Note: Lessons from The Overlook is a periodic update on lessons learned from owning a vacation rental property in the Southern California mountain town of Idyllwild. It's a hands-on opportunity to apply some of the techniques I advise my clients to use. You can find past updates here.

We had a last-minute cancellation in December.

In the past, this revenue would have been hard to replace. Guest generally reserve The Overlook four to six weeks in advance.

This time it rebooked the very next day. In fact, The Overlook had three inquiries from potential guests.

The re-booking reflects a broader trend. Revenue at The Overlook was up 31 percent in 2020 compared to 2019. It's been occupied every weekend for several months. (The market is primarily focused on weekend rentals.)

Why did this happen?

There are several factors. We reduced the maximum capacity from eight to six to capture a larger market for smaller groups. The pandemic has shifted travel preferences, with many guests favoring isolated vacation rentals like ours over crowded hotels.

There's one more big factor: we've actively avoided cheap customers.

Cheap customers don’t appreciate the value you provide and they can be dangerous to your business. Here's more about who is a cheap customer, why they're dangerous to your business, and how you can avoid them.

Who is a cheap customer?

Cheapskates are ultra-price-sensitive customers who prioritize low price over everything else. While nearly all customers would rather pay less, cheap customers take thriftiness to another level.

It takes a substantial discount to lure them in. That discount isn’t appreciated, such as a restaurant guest using a 50 percent off coupon and then pretending it’s their birthday to get a free dessert.

They often demand exceptionalisms, which is a request for something extra that couldn’t reasonably be expected. Arriving guests recently called our property management company and asked for someone to come put snow chains on their car. The guests were at least 20 minutes away from The Overlook.

They often take unfair advantage of a business’s goodwill.

One group of cheap guests at The Overlook took every spare roll of toilet paper in the cabin. They also took all the extra soap, shampoo, and paper towels. The items are all small, but the cost of replacing them adds up.

Some months ago, a group of eight people arrived to check in. The guests knew the maximum capacity at The Overlook is six, but they told our property manager they didn't think the two extra guests would be a big deal. They were hoping to skirt the rules and save money.

Fortunately, our property manager was able to re-accommodate the guests at another, larger cabin. Adding two extra guests is a big deal for reasons I’ll explain in just a moment.

Why should you avoid cheap customers?

Cheap customers are generally unprofitable. They cost more to serve, bring in less revenue, and can hurt your reputation.

One of the reasons we reduced our capacity at The Overlook was eight guests tended to cause a lot of damage:

More dishes were broken.
Furniture was more likely to be stained or scuffed.
Small items, like flashlights or our snow shovel, were more likely to go missing.
More trash was strewn about the property and heaved off our deck.
We’ve gotten noise complaints from neighbors.

There’s also an issue of accommodation.

The Overlook now has just three beds: two queens and a king. There’s no pullout sofa or air mattress. Where would eight people sleep? Likewise, the dining table has six chairs. Where would eight people eat?

It wouldn’t be comfortable.

That group of eight chose The Overlook because they were trying to get a deal, not because they loved our cabin. Experience tells us they would make a mess and then wouldn’t come back.

Cheap customers are also more likely to spread negative word-of-mouth about a business. A study on restaurants that offered Groupon deals found two effects.

First, restaurants increased their number of Yelp reviews by an average of 84 percent after offering a Groupon deal. Second, those same restaurants on average suffered a 12 percent decrease in their Yelp rating.

Customers using Groupon deals hammered the restaurants with negative reviews.

How can you avoid cheap customers?

The best way to avoid cheap customers is to focus on offering the best value proposition rather than the best price. Cheap customers will only pay rock bottom, while most other customers are willing to pay a little extra if they get a lot more in return.

That's what we did at The Overlook.

We raised our prices 11 percent last year. This put our average nightly rate at the high end of our set of comparable properties.

The higher rate discouraged cheap guests from booking, but our incredible value proposition made The Overlook seem inexpensive to guests who appreciated all the cabin has to offer.

The Overlook is in the mountain town of Idyllwild, where vacation rental guests generally look for several key features:

Expansive views
Spa
Fireplace
Deck
Pet-friendly

Most of our competitors have some, but not all of these features. The Overlook has all of them, plus a few extras that are not as common in Idyllwild:

Air conditioning
Fully-stocked kitchen with a blender, crockpot, serving platters, and more
Game room with a ping pong table
Second game room with shuffleboard, puzzles, and board games

Another way to add value is to eliminate annoying fees and include extras in the regular price.

Popular vacation rental sites such as Airbnb and VRBO charge booking fees that can be 10 percent or more of the rental cost. The Overlook can only be reserved through our property manager, Idyllwild Vacation Cabins, which does not charge a booking fee.

We also include a lot of extras that many vacation rentals charge as separate fees:

Cleaning
Spa heating and cleaning
Snow removal

So our nightly rate might be a bit higher, but our total price ends up a bit lower. Cheap customers won't notice this and avoid our cabin while value-oriented customers recognize the deal they're getting.

I’ve taken the same approach for my keynote presentation business. Travel costs within the continental United States are included in my fee, so clients don’t have to worry about separate bills for air fare, hotels, dining, etc. Many clients have told me they appreciate not having to deal with these additional charges.

Take Action

It's tempting to offer discounts to grow your business, but that brings the risk of attracting cheap customers who won't be loyal and are unprofitable to serve.

You can do better by making your value proposition as strong as possible.