Vacation Rental Business Models
I am into my 3rd year of being involved in the Vacation Rental industry through my web site, National Event Rental. I recently relaunched the site with a revamped business model, made after studying some upstart sites and their revenue sources. This post is intended to explain the major types of vacation rental business models, and the positives and negatives of each.
1. Listing Fee
First is the classic, traditional “home owner pays an upfront advertising/listing fee.” This was the original method, used by the HomeAway family of sites, Expedia’s Flipkey, and many of the other sites, both worldwide and in niche markets. The good thing is that this is the established, safe model for revenue. The home owner pays an annual or monthly fee to have their home listed, and the site is supposed help increase the exposure of that property. The company gets its money upfront, and they can show the home owners an ROI with just a couple of inquiries and rentals through them. Additional revenue typically comes from add-ons like extra photo fees or features listings. Potential renters are free to browse and contact the owners without paying a fee.
There are a few downsides. The first is that for popular sites and home owners in competitive markets, their listing could get pushed down low in the results. Often this requires the home owner to put in a lot of extra effort to make their listing stand out among their competitors. This can be done through professional and updated photos, carefully written descriptions and titles for SEO rankings, or aggressive pricing. Next, with no charge for renters to contact the owners, there is a higher potential for spam and scams. The owners need to use their own judgement on whether the lead is quality or not, and listing on popular sites can often increase the frequency of this unwanted correspondence. Another downside is that revenue growth depends solely on increasing the listing fees or increasing the number of listings. Depending on the cost per acquisition of each subscriber, the VR site will need to ensure repeat customers just to maintain their revenue levels.
2. Renter fees
A relatively new business model has gained in popularity over the past 2 years: Allowing the owner to list for free, but charging the renter a “booking fee”, taken as a percentage of the rent paid to the owner, typically around 10%. Sites such as AirBnB, Roomorama, and IStopOver all use this model. The greatest advantage is that by not charging owners to list, these companies can gain lots of inventory of properties in a relatively short time. At no cost, there is no financial risk to the owners, and they get their full asking price since the renter is paying a percent above the listed rent. Also, these sites have payment systems set up that allows them to collect the rent and pay the owner after the stay is completed. This money is considered the “float”, because the companies can invest, or float, this money however they want before they need to pay it back. Depending on the amount handled and the time frame, this can be extremely lucrative if invested correctly. The model has a very high growth potential since revenue comes from additional bookings, not directly from additional listings. Plus, when owners increase their charge, the companies gain more revenue.
As with the first business model, this one has pitfalls, too. If the float is invested poorly, whether into the company or through external strategies, the company could find itself short of cash when time to pay the owner. Also, renters may balk at paying an additional fee on top of the rent and circumvent the site’s payment system. This is probably not an issue for lower priced stays, maybe under $100/night, but a 10% charge on a $1000/night place would significantly increase the cost for the renter. Even if the owner takes this into account and lowers their fee, the renter has no way of knowing this and psychologically will be taken aback by this charge. Another drawback is the potential liability if these companies do not hold real estate licenses. Most states require that any party that handles monetary transactions between a renter and owner of property not their own be licensed in that state. Since this model charges a percent of rent, and has a hand in the money transfer, the risk for legal issues is vastly increased.
3. Third party fees
The final business model that I’m going to cover is the third party fee system. In this method, renters and owners can use the site for free, and the company makes money through third parties, such as advertising or selling other services. Craigslist is a good example, where they only charge select cities and select categories fees for listing. Vast is another example of a VR site that uses this model, gaining the majority of their revenue through advertising.
This model’s main advantages are that inventory can quickly build and renters will not be scared off by a booking fee. The biggest drawback is that if the revenue is coming from a source besides the vacation rental listings, the company has to be extremely good at 2 products, the revenue source and the VR listings. If little effort is spent on the VR listings, owners and renters will not find the site useful and move elsewhere (especially given the free price, which can create a lack of loyalty). Likewise, if the revenue source is lacking in effort, users will not use it and hence, no revenue.
Conclusion
It may appear that revenue model 3 is the worst of the bunch, but my opinion is that is the best model if done correctly, and where the vacation rental industry is headed. Chris Anderson’s recent book, “Free”, theorizes that prices of products eventually fall to the marginal cost when there is competition. Therefore, products with zero marginal cost, meaning that there is zero cost to create an additional unit, will eventually be free. Internet sites have zero marginal cost due to additional memory being virtually free. Vacation rental sites fall in this category, since each additional listing costs nothing in terms of additional production. There are already a handful of sites that offer free listings, and now FlipKey, an Expedia company, is offering monthly listings at $1.99 through the end of 2009. Their revenue can clearly be made on Expedia’s family of products, such as flights and car rentals. Other companies can get commissions off of ticket sales to concerts or sporting events. There are also time savers that can be created around the VR industry for owners and renters that they would be willing to pay for. This is the approach that National Event Rental is taking; we are working on some products that will help users save time and effort when putting their home up for rent.
Overall, each business model has some staying power, especially with the great resources behind some of the sites. I personally feel that the listing fee model will evolve into a third party fee model, due to increased competition and lack of lock in. If an owner can get the same amount of inquiries for half the price, they will move their listing. A listing fee company can use compelling back end software for the users to create lock in, but then the users are really paying for that software and its convenient features, not for the listing. The renter fee model is great for a low end disruption, but I don’t believe it can catch on with higher priced rentals, or stays of more than a couple days, due to the additional fees the renters would pay. The “third party fee” system, on the other hand, opens up the possibilities to be creative with additional products and services. People travel and rent out private homes for many reasons, and tying in time savers, information, and ancillary products could be where the most opportunity lies in the vacation rental industry.