As a vacation rental executive, you know that adding new inventory is key to growing your business. But what are the right metrics to measure the success of your new inventory? In this article, we will discuss the value of key inventory metrics like CAC, ROI, churn rate, and LTV:CAC ratio. We will also talk about the importance of management contracts in the valuation of vacation rental management companies.
With help of the team of inventory growth platform Vintory, we’ve created a series of articles to help vacation rental managers to create, execute, measure, and refine lead generation campaigns. Supply growth is at the heart of Vintory’s mission.
If you are looking for a do-it-yourself guide to vacation rental owner lead generation, grab now a copy of our free 40-page report on homeowner acquisition campaigns. You will where to get data to collect more homeowner leads, discover solutions for better prospecting for property management clients across different marketing channels, and ways to track lead generation for vacation rental managers.
What is a Vacation rental owner lead generation campaign?
A vacation rental owner lead generation campaign is a way to find property owners who are ready to sign a management contract with you. Homeowner acquisition campaigns usually involve direct outreach from a marketing team. There are many different ways to reach out to these homeowners, such as home shows, email campaigns, and other lead generation tools. Go to our article on how to create a homeowner acquisition campaign for more details on the key steps to follow.
The goal of the campaign is to get leads that you can contact after they have been educated about your services and products. You may also run a test with some leads before going through the time and expense of a full campaign.
Why savvy vacation rental managers care about the right lead generation metrics (hint: it goes beyond measuring how many leads are added to a funnel).
Inventory growth is the key engine for vacation rental management company growth
Many people think that if their inventory is increasing, then they are doing a great job at acquiring customers. The reality is that focusing on the right metrics can help you track your growth and understand how effective your marketing efforts are. It can also show which areas of your business are working well and which ones need additional attention.
When it comes to running a successful vacation rental business, it’s essential to continually grow your property inventory. This means constantly adding new properties to your rental program and expanding into new markets. There are a number of reasons why this is so important.
One of the most important reasons is that growth allows you to bring in new customers and increase sales. With more properties available, you’re able to accommodate more guests, which leads to greater revenue for your company. Additionally, growth allows you to attract new property owners as partners, which can help you expand your reach even further.
Another important reason to focus on growth is that it helps improve profitability. When you’re able to bring in more customers and increase sales, it leads to increased profitability. Additionally, it can also help you improve the value of your vacation rental management company.
The reason why it’s important to focus on these inventory acquisition metrics is that they can provide valuable insights into how your business operates. They will show you where the opportunities for growth are and help you determine which marketing strategies work best. If all of this sounds daunting, don’t worry! Our team of experts would love to partner with you to create a winning strategy so that your vacation rental company has an edge over its competitors in our industry.
Marketing metrics are important, but take a step back and think of financial KPIs
When testing or executing at scale a homeowner acquisition campaign, vacation rental managers need to look at metrics. It is crucial to look at KPIs and to understand how they interrelate, particularly in the early stages of a campaign. As with any decision that managers make regarding marketing and acquisition, it is important to test and see what works best.
Now, some basic, execution-focused metrics may come to mind, such as:
- Volume (amount of leads and number of requests)
- Conversion rate (percentage of potential guests who request more information)
- Quality (of the new contacts you receive, mostly represented by their profile information and inquiry text)
These marketing metrics are important to assess how a campaign is running. Yet, vacation rental managers want to step back, look at the big picture, and about the financial metrics that underlie acquisition campaigns.
Every vacation rental company should be measuring these metrics. They are important for both large and small vacation rental companies.
Homeowner acquisition campaigns are a form of investment in your company’s growth. You need to measure and improve their ROI.
When it comes to measuring the financial impact of an owner acquisition campaign, vacation rental managers can turn to CAC (Customer Acquisition Costs), LTV (Lifetime Value), and churn rate. These three metrics actually combine into one main KPI, the Holy Grail of acquisition campaigns: The LTV:CAC ratio.
In just a few words:
- The CAC is the amount of money it takes to acquire a new vacation rental.
- The LTV is the amount of money earned from that vacation rental over the life of their relationship with the company.
- The churn rate is the percentage of vacation rental owners who cancel their contracts each year.
- The LTV:CAC ratio is the amount of money earned from each vacation rental divided by the amount of money it took to acquire them.
These metrics are important because they help vacation rental and Airbnb management company executives understand how much money they’re making on each new vacation rental, how much money they will make on an average vacation rental over the life of their relationship with the company, and what percentage of vacation rentals are churning each year.
CAC: Consider not just the cost of acquisition of a lead, but how much you spend to get a signed rental contract
To get a full picture of your cost of acquisition, you must go beyond usual lead generation metrics. You need to answer this question: How much does it cost you to acquire a signed rental contract (i.e. add a new property?
The total amount of money spent on acquiring properties over a given period should be divided by the number of homes acquired in order to calculate the CAC. This metric takes into account all advertising, labor, and tech expenses. However, it can be difficult to calculate when both variable and more static costs are involved. For example, salaries are a more static cost, while advertising is a variable cost that changes depending on how much money is spent.
You also need to consider the CAC recovery period. It is the amount of time it takes for the average rental property to bring in enough profits to cover the cost of acquisition. This calculation is done by dividing the average monthly profit by the average cost of acquisition. For example, if it takes $3,600 to acquire a property and the average rental brings in $300 in profit for the property manager in a month, then your CAC recovery period would be 12 months.
This metric is useful because it shows you at what point you have earned back the cost of acquiring the property (i.e. the breakeven point of your campaign). All the profit after that point in time goes straight to your bottom line.
You want to make sure that you have enough money set aside for your marketing investment because it will take time before any profits come back. So, you want to make sure you have the cash flow to float that initial investment over the recovery period.
LTV: How to calculate the Lifetime Value of a vacation rental management contract
Start with your churn rate
The churn rate is the percentage of customers who end their relationship with your service during a specific time period. The churn rate is arguably the single most important number for a subscription business. If you have 100 owners and lose 10 in a year, your property management company’s churn rate is 10% yearly.
The higher the churn rate is, the more often your typical contract is being canceled. This means you have to acquire more new contracts in order to maintain your revenue and have enough properties in your portfolio to keep your guests happy.
In order to calculate churn in the most accurate way possible, you need to track the retention of a single group of properties over a period of time. For example, you might look at how many homes you started with on Jan. 1, 2021, and of only that group of homes, how many are still active on Jan. 1, 2022. This will give you your annual churn rate. You can also measure churn by revenue, which will help you weigh the importance of the homes that you are keeping.
Another way to calculate churn is to compare how many properties you had at the start of the month compared to how many properties you had at the start of the next month. You can then average this monthly churn rate over the past 12 months and annualize it.
From churn rate to lifetime value of a management contract
If you know your churn rate, you know your property’s lifetime. The property lifetime is 1 divided by the churn rate. So, if your churn rate is 1% per month, your Customer Lifetime is 1/.01=100 months or a little over eight years.
The average manager retains 90% of their properties within a year, which equates to a 10% churn rate. Using unit economics, you can estimate the lifespan of those properties by taking 1/.10 to get 10 years. Then, you can multiple your average annual profit by the lifespan to get the lifetime value.
Since the future is unknown, this is just a way to predict the future using data from the past. Your lifetime value increases as churn decreases and the lifetime value shrinks as your churn increases.
Why the LTV:CAC ratio captures the lifetime ROI of your management contracts
You calculate the LTV:CAC ratio by dividing the average lifetime value of a management contract by the average cost of acquisition of a new property.
The LTV:CAC ratio is a measure of marketing efficiency. This ratio is a simplified yet powerful metric that is akin to like a lifetime ROI. It encapsulates the cost of your marketing, the lifespan of your contracts, and your yearly churn. All in one metric.
The LTV:CAC ratio can act as a benchmark to help you measure the success of your marketing campaigns. If your ratio is 20:1, it means that your marketing is efficient and you can afford to increase spending in order to grow faster. If your ratio is 2:1, however, it may be time to rethink your spending in order to make your campaigns more effective.
Bonus: Why management contracts can determine key metrics, such as your company valuation and your maximum cost of acquisition
Understanding the LTV of your management contracts can also help you value your vacation rental management company.
Vacasa, the largest vacation rental management company in the US, has recently gone public. The company’s market value was around 3.4bn as of January 2021. It manages 35,000 properties. The value of the company goes beyond the contracts it has. For instance, it has a brand, technology, and a client base. Yet, It implies that each contract is worth at least $97,000.
A management contract is an agreement between a vacation rental manager and a property owner. In return for a fee, the vacation rental manager agrees to take care of all aspects of renting out and managing the property.
The number and value of management contracts are a key part of the valuation of a vacation rental management company because they represent predictable recurring revenue and future cash flow. For instance, a basic valuation method is Discounted Cash Flow (DCF), used to estimate the value of an investment based on its expected future cash flows. DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future.
The value of management contracts helps figure out these future cash flows. The more management contracts a company has, coupled with high renewal rates and few contract cancelations, the greater the sustainable growth rate for that organization.
Running a vacation rental owner lead generation campaign is an important investment in your company’s future. By monitoring the right metrics, you can ensure that your campaigns are as effective as possible and generate a good return on investment. Keep these three key metrics in mind when running your next acquisition campaign: CAC, LTV, and the LTV:CAC ratio. Doing so will help you maximize the success of your efforts and grow your business.
Vintory has an extended resource of homeowner acquisition best practices that you need to check out.
We have the perfect guide for you if your goal is to grow a vacation rental business and generate more owner and landlord leads. Our 40-page report contains everything from tools that will help with prospecting, including data collection strategies based on real-world examples of successful programs in other markets as well as ways to track campaign conversions so it’s easy peasy!