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Vacation Rentals by Owner Sites: Are they Profitable?

 

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Vacation Rentals by Owner Sites: Are they Profitable?

There are literally hundreds of Vacation Rentals by Owner sites and it seems new ones are appearing every week.  On the face of it, it may seem like making money from a ”vacation rentals by owner” site is easy: all you have to do is get 1,000 owners to sign up, each paying $100 per year, and you can generate an annual income of $100k with almost no running costs, right?

Well, it’s not that simple.  For a start, getting vacation rentals owners to pay for a listing on your site is not that easy, and secondly, if you expect to keep them, you will need to generate enquiries and bookings, which only come as a result of spending money, time and effort marketing your “vacation rental by owner” site.

Compare Owner Holiday Rentals (http://www.compareownerholidayrentals.com) recently decided to take an analytical look at the business of running a “Vacation Rental by Owner” site.

Some of you may be familiar with Michael Porter’s famous framework for analysing the attractiveness of an industry: based upon Porter’s model, you can predict how profitable a particular industry is likely to be in the long term. We have used this model to analyse the attractiveness of the business of running a “vacation rentals by owner” site.

Porter’s model says that there are 5 factors which influence the level of competitive rivalry, and hence the relative profitability, of an industry. These are:

  1. The threat of entry by new competitors.
  2. The intensity of rivalry among existing competitors.
  3. Pressure from substitute products.
  4. The bargaining power of buyers.
  5. The bargaining power of suppliers.

These factors can either have a positive or negative effect on the long term profitability of an industry. Let’s take each of these in turn and see how they can be applied to the business of running a “Vacation Rentals by Owner” site.

  1. The Threat of Entry by New Competitors:  As already indicated, there are new competitors entering the “vacation rentals by owner” business on an almost weekly basis. The main reason for this is that the “barriers to entry” are so low: anyone with some IT skills can quickly build and publish a site, with the only cost being their time and some hosting charges. These low “barriers to entry” and the presence of so many new competitors are a negative for the profitability of the industry.
  2. The Intensity of Rivalry among Existing Competitors: Free trials, free listings, reduced prices: all of these are indications of the increasing level of rivalry among the existing sites. Many of the new “vacation rental by owner” sites offer the first 6 or 12 months free of charge. Although some of the established “vacation rental by owner” sites have tried to hold the line on pricing and special offers, the indications are that they are finding it hard to hold their market share. Again, the level of rivalry is a negative for the industry profitability.
  3. Pressure from Substitute Products: By “substitute “products, we will restrict ourselves to other ways that vacation rentals owners can choose to market their properties. Hence, this includes newspaper / magazine advertising (a medium in declining usage), using rentals agencies (still highly used, particularly in Europe) and marketing via the Owner’s own website (which seems to be increasing, particularly with the advent of Google Ads). All the evidence suggests that more owners are using the internet for advertising their vacations rentals; even the rental agencies now heavily use “Vacation Rentals by Owner” sites for marketing their properties. Also, although there are exceptions, using the commercial “Vacation Rentals by Owner” sites is very much more effective than using a personal site. Hence, the pressure from substitutes is relatively low, the industry is growing and this is a positive for the industry profitability.
  4. The Bargaining Power of Buyers: Largely because there are so many options, including free trials and special offers, buyers (owners) have a lot of power when deciding where to list their properties. Also, the cost of switching to a different “vacation rental by owner” site is relatively low. Most owner’s review their advertising on an annual basis, based upon the results (enquiries, bookings) that they have received. “Vacation rental by Owner” sites that fail to produce results are not able to persuade owners to renew. Many new sites that start off by offering free trials fail to turn these into paying customers because they have not been able to attract renters in sufficient numbers to generate rental bookings. Hence, the bargaining power of buyers (owners) is a negative for the industry profitability.
  5. The Bargaining Power of Suppliers : In the context of running a “Vacation Rentals by Owner” site, the main services that site owners buy are “hosting” ( which is cheap and plentiful) and marketing/ advertising ( which is plentiful, but not that cheap). Since hosting is relatively unimportant, let’s focus on marketing/ advertising. As more and more “vacation rental by owner” sites come online, getting good results on search engines such as Google is getting harder and harder. Hence, “Vacation Rentals by Owner” sites are experiencing the need to invest more in targeted marketing and advertising in order to attract renters to their sites. This eats into margins and is affecting the profitability of the business. Hence, although previously neutral, the bargaining power of suppliers is increasingly a negative for the industry profitability.

So, with 4 out of 5 factors being negative, does that mean that this industry is so unattractive that it is impossible to make money running a “Vacation Rentals by Owner” site?

Not necessarily, although undoubtedly it is getting tougher. In particular, smaller “me-too” vacation rentals by owner sites are unlikely to be able to be profitable enough to stay around for the long term, although new ones will probably continue to enter the market, start off by offering extended free trials, stay in the market for a couple of years and then fold.

However, there are probably two ways you can build and maintain a profitable business in this industry.

Firstly, some large “vacation rental by owner” sites will achieve sufficient scale (possibly through acquisition) to use their size to generate competitive advantage. These sites will have the critical mass of owners and visitors to be economically viable. As evidenced by the recent acquisitions that the WVR Group have made, it’s likely that some of the better smaller “vacation rental by owner” sites will get absorbed into such larger entities. Currently, VRBO and the WVR Group, (which owns a1vacations, Greatrentals, Cyberrentals and Holiday-Rentals amongst others) are the two 800 pound gorillas in the industry. Expect further consolidation to happen in the coming years.

However, it is also possible for a smaller “vacation rental by owner” site to be successful. To do this, it will need to carve out a profitable niche, possibly focusing on a particular geography or demographic to build competitive advantage. By focusing marketing efforts on a targeted group, these smaller sites will be able to attract vacation rental owners and renters. Hence, expect to see an increase in the number of specialist sites ( e.g. Petfriendlytravel focusing on renters with pets), possibly offering add-on services that differentiate them from the larger “vacation rental by owner” sites. Indeed, many small regional sites offer full vacation rental management services, from booking through handling changeover, as an alternative to the model which relies upon the owner to manage everything themselves.

Conclusions:

It is inevitable that the business of running a “vacation rental by owner“ web site will change in the coming years. Although the overall market will grow as people continue to move away from traditional package holidays and embrace holidays using vacation rentals, it is likely that “vacation rentals by owner” sites will split into two camps: the large sites with the critical mass to cost-effectively market thousands of properties, and the smaller, niche sites, that offer some unique differentiating factor to be attractive to a more targeted group of owners and renters.

About the Author

Kevin Graham is the founder of Compare Owner Holiday Rentals (COHR).

COHR provides a guide to choosing the best vacation rental sites. For further details, please see Compare Owner Holiday Rentals .

 

 

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