Home rental giant Homeaway recently began charging a new fee to travelers. This has caused an uproar in the rental world. Despite the initial adverse reaction, the fee is a smart idea.
Homeaway is the largest home rental website in the world. It owns a range of sites including VRBO.com, homeaway.com, and vacationrentals.com. Collectively, there are more than one million properties listed on the sites. Expedia acquired the company in late 2015 for $3.9 billion.
Historically, Homeway relied on listing fees to generate revenue. Homeowners paid an annual fee to the company to list each property. For premium placement, that fee could be well over $1,000 a year. Property owners could then opt to pay extra to run promotions.
Earlier this year, Homeaway started charging renters a fee as well, about 5 to 10% of the total booking cost.
The new fee has angered both renters and property owners for obvious reasons: Homeaway is taking a significantly larger share of the overall transaction. Some property owners have said they will abandon Homeaway sites. Others have threatened legal action. You can read more about the issue here.
Although the new fee is creating controversy, it is a very smart idea. It capitalizes on two important concepts in marketing: segmentation and customer advantage.
Segmentation is a simple concept built on the fact that people are different. What is perfect for one person may not be perfect for another.
Homeaway’s previous revenue model was fairly blunt in terms of segmentation. Everyone paid the same amount to list a property. While this seems reasonable, it is far from ideal. Someone with a $3 million vacation home in Vail that rents for $1,000 a night paid the same price as a person with a $100,000 condo in Denver that rents for $80 a night. The Vail property owner probably paid too little; the Denver owner paid too much.
The new system charges high-end properties more, and this makes perfect sense. The booking site is creating much more value for the property owner in Vail than the one in Denver. Over time, the listing fee will likely fall and the booking fee will grow.
Customer advantage is the idea that you want to provide a benefit customers value, are willing to pay for, and see you as best at providing. Strong brands and businesses often have considerable customer advantage. Brands with a lot of customer advantage can raises prices because price elasticity is usually low. When prices go up, people keep buying. Think Apple, Nike and Tesla.
Homeaway provides compelling benefits to both property owners and travelers. It is an important tool for owners–it produces valuable customers looking to rent–but it is also a good tool for travelers, because it offers the benefit of a vast selection accompanied by reviews.
While people don’t like Homeaway’s new fees, they aren’t likely to move away for the simple fact that there aren’t many alternatives. Airbnb is one option, but Airbnb already has a booking fee.
Getting the price right is essential if you want to build a great business. The new fee from Homeaway is a wise move.
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