The concept of bundling explained

AccomNews Sunday, May 29, 2016

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You may recall that in my last article I was in the middle of presenting a series of seminars in an ARAMA roadshow around Queensland.

There were six presentations in total in South East Queensland, Airlie Beach and North Queensland, which were all well attended by enthusiastic members. If the level of enquiry since the roadshow was completed is anything to go by, the topic certainly struck a chord with managers and got them thinking about the way they operate their business and how they charge for their services.

In my last article, I wrote about some of the risks to the industry and opportunities that may now be available since the change in legislation in December 2014. In particular, I introduced the concept of ‘bundling’. Bundling is not new and has been around since the beginnings of management rights. What has changed, however, is the removal of the requirement to be bound by a commission structure, which now effectively opens the doors to new and innovative ways of charging for the services you provide to your unit owners.

Traditionally, services provided have been charged on a per service basis leading to a long list of individual charges, particularly in short-term letting. A bit like the ‘meal deal’ offered by many fast food restaurants, a number of services can now be bundled into one charge making it far simpler and less confronting to a unit owner. Typically, the bundled charge is expressed as a percentage of gross tariff revenue and would appear as one-line item on the unit owners monthly statement.
Let’s look at an example:

Currently you may be charging for the following items (exclusive of GST).
• Commission 12 percent of gross tariffs
• Advertising 2.5 percent of gross tariffs
• Merchant fees 2.5 percent of gross tariffs
• Foxtel $30 per month
• PABX $25 per month
• Room supplies $12 per guest stay
• Spring cleaning $250 per year
• Window cleaning $60 per month
• Administration fee $6 per month

By conducting a review of your historical trading performance you will be able to calculate what all these charges represent as a percentage of the gross tariff revenue of the property.

Let’s say these charges combined have historically represented 24 percent of your gross tariff revenue. By bundling these charges together, they could be replaced with one charge that might be described as a ‘property services fee’.

These nine separate charges are replaced with one fee, making it far simpler for your unit owners to understand while giving them comfort that you are only getting paid when they are making money.

You will note there are two significant items omitted from this analysis, cleaning and linen. They have been left out, not because they can’t be bundled, they absolutely can be, but more because they should be bundled with caution.

Cleaning and linen can represent a significant percentage of your revenue and can be very profitable irrespective of how much you sell your rooms for. This revenue stream can also be quite volatile depending on occupancy, average length of guest stay and your policy on service cleaning. As such, bundling cleaning and linen will require a more detailed analysis and a thorough understanding of how this revenue stream changes as your occupancy changes from year-to-year.

Once you have crunched the numbers and have confidence that bundling cleaning and linen will work, you will invariably end up with a total bundle percentage of between around 40 percent to 50 percent plus GST of the gross tariff revenue.

One of the biggest sources of angst among unit owners is when they receive their monthly statement and the majority (and at times all) the revenue from their unit ends up with the manager. This outcome will be removed by bundling, which creates one of the best-selling points to unit owners. Effectively, by bundling you are going into partnership with your unit owners and are sharing in the highs and the lows.

Again, it is critically important you do your numbers and ensure bundling will work for you. As discussed in my previous article, bundling charges such as advertising and merchant fees will also have added benefits to the future profitability and value of your business. If done correctly, bundling should result in a simpler more transparent business model with improved relationships with unit owners.

In theory, by bundling you may experience higher returns in the high season and lower returns in the low season but the same return over a 12-month period, all other things being equal. As such, cashflow management will become all the more important.

Importantly you will get a ‘pay rise’ every time you increase occupancy and/or tariff and share equally with your unit owners in the spoils of your success. If you have not started updating your letting agreements to the new Form 6 Agreement, now might be the ideal time to introduce bundling with the change to the new agreement format. Alternatively, you may look to introduce bundling to new unit owners entering the letting pool as units are sold to investors.