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Get ready to fire up your business. Here's your host at the Bayer.
Welcome to this episode of The Tipping Point, where the founder of Vintori, Brooke Fouts, is joining us to talk about vacation rental industry metrics, and these are the numbers you need to know to build a successful business, and maybe to, it'll help you make some improvements here and there. So welcome, Brooke.
Thanks so much for joining me today. Yeah, Heather, thanks for having me. I'm super excited to talk about this. I'm a total nerd when it comes to this stuff. So it's actually, I appreciate, I could actually talk about, uh, these, these kinds of metrics to somebody. So thank you. Well, I've, I've seen this, you know, presentations from you before and you make it so understandable and very interesting.
So over to you. All right, let's do it. So I know I've got a lot of information to go over in a short period of time, so I'll go really, really fast. But again, Heather will be sharing links at the end here to the videos and things like that. And also, obviously, you can re listen to this. So super excited. So I've been in the short term rental space for well over 16 years, I think pushing 17 years now.
But for the last five years, I've been really focused on software as a service businesses or SAS, specifically in the short term vacation industry. And as I said before, I totally nerd out and obsessed with these SAS metrics. But what I realized was a lot of these SAS businesses and vacation rental businesses are very similar.
They both have this great predictable recurring revenue. They both have great margins and they have all these like same core elements. And like a lot of these great SAS metrics that I've been studying. Could be a great way to really understand the health of a vacation rental business. Um, so I'm going to go in and dive into, uh, the metrics of, uh, of, of vacation rental inventory metrics.
So let's dig in. So, first off, I think it's really important to understand the value of a new property into your rental program. Now, I've asked this question well over 500 times. As a percentage of your gross booking revenue, what falls to the bottom line in net profits? Now, here's the thing. It doesn't matter if you're like I was in Ocean City, Maryland, charging 13 to 16%, or if you're a property manager in Vail or Aspen, charging 50 to 60%.
It's amazing. Almost always net, net, net. The average is about 10 percent of your gross booking revenue. So let's do an example. So let's say you have a property that's doing about 50, 000 in gross booking revenue, and you take 10 percent of that on average, that comes out to about 5, 000 in net profits per year.
Now, again, you don't keep a property in your rental program for one year. You keep a property in your rental program for multiple years. So how do you calculate the customer lifetime in years? Well, it's a simple formula. You take one divided by your churn. Brooke, what the heck is churn? Churn is what percentage of your inventory do you lose in an average year?
Again, after asking this well over 500 times, we found the average churn in our industry is about 10%. So if you take one divided by 10%, You get a 10 year lifetime. So we have 5, 000 in net profits per year times 10 years equals 50, 000 is our lifetime value in net profits. Now, I'm going to give you a little hack alert.
Assuming you fall within industry averages within your churn rate and your net margins, your net profit margins, your lifetime value is equal to your gross booking revenue. So that example from before, a property doing 50, 000 in gross booking revenue. That's going to have a 50, 000 a lifetime value in net profits.
If you go out there and sign up a new property doing 100, 000 in gross booking revenue, you can assume you're going to make about 100, 000 in lifetime profits. Not bad. Now, I would actually argue that number's a little bit light. Why? Because what happens over 10 years? Does your rental income stay flat? No.
It's going to go up over time. My property, I've got a property in Bethany Beach, Delaware. It does about 75, 000 in rental income. If I look even five years ago, it wasn't doing nearly close to that. It was probably doing 000. So it's gone up considerably. So again, those numbers are a little bit light, but that does give you a quick little, uh, hack onto your lifetime value.
All right, let's change gears a little bit. We're going to talk about customer acquisition cost or CAC. This is a number that you really, really should know. So what is CAC? CAC is the cost to generate a new customer into your rental program. And again, we're only talking about the guest side here for these metrics.
I'm sorry, the owner side of these. We're not talking about guests, but there is obviously a guest cac as well. But we're focused on the inventory side. So let's do a very, very simple example. So let's say you send out 1000 postcards. And the average postcard costs you a dollar each to send out. So that's going to cost you a thousand bucks.
Let's say you get one half of 1 percent response rate, which by the way, that's what the direct marketing association says is the average response rate in direct mail. So that's going to get you about five calls. Now you need to understand what's your conversion rate. So if you get five calls, what percentage of those calls do you close?
We found the average is roughly about 20%. So five calls times 20 percent conversion rate that nets you one contract. So in this example, what's your CAC? Your CAC is 1, 000. So it costs you 1, 000 to get a new customer. Now that may sound like a lot of money, but when you actually do the math, it's actually very, very inexpensive.
So let's go through it. So again, using our example from before, so let's say we have, we sign up a property that's doing 50, 000 in gross booking revenue, and you're going to make 5, 000 in that first year margins. Okay. If you take 5, 000 divided by 12 months, that gives you about 416 a month is what you're going to make on average.
So we have this outlay of 1, 000 to acquire this customer, but yet we're making this stream of income, this stream of profits of 416 a month, as long as you keep that property in your rental program. So for that, you know, from month, uh, one through month 12, you bring it in 416. And then also from, uh, if you think about it from year two, all the way through a year, uh, year 10 that you're going to do that.
So here's what it looks like if you're watching online on a cumulative basis. After 2. 4 months, we've actually broken even and from month three through 12 is all profit. And then from year two and on is all profit as well. So I would definitely argue that as a fantastic, uh, return. Now let's look at it one other way.
So we're going to look at it and talk about it on a lifetime basis. So again, we have this thousand dollar, uh, we've invested a thousand dollars. We've profited 50, 000. So that's a net of 49, 000 over the life of the property. Not bad. Um, but here's an example to make it even more relevant. If you were to invest that same thousand dollars into a low cost mutual fund, like the S and P index, and let's say you were to get 15 percent annualized return, which is fantastic.
That's a great rate. I would kill to have 15 percent year after year after year. You'd only have 4, 400 in your investment account after investing that 1, 000. But we talked about before you get a 1, 000 tack and you bring on a property like this, it's going to make you 49, 000. It's all said and done. So I would say there is not a better investment out there.
than investing in getting new inventory, uh, into your rental program. All right. We change gears. We're going to talk a little bit about unit economics. The definition is pretty simple. Um, can I make more profit from my customers than it costs me to acquire them? Hopefully if you're in a for profit business, you are.
Um, and there's three primary metrics that you want to look at when it comes to this. The first is ROI or return on investment. The next one is CAC recovery that customer acquisition cost recovery. We're going to talk a little about these in a little bit. And then the last is the LTV to CAC ratio. So this is lifetime value to customer acquisition and cost.
And we're going to dig into each one of these in a second here. Just as a side note for this presentation, these metrics, we do not include staffing and onboarding costs into the calculations. Um, we honestly, we don't do that because most vacation rental managers, it's usually have like the owner or the GM doing the owner acquisition.
And in addition to the a hundred other things that they're doing. Um, so it's really just too variable a number to kind of do. So just to make numbers equal across the board, we don't calculate that next, uh, necessarily into the, uh, LTV and CAC numbers. All right. So first up, we're going to talk about a first year ROI and five year ROI.
So for, again, for every dollar I invest in the inventory acquisition, how much am I making in profit? So typically what we're looking for a target of about a one X on that first year ROI and the top companies, though, we're seeing sometimes as high as 10 X on that, um, on that first year ROI. Now, on a five year ROI, our target is usually about a four X.
The top companies we're seeing as good as a 20 X, uh, kind of that best in breed. All right, now we're going to talk about, uh, CAC recovery or those customer acquisition costs. So our CAC recovery, if you remember was 2. 4 months. Now we are usually recommending, um, for most of our partners, if they can get your CAC recovery.
So again, we're covering those acquisition costs. If you can do it under 12 months around that one year CAC recovery. You are home free. This is a fantastic investment. We'll talk about in a little, a little bit why so much. Um, and you can only imagine that, right? If it takes you 12 months to recover your CAC and you keep a property for 10 years, that means from year two through year 10 is nothing but profit.
We're seeing even some of the best companies out there that best in breed, best in class companies are getting a CAC recovery under four months. All right, now we're gonna talk about the LTV to CAC ratio. So. This is again, the lifetime of profits of a property versus the cost to acquire them. This is what I call the Holy grail of all inventory, uh, acquisition metrics.
If you're going to track just one metric for inventory acquisition, this is it. So put it on your KPI, put it on your dashboards. And the reason why is it takes into account all the key factors, including profit margins, including account churn, and including acquisition costs. Um, so. On our end, for our partners, we're seeing about a 20X, uh, on that, uh, LTV to CAC ratio.
And the best in breed are looking for about a 40, uh, uh, X, uh, ratio here. Just to give you an idea, uh, the CASA's investor presentation, they said their LTV to CAC ratio was five to one ratio. Now, just to give them a little bit of benefit of the doubt, they probably are allocating some onboarding costs, uh, and also some business development labor costs in that too.
So it's not necessarily carrying, uh, comparing apples, uh, and oranges there. So here's the thing. If you have a solid LTV to CAC ratio and you have a systematic way of generating new properties back up a truck of cash and invest it into your back to your business, you've got literally a money making a machine where you're literally putting like dollar bills on one end and out.
The other end is pumping out 50 and 100 bills. Plus, if and when you decide to sell your company, you're going to get a huge check on the other side of it. So I know this is a ton of information. And Uh, if you want though, if you go to Venturi. com slash ROI. We actually have built out a really cool interactive calculator that allows you to enter in all your metrics, all your information, all your response rates, and it'll show you all those key metrics we just talked about.
You can play with it, make as many estimates as you want. Um, it's just a great way to, to figure it out. So, um, Heather, that's it. I hope I kept it under a time. That was absolutely terrific. Thank you so much. Um, just to reiterate, um, to get that interactive calculator, I mean, you can go to vintori. com forward slash ROI, or if you're watching on YouTube, you can actually go down to the description below and, and click on the link there as well.
So head on over to, to get that and, uh. Yeah, start figuring out how you're going to make more money. I wish, I wish, you know, I wish, Brooke. Well, when I was running my company that we'd spent more time on this. But, uh, yes, no regrets really, but you know, I, I, I think what you're doing is, is such an amazing job and thank you so much for joining me and, and talking about it today.
My pleasure. Thank you, Heather. We hope you enjoyed this episode of the tipping point. Don't forget to check out this week's sponsor price labs to help you master the art of dynamic pricing for your short term rental business. Click the link in the description of this episode for more information.