Growth or Profit – What is more sustainable?
What a great question to pose during these difficult times, The short term rental market is flooded with ‘Venture Capital’ where privately funded companies raise millions upon millions.
With one goal to gain market share as quickly and efficiently as possible, a growth driven venture capital backed company has no qualms in losing huge sums of money due to the potential increase in valuation thanks to impressive ego driven revenue numbers.
The rule of 40 model, while great for investors. Does have a shelf life, at some point the huge growth comes to an end. While SME’s competing with these venture funded corporations have to trade within the confines of their organic revenue / profit growth.
Airbnb, Vacasa, Cosi, Stay Alfred, Domio, MisterB&B, Holidu, The Plum Guide, LuxStay and 2nd Address are just a few companies that have received large amounts of funding to grow their business.
Obviously Airbnb is the one that stands out and has to date raised over $4.4 billion since the company started and until now was lauded as the no. 1 short stay listing website.
So how do SME’s within the hospitality industry that offer a niche portfolio of properties between 20 and 400, compete with such organisations and build an agency that is not only sustainable but supports local communities and provide a unique and beautiful experience for their consumer which we all refer to as the ‘guest’.
Firstly as business owners you MUST stop looking for shortcuts and looking up to these companies, wishing and hoping for something magical to happen to you and your business.
Each and every one of these companies is now struggling and have so much liability they are on the brink of collapse, experienced individuals such as Simon Lehman at AJL Consulting have been discussing profitability for a long time and wondering when the bubble will burst.
The corona virus was a complete curve ball and has highlighted so many flaws in the way business is currently done, however this crisis could of been caused by many more different events. So this is our ‘wake up call’ this is the time now where we focus on how to make our agency as efficient as possible, as lean as possible and as profitable as possible.
Leaving money in the bank to see through 14 weeks, yes that’s right 14 weeks cash reserve. Meaning you could go 14 weeks fully staffed with no bookings and zero revenue coming in.
Profitability is Survival in Disguise
The focus right now is to survive the current trading period and position yourself for the inevitable bounce-back. The human desire for wanderlust cannot be crushed, a period of lock-down will only strengthen the need for travel.
There’s a lesson to be learnt though, and that’s this…
You have to focus on PROFIT and not revenue growth. Can you within 12 – 24 months secure a cash reserve of 14 weeks minimum? Can you become super patient, reduce your growth plans so that your business operates on today’s revenue and NOT tomorrow’s.
We can start to break this down for a small/medium agency and see how we can increase revenue and decrease costs.
First place to start is your expenses BUT it’s important that we see this as a prudent task something we review on a regular basis and should take up as little amount of our time as possible.
With so many ‘must have’ SAAS products on the market it is tempting to signup and utilise them all, however £50 a month times 10 becomes £500 per month which becomes £6,000 per year, that could be £6,000 towards your cash reserve.
Before you signup to the latest craze ask yourself these questions…
Do I really need that in my business right now?
Will that product generate my agency more profit?
Will I get a return on my investment?
Recently I have reduced my own subscriptions and now utilise just the following products:
- Ringcentral – Phone, Chat, Meetings
- Google Suite – Email, Cloud Network Drive, Docs, Sheets, Powerpoint, Forms
- Freshdesk – Support System
- Hubspot – CRM
- Loom – Video recording
- Mailchimp – Email Marketing
- Quickbooks Online – Accounting
- Canva – Design Studio
I realised that many of my subscriptions I was using less than 10% of the functionality and didn’t have the need or the requirement to utilise more, so I removed subscriptions such as BreatheHR, Drift, Pandadoc, LinkedIn, InboundNow and many more.
While each saving on its own was minimal combined the saving does contribute towards my own cash reserve, around £4,000 per year!
So to replace these products I looked at using alternatives within my favourite applications and I found that Hubspot combined with GSuite, I could achieve most of what I wanted and it was all available within the cloud and across all of my devices.
With iPRO you have a CRM, you have a Choose your booking management system, you have an online booking platform, you have a property management system, you have a mobile responsive application available across all devices and a powerful unlimited CMS that can drive your website should you require.
You too can combine this with GSuite or Microsoft’s equivalent to manage everything within your agency.
Controlling Marketing Spend
Where else is the comfortable business owner spending money where they could indeed be saving money, marketing is an expensive business and there is an acceptance that sometimes it is just about ‘exposure’ with no real returns or measurable returns.
However this mentality has to stop NOW, everything you do must be measured and analysed and unless you return a profit on that campaign you do not repeat it again.
Questions to ask yourself here:
Do you really need to use a marketing agency?
Would it be more cost effective to in-house my marketing activity?
Do you really need that dedicated PPC agency?
Do you need an agency to manage your social media profiles?
Is it worth competing with booking.com, Sykes, James Villas, Airbnb for those top top keywords on PPC?
Without overloading yourself or your team, during a crisis you need to look at how effective all your suppliers are and what you can bring back in house or can you utilise a flexible virtual workforce.
Marketing will make up around 10 – 15% of your costs annually, if you are above that number then you seriously need to look at the suggestions above to bring that down and ideally bring that under 8% of your total revenue.
Let’s take the following example, your agency is currently generating on average £80,000 per month in commission & ancillary revenues.
So you would have a target budget as follows:
Savings (30%) – £24,000
Marketing (10%) – £8,000
Employment Costs (45%) – £36,000
Technology (10%) – £8,000
Misc Costs (5%) – £4,000
How does your business currently stack up, with this structure you would have saved over 14 weeks of cashflow within just 12 months. Of course you may have to adjust this if you wanted to build up that war chest over 24 months or you felt that you had other costs such as debt repayments that needed to be cleared before you can build your cash reserve.
To save money on employment costs and marketing, I would look to increase technology costs to streamline and simplify operations and I would look to use freelance employee’s that you can scale up and down as required.
Pull back on Marketing Channels that are short-term & costly, such as PPC, and focus time & resource on longer lead activity such as creating & optimising new landing pages to attract an audience from Google.
Invest in Sensible Places
This is your time to look at your business from top to bottom and identify which roles can be merged, dropped and adapted. How can you continue to provide a great service to the guest and owner with a smaller and leaner team.
This is why increasing your spend on technology is so important, as the ROI is so much greater. As once the technology is set-up efficiently you can handle many more guests & owners without increasing your overheads.
Whereas now you may be limited to the number of owners / properties and guests due to your internal staffing numbers.
Once you have a handle on your expenses, you can plan quarterly reviews to ensure that you keep on track and do not let miscellaneous cost build up and impact your profit.
Identify Incremental Revenue Opportunities
Many agencies have a variety of incomes based on commission, however I believe that these don’t go far enough.
Here are some examples of where you can increase your revenue for each and every booking.
- Commission per booking – Target 20% minimum
- Damage Waiver – protection against damages instead of a security deposit
- Service Fee
- Concierge Fee
- Cancellation Protection – Booking Protect
Do you find yourself dealing with many requests from your guest? Would you like to provide more in this area, so you can be 100% sure they have the very best experience when staying in your properties.
Then why not setup a concierge team, help them to experience everything your local area has to offer.
With iPRO CRM and Booking System we can setup inclusive costs such as a Damage Waiver, Service Fee, Concierge Fee. This means they are added to the accommodation cost and displayed as one price to the guest.
The key advantage here is that these are items on your income report and your commission is calculated on the accommodation cost only so these extra items do not affect the net price to the owner.
By utilising these extra items you can increase your income per booking making your agency more sustainable.
Have you considered an amendment fee? Charging guests if they wish to change dates or adjust the group details?
Of course the no. 1 way of increasing your revenue is to look at your base rates, a great way to encourage more future bookings is to offer discounts to guests as they checkout this year. The more bookings you can achieve for next year in the current year, will ensure you can rent the remaining weeks at a premium.
Being flexible and adaptable with pricing is critical to maximising your revenue and occupancy. Implementing short breaks and dynamic pricing is a great way to stay agile in this area.
One final area to ensure you don’t reduce your profit, is ensuring that owners and guests are charged for your time when things go wrong. Watertight contracts are essential here, if an owner lets you down with cleanliness or quality control, then fines should be applied so the additional costs are charged for.
By being stricter here, owners may take a higher level of service contract that includes cleaning checks, property inspections pre guest etc.. You decide what is feasible for you.
Depending on your business model an area very commonly overlooked is the revenue opportunities from your owners. People believe that the commission they earn should cover a variety of costs, however my expenditure percentage diagram highlights that to build a profitable and sustainable agency you need more revenue than you have anticipated.
Automating your owner portal and providing a seamless platform for them to monitor and review performance and see best practise will ensure you handle less calls.
However you will want owners to be proactive and to ensure their property is ‘best in class’, so do you provide inspection audits, deep cleans, furniture recommendations, etc..
If you have an automated owner onboarding process with an automated platform for ongoing communication and updating availability, you have another revenue opportunity if they refuse to use the automated system, charging an administration fee for updating availability or sending posted copies of the statement.
Looking forward to continued growth
I for one love this industry and believe that there are so many fantastic holiday let agencies providing an unbelievable service to their guests. I hope that this guide has inspired you to take action on growing your agency based on profit rather than debt and ego!
I hope that this guide has inspired you to take action and ensure you are ready for whatever the future will bring.