From Full Vacation Rental Occupancy to Full Vacation Rental Profit

When it comes to vacation rental occupancy, higher the better is the conventionally accepted wisdom.  So, why is 100% occupancy not the answer to your short-term rental success? Well, for starters, if your occupancy is well above market average, there’s a strong chance that you have been leaving money on the table with your average daily rate (ADR). It’s key to strike a balance between occupancy and rate in order to maximize vacation rental revenue: In this article, VacayMyWay shows us more effective ways to track and measure performance than looking purely at occupancy, and also provides some top tips on balancing occupancy with ADR.

Occupancy levels, along with ADR and RevPAR have been the key metrics for revenue managers in the hospitality industry, and while the vacation rental industry is still the new kid on the travel industry block, these measures still ring true.  Even a single vacation rental property owner can utilize these tools to ensure they are maximizing revenue while minimizing wear and tear on their property.  

Isn’t 100% Vacation Rental Occupancy the Best Possible Scenario?

Anyone managing a vacation rental would look at a fully booked calendar and have a hard time not getting excited.  The trouble with 100% occupancy in vacation rentals is that it doesn’t translate into the highest revenue.  Don’t forget to focus on the actual revenue and compare it to the potential of the property – market data can provide invaluable visibility when it comes to this benchmarking.  In simplistic terms, if you’re booked every night, you may have left money on the table by not selling at a higher rate.  

For example, if your property is 100% occupied for 365 nights per year at $100/night, you’ll project an annual Gross Booking Revenue (GBR) potential of $36,500.  Of course any discounts would reduce that potential revenue and – even 7 nights per month with a 15% discount reduces your revenue by $1,260 .  So it’s clear that revenue is very sensitive to ADR shifts.

And so, pushing your ADR higher will have a very beneficial effect on your bottom line – even if your occupancy suffers a little. Referring to your vacation rental neighbours – either through manual rate shopping, or investing in vacation rental data to bring accurate and time-saving answers – will guide your ADR decisions and ensure that your ADR is aligned with your competition. With data it is possible to gain insights for a highly specific segment of short-term rentals – how are 2 bedroom apartments in the same zip code on Airbnb priced throughout July? Benchmarking from their ADR means that you can control how your value plays to your audience and maximize your revenue.

Your goal should be to balance ADR and occupancy as closely as possible, which could mean turning away low-ball guests, or waiting longer to lower your rates on busy weekends and during peak season.  

How do I calculate my occupancy rate?  

It’s actually pretty simple: Just divide the number of nights the property is booked by the number of days it was made available within your time frame.  Most of the time, a monthly time frame is used to track performance.  

Example 1: Monthly Occupancy Rate – If a property is booked 25 out of 30 days in a month, the occupancy rate would be 83%.

Example 2: Annual Occupancy Rate – If a property is booked 281 days out of 365, the annual occupancy rate would be 77%

How about ADR, how do I calculate that?  

ADR is calculated typically on a monthly basis as well, dividing the total revenue earned by the property by the number of nights booked.  

Example 1: Monthly ADR –  If a listing earned $3,100 of GBR in one month and the property was booked 25 days, the ADR for that month would be $124.

Example 2: Annual ADR – If a host earned $28,000 in GBR with 281 nights booked, the Annual ADR would be $99.64

So how else can you find the perfect balance between vacation rental occupancy and ADR? 

Here are a few pointers to help you gauge your best case occupancy vs. revenue scenario: 

  1. Watch those neighbours – if your occupancy is far higher, this could be a sign of you underpricing. On the flip side, if you have a surplus of availability and your competitor properties are full, you may be priced too high and it’s time to consider a price adjustment. Why not check out the top performers in your market and use them as a guide?
  2. Pacing can be a highly useful tool to understand how your bookings are tracking for a particular time period – you can compare with a previous year or track to a certain occupancy target; adjusting rate as you go.
  3. In any case, having an optimal target occupancy and understanding how this should progress is important.  Many hosts don’t realize how late guests tend to book, particularly in urban markets with more inventory options, and lower their rates prematurely.  
  4. Get back to that data – basing your pricing on what potential guests can book can’t fail – what’s more you can make proactive changes to your rate if you see that market occupancy is very high or low on specific dates, to steal the extra ADR or revenue ahead of your competition.
  5. Adjusting your rates accordingly – as often as possible – is key to maximizing ADR. Our research shows that frequency of rate adjustment is directly correlated with revenue.
  6. The aforementioned RevPAR can be an excellent metric to target as it combines ADR and occupancy – revenue per available rental night (ADR * booked nights / total nights made available) effectively gives an amount earned per night your property was available – clearly showing the balance between ADR and occupancy. $100 ADR * 20 booked nights / 30 nights made available = $67, but $135 ADR * 15 booked nights / 30 nights made available = $67.50

Remember, occupancy is not the only measurement tool for success.  A long-standing rule adopted from the hotel industry is to aim for 70-80% occupancy, and by maximizing ADR through pricing strategies like those suggested above, you can turn a similar or improved profit whilst also sparing your property excessive wear and tear.  Afterall, sometimes the best guests are no guests at all.  

Heidie Henriksen – Vice President of Business Development, VacayMyWay & Co-Founder of ASTRHO (Association for Short-Term Rental HomeOwners)

Leading business development efforts for VacayMyWay, Heidie is a short-term rental industry expert with over 20 years of experience promoting and operating vacation rentals. Her most recent venture was with ASTRHO (The Association for Short-Term Rental HomeOwners) to bring short-term rental homeowners together to share best practices within the industry.

Learn more about how data can power your vacation rental property management company:

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