Matt Landau
  • Founder, VRMB

Monday Morning Motivation [Golden Ratio]

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Over the last five years, I’ve had the pleasure of meeting many of you around the world — sometimes only for a few minutes after a presentation, other times at length over meals, walks, car rides..etc.

And although our industry is so diverse and all our businesses goals so unique, I began to notice a pattern about your businesses (no matter the size/age/location) when compared to others in our industry. Some may argue the correlation is just coincidence. But I believe the trending ratio exists because this particular growth pattern has evolved as the most effective.

This pattern starts with a ratio of bookings:
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In short, a business with a high golden ratio relies less on 3rd party listing site to generate bookings and thus can project their income deeper into the future. Whereas those that are too dependent on outside marketing sources are “less healthy” because they cannot project with the same confidence.

But here’s the good news…

Your actual golden ratio alone is way less important than the upward trend of your ratio year upon year. Even if small increments, those that can show upward trends in repeats and referrals have mounting momentum and more sustainable businesses in the long-haul.

ACTION: Let's set some goals!
  1. If you have not, calculate your golden ratio for 2018, and then dating back for as many years as possible (publish your numbers below)
  2. Plot those ratios on a graph (x-axis year, y-axis ratio)
  3. Create a percentage goal for 2019
Keeping track of this simple ratio throughout the year is akin to staying conscious of your heath. Over the course of the year, small improvements can turn into a beautiful thing.
 
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Assuming the data are correct, here are my results:
2016: 52/21 = 2.5 (data available for only a few months on new PMS)
2017: 182/65 = 2.8 (early in year, moved away from HomeAway/VRBO to Airbnb)
2018: 184/28 = 6.6 (as per Rex Brown's Vacation Rental Mastery, my vacation rental listings on Airbnb provide a very substantial 'leakage' into my executive stay properties)

I suggest adding 'other' to the numerator. In my case, 'other' would include:
- as an absentee owner, visits to town and staying in my vacation rental
- comps for special visitors, such as travel blogger, NatGeo photographer, IC member (our town's CVB spreads these opportunities around to local B&Bs too)

For Gabor Gabor, a couple of things to ponder:
- Will results by VR owners cluster together in the same range? Similarly will VR managers cluster together, but in a different numeric range, as these two business models, while similar, are not the same?
- Should this ratio be multiplied by the overall occupancy level for the owner or manager? I have only four vacation rentals; others have dozens or even hundreds. This additional factor may reconcile the data more coherently. My occupancy level has been slowly rising from 20% to 35%, so I have some opportunities ahead.

And Gabor Gabor, your 'earned-to-bought index' is a great term.
 
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I tried to make a cool line chart showing the percentages over the years by channel but I gave up. So, below is a colorful excel spreadsheet......that I can do. I am pleased to see that our personal website is the lion's share every year.
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A suggestion re. the idea of Golden Ratio calculation: simplify it by calling it Earned-to-Bought index of revenue. Where "Earned revenue" is from bookings where the host paid no commission to any third party platform. "Bought revenue" is bookings where a commission was paid (in other words: that was the cost of business acquisition).
Should Earned over Bought be equal amounts in a year, the division of Earned divided by Bought results in an index of 1.0. The objective for those, who get an index of less than 1.0 (e.g. 0.8 or 0.5) is reaching the point where a host can at least match the Bought portion with Earned and get to an index of 1.0.
For those who are already over the 1.0 index, the objective would be an increase to 4.0. At that point a host gets 80% of the business from earned and 20% from Bought. (If the total revenue would be $10,000 and it splits to $8,000 Earned and $2,000 Bought as an example.)
Why not go to 100% Earned? Because a healthy business always gets new clients! Relying totally on direct bookings means an exposure to churn: if a regular is not booking in one season, who is to replace that if we are dark on third party platforms?
A healthy channel mix of revenue is always better than keeping our proverbial eggs in one basket only.
 
I tried to make a cool line chart showing the percentages over the years by channel but I gave up. So, below is a colorful excel spreadsheet......that I can do. I am pleased to see that our personal website is the lion's share every year.
View attachment 2731
Hi Jan!

Out of curiosity, what do you attribute your direct booking % decline to? Or do you not consider it a material change?
 
Wes Wes, Great question. I would need your keen mind to analyze the decline from 2016 to 2018. Although, no matter the reservation source, our rental income has steadily increased since 2016.

Questions I am curious about:
  • 2016 - why did VRBO have such a small slice of the pie? What did they do in 2016 that set them back?
  • 2016 - Marysia was at full steam adding content to the website and very active with social media
  • 2017 - my Airbnb bookings were down because of an instant booking setting I believe. Once I enabled that setting bookings came back.
  • 2018- I believe that Airbnb enabled 50% payments which increased their share
  • 2018 - we had less new content for the website and less social media activity.
 
JStevens JStevens since your data is in percentages (rather than # of bookings) we can only see how your ratio of direct to non-direct has changed. I assume, based on your comments, that the number of your direct bookings went up, but perhaps not as much as the 3rd party bookings? Great to hear that business is up, overall!
 
JohnK JohnK Here is the report including the number of bookings. The number of bookings is just part of the math to get to the ratio. Isn't that the question? What is the ratio of personal website bookings to other listing sites? Matt also asked for the # of repeat and referrals which is a deeper dive into the report which I have not done.

Notice that 2016 has 27 more bookings than 2018. Why? We increased the minimum nights for July - September so we could have less turnover and we make more profit per booking.
number of bookings 2016- 2018.png
 
A suggestion re. the idea of Golden Ratio calculation: simplify it by calling it Earned-to-Bought index of revenue. Where "Earned revenue" is from bookings where the host paid no commission to any third party platform. "Bought revenue" is bookings where a commission was paid (in other words: that was the cost of business acquisition).
Should Earned over Bought be equal amounts in a year, the division of Earned divided by Bought results in an index of 1.0. The objective for those, who get an index of less than 1.0 (e.g. 0.8 or 0.5) is reaching the point where a host can at least match the Bought portion with Earned and get to an index of 1.0.
For those who are already over the 1.0 index, the objective would be an increase to 4.0. At that point a host gets 80% of the business from earned and 20% from Bought. (If the total revenue would be $10,000 and it splits to $8,000 Earned and $2,000 Bought as an example.)
Why not go to 100% Earned? Because a healthy business always gets new clients! Relying totally on direct bookings means an exposure to churn: if a regular is not booking in one season, who is to replace that if we are dark on third party platforms?
A healthy channel mix of revenue is always better than keeping our proverbial eggs in one basket only.

Thanks for that Gabor Gabor...I like the Earned/Bought simplification, plus the need for new business...and JPrugh JPrugh your addition of occupancy adds an excellent 3rd element.

....I just spent 30 minutes trying to develop an algorithm....gonna need more coffee.

But, the EBR/EBI should be the root of Matt Landau Matt Landau 's Golden Ratio

PS: From past projects, I've found that larger venues, especially for event hosting or family reunions, would have a low index because those are one-off events. I'm working on a project in Oregon right now...with little to zero value in the numerator...but they are still hugely successful in the occupancy column. Point Being: Every property has it's own Golden Ratio...but understanding it's components is probably more valuable than the result.
 

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