All You Need to Know About Net-Rate in the Vacation Rental Business
Net-rate is becoming a crucial financial component of managing vacation rentals. So, what is this new thing and why do I need it? Well, to start — it isn’t actually a new concept, but for some reason vacation rental managers have forgotten about it or ignored it. Talented, hardworking entrepreneurs in any industry should always win at the end of the day. Instead of winning (being profitable) we find ourselves, as property managers, doing all the dirty work when it comes to the vacation rental sector, yet we end up feeling eaten alive by “ever increasing OTA costs.” Most managers today are working harder than ever before on things like guest experience, turnover management, and owner satisfaction, but making less money than they ever have before. This just ain’t right, folks! It is not sustainable, much less fun. You should be making good money as a property manager.
Quite honestly, if the “bottom of the funnel” (aka the property manager) doesn’t win in the end, then almost nothing else in the proverbial food chain of vacation rentals can win either. This should by no means be a threat to any of the vendors to our space — it is simply reality of the economics of how vacation rentals work. We are a very logistically challenging and physical industry. As with any hard job, it must be lucrative in order for the property manager to want to stay interested. That being said, we aren’t super heroes either and it is convenient to have something as complicated and expensive as marketing to guests almost completely outsourced. If this sounds complicated, you should sign up for our master’s subscription at Vacation Rental University and learn all you need to know about managing vacation rentals!
So, let’s get to the point. What is net-rate and why do I care?
Net- Rate Strategy
Your net-rate is the amount of the booking rate that you receive and split with the owner after all marketing costs are deducted. In other words, it is what you receive after the traveler completes the booking process on any of the various marketing channels. Each channel will become more or less expensive with their fees based on how much they can produce for you. Naturally, the most productive channels should charge the highest amount that they can. Instead of you paying for these costs, let them pass onto the guests. If the fees get too high the channel will have to reduce in order to keep production up when compared to other channels that may have lower fees. Regardless of these costs, you can still meet your margins by implementing a mark-up and net-rate system that pushes these costs on to the guests. This is where you as the provider and manager of the inventory will have to be in order to survive long term.
How Do I Do This?
Start by setting your base rates at competitive levels for your market before considering any marketing costs. Then, mark those rates up based on the cost of each marketing channel. This way, the price is marked up for the guest allowing them to pay more so that it covers the marketing costs. For example, if Booking.com charges 15% commission and you want to list on their site and generate $100, then your rate displayed on their site will need to be around $117 so that the amount you receive is $100 after their commission. Your website, email and social may see little to no markup, but still be outproduced by Booking.com — this is OK! You were expecting $100 for the night based on your competitive analysis and any channel with the marketing clout to deliver that plus their fees (whether charged to you or the guest directly) can earn the business under this model! After the marketing costs are paid and you receive your desired net amount of $100, you then send this to be split with the owner based on your commission rate and terms. If you balance this well and distribute on all available channels, you will receive more bookings and higher occupancy at the same price that you decided on in the beginning.
As different channels charge different fees, it is essential to know these costs. It can seem overwhelming, but if you truly wish to make it (profitably) in this industry, use net-rates. Not only are they the only way to protect your margins long term, but net-rates worked in the past, and they are the future! If you don’t believe net rates will work for you because you don’t see how you can mark-up the rates anymore, just try it! You’ll be surprised how powerful some of these channels are. If it really doesn’t work, then you may need to adjust what inventory you manage as it may not be in strong demand. Don’t be afraid to talk about this with owners — it is very common in many industries. When preparing your management contract with the owner, include a policy stating that you operate on a net-rate basis. Simply let them know that this means your goal is to get as many bookings as possible by marketing broadly, and to do that you’ll need to pass the costs on to the guests through each channel. Implementing this strategy allows you to list on every channel at a rate that will meet your margins and you and the owner will win over time. Otherwise, you may find yourself overcharging elsewhere to make ends meet and eventually you will lose your client and your business.
Want to learn more about net-rates and how to be successful in the vacation rental business? Sign up for Vacation Rental University today!