illustration, we will use the following sample numbers:
  • They are being asked to pay a call center 7.5% of each reservation dollar booked.
  • For a $5000 annual investment, the call center promises to generate at least $50k in bookings.



Would this be a good investment or bad? The ROI (return on investment) question is this: How much will each need to generate in new sales to break even or make money? The answer depends on:
  • Who pays the call center booking fee;
  • The amount of fees each company earns on top of the commission split.
  • Whether each company can offset the cost by eliminating traditional marketing expense.


Lets look more closely at the three rental managers. For purposes of this example, each charges a sample 20% commission, but:
  • Manager A imposes no add on fees, has correspondingly lower profit margins, and will have to pay call center costs out of his own pocket, with no contribution from homeowners or renters.
  • Manager B does charge fees, increasing his profit margin. He will pay call center costs himself.
  • Manager C charges fees and takes the call center costs off the top before the commission split.

Table 1, below, illustrates how much profit each company earned on a single reservation before it was confronted with Call Center costs.

Lets see how each manager fares in the face of this sample sales pitch: If you spend $5,000 on our call center, we can generate $50,000 in new bookings your ROI (rate of return) will be 10 times your investment!

For a $5,000 expenditure, all managers would lose money with just $50,000 in new bookings.
  • Manager A could never break even: his net profit per booking is just 2% of sales ($33) but his cost for each call center reservation is 7.5% of sales ($124).
  • Although Manager B earns twice as much as manager A, his per reservation profit of $79 still falls short of the $124 call center booking fee. He can never earn a profit.
  • Manager C is the only one who can make money because she deducts the $124 cost of the call center booking off the top before taking her fees and commission split. Manager C effectively contributes only $24.75 (20% or her sample commission split) of each $124 call center fee. But to break even on a $5000 call center expenditure, she too would lose money with just $50,000 in new sales--her break-even requirement is $104,167. (See below for break-even calculations.)

For Manager C, the reality is even more sobering. She has no choice but to give the call center access to homes that she could certainly book on her own without paying a fee. While spending $24.75 may generate $75.49 on one new reservation (ROI of 305), she could lose $24.75 on each of the next nine bookings taken by the call center (a total of $223) that she could have booked herself:
  • For good homes, unanswered overflow or after hours calls are often offset by bookings to other renters who manage to get through during normal hours.
  • The proof is in year-to-year statistics. Ask around. Try to find situations in which a first-year user of a call center can brag that his year-to-year bookings increased by the number of bookings taken by the call center.
  • Managers in ski resorts who routinely rely on central reservations should strive to maximize direct bookings.


To summarize, third-party booking fees can generate incremental profit under specific circumstances:
  • Where the booking fees are paid by the homeowner;
  • Where they are paid before the company's commission;
  • Where companies reduce other costs by replacing traditional in-house expenses such as the cost of hiring additional reservations and front desk staff, staffing longer, etc. with same or lower costing call center partners such as one that does not charge hefty commissions.
  • Where they generate NEW revenue ONLY for reservations the company would not make itself

Importance of Fees. This illustrates why every manager should have fee revenue in addition to commission revenue.

When are call centers profitable?I f you do want to utilize a third party call center for after-hours and overflow calls, find one that has a fee structure such as a per minute model which generally works out better for most vacation rental companies that traditionally have a much higher average revenue per booking than a hotel would have. Why should your call center be paid more to book a one-week stay for $10,000 vs. $1,000 when it takes the same amount of talk time?

When Do We Care? Call centers can generate new profits, and there are compelling justifications for losing money on a call center, including the following:
  • Where failure to convert after hours or overflow calls will generate vacancies, and
  • Where it is financially more feasible to use a call center than to add staff, which might be the case for a company in a costly labor market that works with a call center that bills on a reasonable perminute fee structure.


ROI: Whether you expect to generate profit from your call center, or subsidize it, it is important to
calculate ROI.
ROI = (net profit from new revenue divided by cost) x 100: if an expenditure of $5,000 generates new sales of $134,000 and net profit of $6,400, ROI is 128 ($6,400 / $5,000 = 1.28 x 100).

Where ROI measures recurring revenue, ROI need only beat the current payout on alternative investments (ROI of 40 equals an annual return on your investment of 40%).
  • Where ROI measures returns on onetime payout, a ROI of 100 indicates that your investment broke even but didn't generate new revenue (ROI of 300 would triple the investment).

Other Takeaways
Booking Fees. Too many rental managers still pay call center charges entirely by themselves, not realizing that call center costs are essentially booking fees too huge to be absorbed by the manager.

Who Should Pay? Try to pass the cost on the homeowner or renter (where you contribute a small portion).

Only New Bookings Help when Pursuing ROI
  • Whether a call center handles 10% of a manager's bookings or 20%, many of the vacancies filled by the call center would have been filled anyway by the manager herself.
  • The fact that a third party booked a home does not mean the home would have stayed vacant.
  • Few call center clients experience year to year reservation growth that remotely approaches the number of reservations fielded by a call center.

Conclusion A rental manager's profit turns first and foremost on the number and quality of his inventory. To attract and retain good inventory, it is critical to book well enough to satisfy homeowners. Your first goal is to create internal systems that maximize your company's direct bookings. Where you believe a call center helps retain and grow inventory, ROI may not be your most important consideration. But you must understand ROI to consciously weigh the financial trade offs as you make these decisions.

Comments

 
By: Chad
On: 09/24/2014 21:35:03
Best for call center companies

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