As of yesterday (6/5/2019), AirBnB began to implement a fee structure change that shifts all booking fees from the guest to the property manager. The new AirBnB fee is a 14% commission charged directly to the property manager. This is an interesting development as AirBnB continues to position itself to take on OTAs in the traditional hotel space (in the same vein, AirBnB just started adding HotelTonight listings to its platform). For now, it remains optional but is likely to develop as a requirement in the not too distant future.
The new fee structure means that AirBnB prices will now be comparable to those on Booking.com and Expedia. Moreover, the commission charged to property managers is almost identical. This new apples to apples world means property owners are less likely to care which channel their sales come from. However, it also means that AirBnB, Booking.com, and Expedia will be able to enforce price and availability parity across all channels. The result is an increasingly complex market place for property managers through operational coordination, omni-channel sales, revenue management challenges, and increased competition.
Luckily, many of these challenges have been tackled before and RevPARTY is here to help you keep up in the ever-evolving niche of short-term rentals. Below are some explanations of the new policies, market expectations, and tips on how to manage the transition.
What Happens if All Properties Start Changing Fee Structures?
Many property managers’ gut reaction is to offset the commission increase by increasing their prices accordingly. In order to make the same amount of money per night they assume that they have to charge the same net daily rate. They reason increasing their rate by 11% to offset the 11% commission increase is the logical and smart thing to do. Knowing that competitors are raising their rates, there seems to be little risk in raising their own.
All of this forgets one thing though: in the short run, prices are sticky.
Even if every property manager wanted to increase their listing’s rates it would take time to do so. Maybe some don’t get around to it until next week. Some may have multiple properties that they have to work through. Some may have missed the email that went to their spam folder or can’t figure out how to make the changes on the website. What this means is that there will be a period of time where some prices have adjusted and others haven’t. Some managers will have competitive prices at lower margins while others remain margin neutral and outprice their neighborhood.
Prices aren’t just sticky due to implementation challenges (or menu costs for any economists out there). They’re also sticky in the customer’s mind and this effects bookings through sticker shock. Guests that have stayed with you before or guests that frequently use AirBnB have an expectation of pricing on the platform. Even if every listing on the platform raises their rates potential guests will still register the pricing as higher than expected and be deterred from the purchase. Maybe they reason for the same price they can stay at a hotel or maybe now the rates are above the mental budget they set for lodging. Overall, consumers are bad adjusting price expectations due to market shocks (think of how much we complain about gas prices, or how few limes we ate in 2014).
“But wait,” you say. “They’re paying the same amount. Their fees are just built into the rate now.” And you would be right.
Unfortunately, consumers are also not all that good at logically calculating and comparing costs (and I’m restraining myself here from a great tangent on behavioral economics, but I highly recommend MisBehaiving by Robert Thaler if you’re interested). Even when guests compare rates between one listing and another they rarely include all the fees associated with that booking. Primarily, they’re comparing the sticker price and then proceed to checkout as long as the cleaning fee or booking fee isn’t outrageous (also known as offense pricing). AirBnB, Expedia, and Booking.com all know this and actively advertise ways to lower the “entry rate”, or the rate shown on your listing in search results, to property and hotel managers alike. Thus, in the short-run while property managers transition to the new fee structure, those who don’t transition will likely be viewed as a more competitive price.
In the long-run, if everyone must change fee structures (which is likely given AirBnB’s moves to be more like traditional OTAs and attack the hotel space) all prices would eventually float higher. Even if there isn’t a conscious decision to increase rates to offset the commission eventually, and incrementally, the lower priced listings would raise their rates either because they have high booking rates and have a lower price than their compset or because the profit per stay becomes too low to be worth their time without a higher ADR.
These higher rates also may have effects outside of the AirBnB platform. In the short-term, the higher rates may cause guests too book hotels because their prices more closely align with their price perception (the price they see is the price they expect) until the consumers adjust to the new prices. In the long-run, a higher price will come with an expectation of higher quality and if they pay hotel rates they’ll expect hotel service and amenities. These two factors will continue to blur the lines between hotels and vacation rentals and create a more competitive short-term rental landscape.
What Will the Market Actually Do?
Most property managers won’t like the idea of a 14% commission “coming out of their pocket.” In the long-term, sticker price, fees, commissions, search criteria, and the competitive landscape will equalize this initial, knee-jerk reaction (or if they read this post). So given the disadvantages of being a first mover to change price and the reluctance to change the thought process behind accounting there will be very low adoption until it seems necessary. Most properties will shun the increased commission and want to keep lower sticker prices; those who don’t will still want to compete with the lower rates. In the end, its about attracting guests and a low price will do just that.
Eventually, pressures from AirBnB and other platforms will increase the importance of pricing parity and the consumer will adapt to searching for “no fee” bookings the same way they search for “free wifi.” This will force the property managers wishing to maximize revenue to consider price and policies along side conversion metrics to find their optimal strategy.
So What Should I Do?
Keep the Old Fee Structure: The advantage of a lower price and meeting consumer expectations during the optional fee period is likely to outweigh any advantage of switching. While potential guests search for properties in the same way and have the same price expectations you should continue to optimize as usual and beat the sticker price of any early adopters.
Closely Watch Your Metrics: If conversion metrics start to slow without any cause from demand or competitive positioning, it may be time to switch. As filter criteria limit search appearances and adjusting customers change their property selections you should adjust accordingly to maximize the conversion funnel. ADR, occupancy, and RevPAR will continue to be good indicators of a successful strategy or a warning that a tactics need to be adjusted.
Focus on Driving Direct Bookings: Driving direct bookings is the main way to make your revenue independent of OTA listings. With a loyal customer base and a strong direct booking channel commission changes and filter criteria play less of a factor in your final sales. Try to meet the rising expectations of guests and foster a brand loyalty to the amazing experience you provide outside of AirBnB.
RevPARTY is Here to Help
All of this information should set you onto the right path of navigating the changing short-term rental environment. If you would like to drive direct bookings, strategize new pricing tactics with the fee structure change, or optimize your listing RevPARTY is always here to help with proven strategies to raise your revenue. Contact us at jordan@revpartyconsulting.com.