OTAs are forming a consensus on how vacation rental managers should operate, but what if they are wrong?
The vacation rental industry is finding itself at yet another turning point in its history. Online distribution channels have consolidated, with four major players taking the lead: Airbnb, Priceline-owned Booking.com, Expedia-owned HomeAway (and VRBO.com), and TripAdvisor. Phocuswright’s 2016 study “A Market Transformed: Private Accommodation in the U.S.” reported that “while property management websites held the advantage as recently as 2013 [just under 60 percent], online intermediaries will capture 63 percent of the online market in 2016, rising to 70 percent by 2018.”
These consolidated OTAs are testing and adapting policies that seek to transform the way vacation rental managers (VRMs) market and book rental properties, and they are developing a consensus on how vacation rentals will be booked in the months and years to come. Their decisions are based on market assumptions they have developed from their vast experience in the hotel industry and their need to integrate rental and hotel inventory into a comprehensive lodging marketplace.
Consequently, VRMs are being told that OTAs are quickly becoming travelers’ chosen channel for booking vacation rentals and that VRMs need to adapt to the policies that these mammoth marketplaces dictate.
But what if they are wrong?
At this crucial stage, it is worth challenging the assumptions that are the foundations of OTA policies. Even if these assumptions prove to be true, suppliers of the core vacation rental sector have an obligation to ask this important question: “What if these assumptions are not accurate?”
Foundational Assumptions Supporting an OTA-Driven Vacation Rental Marketplace
Assumption #1: Travelers search for and book vacation rentals in the same way they search for and book hotels.
Large OTAs preach to rental home suppliers that the vacation rental industry needs to shift its booking model to more closely match that of hotels. These distribution channels have implemented changes to policies, sorting algorithms, and booking flow to mirror those of the hotel industry.
However, what if they are wrong?
For example, what if the booking paths that vacation rental travelers take more closely resemble how they book long-term rentals? Or how they buy real estate? Or even how they decide on summer camps? Is there another booking path that works better for vacation rental travelers?
OTAs perform an astonishing number of tests on their websites to optimize the booking path. However, they are limited by the constraints inherent in their websites and integrated platforms—constraints created on the premise that the vacation-rental-booking flow should align with that of hotels. As a result, the foundation of the OTAS’ testing is based on assumptions that have not been adequately challenged.
One practice not often seen utilized in vacation rentals is the use of focus groups. Focus groups are diverse groups of people put together in a room to participate in a guided discussion to gain understanding about products or processes or to provide ongoing feedback.
What if vacation rental and website development companies joined together to set up and observe focus groups as they navigated their way through the 1.4 million vacation rentals in the United States alone to try to book their perfect annual family vacations?
Assumption #2: Less restrictive cancellation policies lead to an increase in bookings.
OTAs are in the process of evaluating cancellation policies put in place by owners and managers. The OTAs are also looking for ways to encourage owners and managers to relax cancellation policies to more closely align with hotel policies.
But what if loosening cancellation policies does not generate more revenue?
Each vacation rental market has its own seasonal booking window. For many markets, bookings for the most desirable homes are made a year in advance. In an interview with U.S. News in the article “Why You Should Start Your Summer Vacation Rental Search Now,” Jon Gray, then chief revenue officer for HomeAway, said, “The booking window for vacation rentals is typically ninety days.”
Copying the hotel industry’s twenty-four-hour booking policy would be a mistake. For example, in vacation rental markets where bookings are made an average of ninety days in advance, rebooking a vacant period caused by a cancellation made a week before the guest’s check-in day is nearly impossible without offering potential guests heavy discounts and paying the high marketing cost of advertising that discount.
“The supply and demand of economics of hotels and vacation rentals are quite different,” said TripAdvisor Vacation Rentals Spokesperson Laurel Greatrix in the same U.S. News article.
Is getting a booking from a channel that promotes and rewards twenty-four-hour cancellation policies for dates that cannot be filled if the cancellation occurs a good thing for a VRM? As OTAs begin to shift their stance toward vacation rental cancellation policies, VRMs may find it advantageous to push back.
Assumption #3: Travelers prefer to book on OTAs and will pay 6 to 15 percent more to do so.
Airbnb, HomeAway, and TripAdvisor have implemented service fees for travelers looking to book on their websites. As a result, repeat vacationers are now seeing a 6 to 15 percent increase in the cost of their vacation rentals on these channels. Phocuswright and Expedia recently published a whitepaper entitled “Where Consumers Shop for Online Travel,” which features ten reasons that travelers choose to book through OTAs. The list included the following reasons: travelers trust the OTA brands, OTAs have the best prices, and websites have the most selections.
What if vacation rental travelers would rather book directly with the manager or owner?
Do travelers want to pay 6 to 15 percent more to book through OTAs? Perhaps not. Consumers are smart. In the case of vacation rentals, OTAs often do not offer travelers the best prices, and in most traditional vacation rental markets (e.g., beach, mountain, lake, and attraction-based destinations), OTAs do not have the best selections. In traditional markets, the best inventory is not even listed on OTAs. Premium properties are booked directly with such frequency that VRMs do not list them on the channels.
In Skift’s article “Why Wyndham Is Going After Urban Rentals,” Gail Mandel, CEO of Wyndham Distribution Network, the world’s largest vacation rental management company, said, “We’ve been consistently able to generate about 85 percent of our revenue through our proprietary distribution channels . . . While the remaining 15 percent of revenue comes from third-party platforms.”
Skift also posted an interview with Eric Breon, CEO of Vacasa, an emerging company that has quickly become the second-largest vacation rental provider in the United States and one of HomeAway’s largest suppliers of inventory. Breon said, “About half of our bookings come through our own website, and about half come through third-party channels.”
OTAs’ success in vacation rentals, unlike hotels, is dependent on their ability to continually generate new demand because vacationers quickly find that they receive more value, lower prices and higher quality choices if they book directly with property managers or owners.
What if the decision of whether OTAs succeed in becoming the primary source of vacation rental bookings were up to VRMs?
The hotel industry gave up control to OTAs post-9/11 as travel came to an unprecedented halt. Hotels rely on a 60 percent occupancy rate to function, and the discounted bookings OTAs captured were a necessity, not an option. However, travel rebounded, and sixteen years later, hotels are still frantically looking for ways to lessen their dependence on OTA channels and drive direct bookings back to their properties.
In contrast, traditional vacation rental markets are not experiencing the same dire circumstances. Vacation rental travel is strong, and VRMs are not desperate to take discounted bookings in order to fill their properties. For example, Wyndham and Vacasa, vacation rental companies are utilizing distribution channels to the fullest, reported that 50 to 85 percent of bookings are still done directly through their own websites and call centers. And dozens of market-leading vacation rental management companies have reported this year that they have removed all or most of their listings from OTAs.
“At this point you have to determine whether you should continue to invest in building the [OTA] brand, or use those same funds to begin investing further in your own brand,” said Jason Sprenkle, co-owner at 360 Blue in the Florida panhandle. “That question will depend on the strength of your current brand, your market’s dependence on VRBO, and your relative market share.”
The success of these OTAs is dependent on supply. Without aggregated vacation rental supply, these OTAs cannot dominate the industry.
Growth in the sector is slowing. As we read in “Over $5 Billion Raised” on page 79, the short-term rental industry has experienced less than 15 percent growth in revenue since 2012, excluding newly added owner-occupied rentals. According to the National Association of Realtors, second home sales are down 21.6 percent from 2015 (920,000) and are at their lowest since 2013 (717,000).
With maturing growth rates, the modest incremental demand these OTAs are driving to VRMs may not be worth giving up the control that the hotel industry fights daily to reclaim.