Talia Lockard from vacation rental revenue management service Rented, borrows our blog to weigh up the use of historical and demand data in pricing your short term rental portfolio.
In my daily work as Director of Business Development at Rented, I’m surrounded by revenue managers who love to nerd out about occupancy, market trends, and forecasting. And they all share the same outlook: pricing a vacation rental always starts with data.
Our revenue managers use data to predict the right price at the right time. And put very simply, there are two ways to determine a pricing strategy for your rentals: historical data (looking back) and future demand data (looking forward). In this article, I’ll cover the differences between using historical and demand data—and which method my revenue-managing colleagues prefer.
What is Historical Data?
Pricing based on historical data relies on how a property performed in the past. That’s it. This simple definition has fueled projections of how any given property will perform for quite some time. Is this wrong? Absolutely not! We all learn many different skills based on past patterns. But, what if something crazy happens—like, let’s say a pandemic that shuts down the whole world and makes historical data irrelevant in most cases?
The problem with this historical approach is that there are many factors that may not hold true year over year, rendering this information obsolete. For example, new properties are often priced lower in their first year to build up reviews. And don’t forget Mother Nature—we just can’t predict how many feet of snow she’ll bring each year (not to mention wildfires or hurricanes) and how that will impact travel to destination markets.
And then, of course, there’s covid-19 and the global pandemic that rocked our industry in 2020. The most obvious disruption to historical data here is empty calendars due to cancellations, but we’ve also seen a significant influx of travel to destination markets due to pent-up demand. After the initial cancellation waves of March, April, and May, some markets started to see crazy YOY increases that will most likely normalize over time.
If we look at past ADR for the beautiful beaches in Destin Florida, you can see ADR was relatively the same in 2018 and 2019:
In fact, rates across all these destinations varied around 5% between 2018 and 2019. However, when we come to 2020, prices have moved 15% on average. Luckily, the drive-to destination of Destin fared well in the summer of 2020. That aforementioned pent-up demand after initial lockdowns allowed the ADR to soar $100+ in June alone.
Using historical logic, we would assume rates for 2021 should be about the same…right? Wrong, but let’s move on to demand data.
What is Demand Data?
The second way to build your pricing strategy would be to look forward and to determine what the market demand is for properties in the future—identifying the demand and average rate for bookings in the area over upcoming days and months.
Using demand data means that your price should be based on how many travelers want to book a property and how much they are paying. Demand data is a little more difficult to gather than historical data—you’re not looking solely at your own properties—and often, raw data doesn’t offer visibility into why each calendar was booked. For example, we can’t easily determine owner holds versus actual bookings or account for extended stays with higher discounts—both factors that drag ADR down for a given market. There are specialized tools like Transparent that can assist with ensuring you are collecting the right data when trying to get the optimal price per night.
Regardless, our revenue management team at Rented believes that demand data is the better option to use the majority of the time, because it is forward-looking and helps account for anomalies. After all, I have heard many industry professionals say “The only constant in our industry is change!” If our one constant is change, then why do we rely so heavily on past performance? At the risk of sounding cliche, there is no time like the present.
Look at the advertised rates for 2021 in Destin. Booking window and demand is what is dictating this pacing; however, the majority do not have visibility over demand, which in turn gives those who do an edge over their market. If you look at booked ADR you can see the difference from historical rates and use this for pacing your rates, and we urge people to consider the demand in conjunction with the advertised rates – these are the prices your potential guests are faced with, but identifying ‘hot or cold dates’ can allow you to act to squeeze a touch more ADR or snatch limited demand.
Do we expect to see these same ADRs in 2022? Absolutely not. As the world starts to settle, we can assume these numbers will start to level out—however, with virtual work and schooling becoming a new reality, we know travel metrics will likely look different going forward, compared to our pre-pandemic norms.
So Historical Data or Demand Data?
In conclusion, you really need a healthy mix of both historic and forward-looking data. Unfortunately, technology alone isn’t smart enough to do this automatically for us. It’s important for you as a vacation rental manager to really grasp this concept and have someone take full responsibility for your revenue management strategy, whether this is an outsourced team, in-house specialists, or a combination of both.
Because pricing may start with data, but it takes some know-how to turn those numbers into a powerful revenue management strategy.
Rented provides technology, tools, and services to help vacation rental pros optimize their portfolio of properties. Art, our Automated Rate Tool, is the only dynamic pricing software built for and by professional short-term rental revenue managers.
For companies that need hands-on support, our Revenue Management Service provides a dedicated revenue manager that specializes in handling every detail: setting prices, monitoring performance, and making custom adjustments. Learn more at Rented.com or follow us on LinkedIn.
If you would like to learn more about market insights such as demand, advertised ADR, booked ADR pacing or historical data, you should book a demo with Transparent to discuss your market!