Fractional Ownership: The Resaissance of Timeshare

In the December 2005 edition of the Wiglaf journal, I wrote about some of the developments and milestones that were witnessed in The World of Pricing in 2005. An earlier version of that article appeared on this blog here. As we pass the half way point of this year, is it too early to speculate on what might be one of the most important developments for 2006?

More and more companies around the world, from Seattle, to Shanghai and Sydney, are trying to sell more services. After all, as Allmendinger and Lombreglia point out in the October 2005 edition of the Harvard Business Review[1]:

“…smart service providers are..deriving more than 50% of their revenues and 60% of their margin contributions from service, as opposed to product sales.”

An increasing number of companies around the world are finding a solution to this challenge in a business model that was developed 43 years ago by the French company Société des Grands Travaux de Marseille. The model is applicable in B2B markets, where company’s like NetJets has been using it for years. Likewise B2C companies, like GolfClubDemo.com, Bag, Borrow and Steal and Bags to Riches are using it. Even former Formula 1 driver Damon Hill has adopted the model at his company P1 International. What is this model? You may know it as time-share, or the by the increasingly common moniker of ‘fractional ownership’.

Who’s doing it?
At P1 International, members pay a £2,500 joining fee and either a £11,750 or a £13,750 membership fee, in exchange for anywhere between 50 and 70 days a year in a high performance vehicle like a Bentley Arnage T or a Lamborghini Murcielago. Manhattan’s Classic Car Club and Club Sportiva in San Francisco offer similar services to P1 International.

Log on to GolfClubDemo.com and select a new driver or putter to test. It will be FedEx-ed to you in two days, after which you have a week to work on your handicap. Return the club in the supplied FedEx boxes and select another club, or apply the $25 charge for the club to a purchase from a partner retailer.

And while he is on the golf course, she can part with between $19.95 and $174.95 a month and be seen with the latest Chloe, Fendi or Gucci handbag, and hang onto it for anywhere between one day and six months.

A Subscription Model by Another Name?
All these companies, and others, are offering what is most commonly known as fractional ownership schema. Other commentators use terms such as Leasing Luxury or Temporary Ownership[2]. Regardless, most customers of these company’s, in one way or another, are joining forces to purchase collectively, or qualify to rent or lease, a product or service that would otherwise typically be out of reach for the consumer.

Writing in the Harvard Business Review recently, Pedraza and Bonabeau[3] attempted to distinguish fractional ownership from a concept they term ‘variety-in-luxury’. Taken literally, variety-in-luxury also describes one of the main benefits of such schema, allowing customers to do something that otherwise would be very expensive to do: experience variety in luxury goods. Where variety in a product is more important than access to it, the authors believe variety-in-luxury is the paradigm. Fractional ownership on the other hand, applies to the situation where “access to an item is more important than variety”.

To illustrate the difference, they give the example of Tanner and Haley Resorts that, in return for upfront fees of $300,000 to $500,000 (for a 30 year membership), annual fees of between $5,000 and $20,000 and overnight rates of between $200 and $400, members can live in a variety of luxury properties for up to 60 nights a year. While variety may be more important than access in this particular example, the concept of value is determined by the customer, and not by the product or asset category. Luxury cars for example could equally fall into the categories of both fractional ownership and variety-in-luxury.

The Fractional Ownership Society
There is a long list of reasons why fractional ownership is booming, some of which relate to the product and the business model itself, while others reflect broader trends and developments in society in general.

Fractional ownership is ideally suited to “Generation Debt”, those consumers who want the best in life, but don’t want to save up for it. It is also ideal for those who don’t want to hang on to assets for too long: like shoppers at Ikea, they don’t purchase furniture to pass on to the next generation. This is particularly the case with classes of assets that depreciate, rather than appreciate. And of course, the customers get the benefits of using the products without actually owning them, as well as the ability to change the product according to their whim or fashion.

What’s In It For the Company?
The rewards for companies who can sell a product as a service are potentially enormous. These models offer a revenue stream, like an annuity, rather than the one-off, lump sum payment reaped from a single transaction: selling the product. Furthermore, if all five pre-requisite of revenue/yield management can be put in place[4], such services can be sold in a way that minimises the consumer surplus, in the same way that airlines, hotels and car rental companies attempt to do so.

However, like an airlines’ fleet of aircraft, fractionally-owned products only make money when they are working. A handbag or golf club doesn’t make money while it is sitting on a shelf. It should however, be possible to depreciate the inventory of fractionally-owned products.

Companies offering fractional ownership schemes can also enter new market segments. They can capture the middle market, which may consist of customers who can’t afford outright ownership of a luxury product, but don’t tolerate knock-off products.

Fractional ownership schema also allows customers to enjoy the benefits of a product without the inconvenience of ownership. Members of Damon Hill’s P1 International can drive a Ferrari without having to worry about insurance, maintenance or registration. While they are out driving, no one knows that they are not the outright owner of the vehicle. And of course, when they pull into the country club, with a new set of (GolfClubDemo.com) golf clubs, they can be tested on a real golf course, and not in the back of a pro shop. All of which helps the customer make a more informed purchase decision, having found (cost-effectively) the product they really want.

More Pro’s than Cons
Sounds too good to be true? Well there are a few risks and potential downsides associated with fractional ownership schema, but fortunately most of them can be mitigated. Any fractional ownership provider runs the risk that ‘runners’ will shoot through with the product. This situation can of course be mitigated by vendors taking out appropriate insurance.

Another possibility is that the product gets returned damaged: a Mont Blanc fountain pen leaks in a Gucci handbag for example. No problems in the case of Bag, Borrow and Steal, where customers can take out insurance for anywhere between $5 and $40.

Finally some fractional ownership models allow customers to keep the product for as long as they like, a practice that may not assist in optimal scheduling of the next hire, as well as diluting the potential benefits of a revenue/yield –managed service.

Premium Products, Premium Services
There is a lot of value in many of the fractional ownership schema examined above. Product and service providers that understand the value their products are delivering should be able to capture that value in premium pricing. Commercial aircraft in the US can land at 500 airports, while Biz Jets, such as those operated by NetJets, can land at 5,000 airfields. It is value propositions like this that should help command premium pricing for what Allmendinger and Lombreglia call smart service providers.

References

Anon (2006) “Ferarries to go” in The Economist, 14th January, p65

D’Innocenzio, Anne (2006) “New Ways to Satisfy Lust for Leasing Life of Luxury” in The Seattle Times, 21st March, accessed online at www.seattletimes.com on 21st March 2006

Foust, D (2006) “Now You Can Try ‘Em Before You Buy ‘Em” in Business Week, 30th January, p107

Gross, D (2006) “How Much For Those Used Jimmy Choo’s?” in Slate, accessed online at www.slate.com on 22nd March 2006

Jackson, K (2006) “Renting Luxury” in Open Skies, January, p31

Pedraza, M & Bonabeau, E (2006) “What is Luxury Without Value?”, in Harvard Business Review, April, accessed online at www.hbr.org on 29th March 2006

All prices mentioned are in US dollars

Footnotes

[1] “Four Strategies for the Age of Smart Services”

[2] D’Innocenzio, Anne (2006) “New Ways to Satisfy lust for leasing life of luxury” in The Seattle Times, 21st March, accessed online at www.seattletimes.com on 21st March 2006

[3] Pedraza, M and Bonabeau, E (2006) “What is Luxury Without Value?”, in Harvard Business Review, April, accessed online at www.hbr.org on 29th March 2006
[4] The five prerequisites for revenue/yield management are: (a) the product is perishable, (b) there is limited capacity of the product, (c) demand for the product is variable, (d) incremental costs are low or non-existent and (e) market segmentation is possible.