Like many sectors within the travel industry, the distribution landscape for short-term vacation rentals is dominated by marketplaces.
According to Transparent/VRMA research, digital marketplaces drove 60% of bookings for property managers in 2019. Many of the largest marketplaces are also channels in that they are online travel agencies (Expedia/VRBO, Booking.com, Airbnb).
However, the pandemic has revealed some weak points and misalignment of incentives within the traditional marketplace model.
Even before coronavirus, many of the hot button issues around safety and the protection of hosts’ property were exacerbated by the very forces that make marketplaces so efficient and powerful.
But lately, other membership-based business models have emerged in the alternative accommodation sector. These sites focus more on community building to acquire both supply and demand, thus bringing together like-minded hosts and guests.
While these membership sites are technically still classified as marketplaces, the approach and value proposition is different, as are the incentives to participate on both the supply and demand side.
- Is the traditional marketplace model sustainable with the incentive structure on both sides?
- Do new membership-based distribution channels better align incentives between hosts, guests, and the site itself?
Marketplace dynamics
For a marketplace to succeed, incentives must be aligned on each side – supply and demand. For short-term vacation rentals, this means hosts or property managers on one side and guests on the other.
You could also argue that there is a third side – that of the site itself, where a mix of algorithms, artificial intelligence, and human optimization try to maximize revenues and liquidity.
For the site itself, whether an OTA or a metasearch marketplace such as the now defunct Tripping, aligning incentives means assuming users behave in a certain way once on the site. The issue is that as a marketplace scales, this behavior can change as one side or the other tries to gain an advantage.
Josh Breinlinger, Managing Director of Jackson Square Ventures, a VC firm specializing in marketplace investments says on his blog: "Most marketplaces I know end up seeing some unexpected behavior from their users. As soon as you have any kind of scale, plenty of people will try to game your system.”
Here are three incentive misalignments to consider for short-term vacation rental marketplaces:
#1 Flexibility vs. cash flow
Guests will always want maximum flexibility with their booking. The pandemic has shifted this want to an expectation. However, flexible cancellation policies were always attractive on the demand-side. Look no further than the airlines, who carved out a separate class years ago for flexible fares.
On the other side, hosts need some degree of certainty to manage cash flow. Last minute cancelations can be a logistical nightmare, and depending on the booking channel, can trigger a laborious refund process. Of course, the pandemic has exacerbated this issue with Airbnb offering guest refunds without first consulting hosts, resulting in a recent backlash.
It looks as if flexibility will be the norm for at least the foreseeable future, while hosts try to navigate this new normal across all of their distribution channels.
#2 Review algorithm vs. inventory freshness
Almost all marketplaces, either OTAs or metasearch, depend significantly, but not exclusively, on two metrics to determine a property’s ranking:
- Number of overall guest reviews
- Average star rating of those reviews
All other factors being equal, a property that meets a guest’s search criteria will be shown higher in the rankings if they perform well in one or both of these areas.
While this is valuable from a guest perspective, it presents a couple of challenges on the supply side.
Property managers who consistently add new inventory to their portfolios could have difficulty getting these new properties to rank in search results. This has a carry-on effect to the demand-side, where guests might not even see properties that could be a good fit for their search criteria.
Without a critical mass of highly rated reviews, individual hosts could also be faced with climbing a steep hill towards visibility on any given marketplace site, not to mention, generating actual revenue.
#3 Instant booking vs. proper guest vetting
A few years ago, there was a big movement towards connectivity which continues to this day. In order to compete against traditional hotels, property managers and hosts were being pushed towards instant bookings.
For an industry that had just embraced online booking in some cases, this was next level and beyond the technological means of many in the vacation rentals business.
Airbnb and Booking got into an arms race for the title of category leader in instantly bookable products. Airbnb started to reward hosts that could release inventory in real time.
Innovation is always a positive, especially in the travel industry where many sectors have historically lagged. However, one downside of instant bookings was losing the ability to properly vet a guest before taking payment.
Philip Kennard, CEO of industry connectivity tech company Futurestay, adds: "As STR moves into the mainstream, there’s an incompatibility between the traditional, hands-on industry and the modern, frictionless industry. There are millions of individual owners and managers, and no one has written a playbook for all of them yet. That’s why multiple marketplaces will always be necessary.”
This is more of a misalignment between the supply-side and the marketplace itself. The marketplace wants to maximize revenue and liquidity and will take a booking from any user (guest). Hosts and PMs of course want to make money, but also want to protect their assets and restrict any renters who might be disrespectful or irresponsible.
Airbnb, VRBO, and others mitigate this risk for hosts with a "traveler rating," but this is not a panacea.
New models emerge
While the traditional marketplace model remains the most popular in the alternative accommodation sector, new formats have launched that take a different approach.
Membership sites, where one or both sides ‘pay to play,’ are gaining popularity and traction in the North American market.
For example, TrustedHousesitters is a membership-based site for pet lovers and owners. On the supply side sit homeowners who travel frequently and are in need of verified and trusted pet sitters. On the demand side are travelers (the sitters) who are looking for an inexpensive way to explore new destinations.
Both homeowners and pet sitters pay an annual fee of $129 to access the site. However, no money is transacted during the ‘booking’ process and user profiles are very thorough and robust.
This arguably offers a higher level of trust and transparency than traditional marketplaces. For example, sitters, the guest in this case, go through multiple layers of verification, including a reference check.
Mathew Prior, CEO of TrustedHousesitters, says: "We see our membership-based revenue model create a sense of community and accountability that is tough to find on other sites. Our members on both sides feel like they’re part of something bigger – not just a transaction waiting to be processed. We think our model provides way more value than traditional marketplaces.”
Unlike the current environment with traditional marketplaces, in the case of TrustedHousesitters, the cancellation policy heavily favors the host. A "sit" cannot be canceled unless both parties agree there are ‘extraordinary circumstances.’ If both parties do not agree, and a sitter cancels a stay, an investigation could take place with possible disciplinary action against the sitter.
Another membership-based community for short-term rentals is Golightly, a private travel club for women only (men can travel, but only women may join.) To join, you must be referred by an existing member.
Aside from powering the site’s acquisition strategy, the referral flywheel increases the incentive to maintain good standing in the network, since all members are separated by no more than a degree or two from each other. It also provides an extra layer of vetting and safety.
The platform takes a cut of each booking on each side – 10% from the traveler and 5% from the host.
Traditional marketplaces are not going to be disrupted, at least in the short-term, by these relatively new entrants.
For hosts and property managers, there is huge value in distributing their product on traditional marketplaces and OTAs. These sites continue to offer massive scale and are able to efficiently acquire users in part because of great SEO built up over time.
Membership-based sites cannot offer the same visibility and arguably target an entirely different type of guest altogether. Afterall, pet sitting might not be on everyone’s vacation itinerary.
But, when evaluating marketplace dynamics, these alternative models do seemingly align incentives more optimally for both supply and demand sides. This leaves the door open for alternative models going forward in the STVR sector.