How do you choose the right price for your short-term rental? In our previous article on selecting a base rate for your listings, we talked about how to start with short-term rental pricing. Here, we get serious talking about setting optimal variable rates.
You may have landed on your base price, however, in reality there is no ‘right price’. The key is selling at the right price, to the right person, at the right time; meaning that that perfect rate will look different on a different platform or on a different date. This is the fundamental principle of variable rates – or dynamic pricing.
Importance of variable rates
The bottom line is that setting optimal variable rates is crucial to a vacation rental property manager’s bottom line. And, while there’s data to inform your base rates and variation, and automated pricing tools to implement these rates, it pays to understand the principles and level-up your strategy. So why not read on?!
Flat Pricing Vs. Dynamic
So we have a base rate. Why not set our pricing at this rate across all availability and relax? Let’s explore the reality of advertising a unit with a flat rate.
Our unit is a 2 bed in London. The average nightly rate for a London 2 bed in 2018 was $253, and we advertised our listing at $253 for every available night. In actuality, data also tells us that the average price in January was $221, while the July ADR was $292. In January, at $32 more expensive than the average bookable listing, the probability of our unit being occupied dropped significantly in that low demand period. In July, whilst our property stands a much better chance of being occupied, selling at $39 less per night could leave your July revenue up to $1185 less than market average. While these are extreme examples, imagine these discrepancies throughout your availability, and think of the revenue you’re missing out on when you don’t vary your pricing. Remember your objective; to sell each and every unit for the maximum possible revenue each and every night.
So we can very obviously see the disadvantage of flat pricing. The critical point is that an average rate isn’t the mode price a unit is most commonly booked at, it is only a mean, ‘middle’ point of all nightly rates booked. In practice this means that every time we advertise at exactly that average rate, as above, it’s highly likely that we’re either reducing our chances of receiving a booking, or losing potential revenue. This is because the maximal potential rate for any given night is subject to many factors of demand.
Ultimately, there is a logical advantage to our unit rates being as dynamic as the demand they face. The concept of price elasticity underpins this, describing the relationship between rate and demand.
Factors in variable short-term rental pricing
Our example above only considers one demand factor that might affect our pricing; seasonality. There are other important factors to account for, such as:
- Unit characteristics
- Localised demand spikes
- Channel demographics
- Days before arrival (time left to sell the room night)
- Market (supply & rates)
- Inventory control
- Day of week
We will dive into these influences in a forthcoming article, but once you understand the multitude of forces acting on rate, it is easy to see understand how nuanced our pricing should be. As a result of this, many operations elect to ‘automate’ their rates through automated dynamic pricing software.
A derivative concept of variable rates is that pricing should be open, keeping as many doors open to potential guests as possible. Open pricing means concurrently offering different rates; pricing different products or channels independently. For example, a certain length of stay may be less appealing or profitable to you at a given point, so you combat this by adjusting rate for this booking type to make it cost effective, rather than closing it off. This is a useful approach, optimising revenue whilst maintaining reach and selling opportunities, which cannot currently be managed exclusively through dynamic pricing software (more on this to come).
Application of variable rates in short-term rental pricing
Our most recent property manager survey revealed that 32% of hosts only update their rates monthly or even less frequently. ‘Set and forget’ is not an effective way to manage your pricing. Once a rate is calculated, it is out of date. This may sound exhausting, but an important feature of dynamic pricing is its proactivity and reactivity to change.
Once again, AB testing, tracking and forecasting are your friends here. Often, this is of course underpinned by vacation rental data. Forward-looking data will highlight demand and allow you to exploit it, while by pacing a unit’s occupancy at particular rates across various channels and times, you can proactively build a picture of a range of optimal rates and booking windows.
As you can now comprehend, the degree of nuance is never-ending, and as a result, many short-term rental property managers have turned to automated dynamic pricing tools.
Automated Dynamic Pricing Software
These are usually algorithm-based calculators that generate a rate for a given day based on parameters set by the user. They tend to account for market supply, local demand or events and seasonality/day of the week, amongst other factors. In essence dynamic pricing software is a great concept, regularly and automatically updating your rates according to real-time market feedback, which can boost your OTA ranking, and reduce workload.
They do however have their limitations. Consider the demand factors we mentioned for a start; the algorithms do not categorize units by value or quality – this is only translated through the base rate that you can supply. There is also no automated differentiation between distribution channels. Mark ups for fees or rate demographics must be applied thereafter through a channel manager or property management system.
These tools can only account for so much ‘automatically’. Often they are hugely flexible but it is down to you to identify an effective customisation for different conditions, based on your own understanding of the market. These customisations can apply to day of week, days before arrival, orphan stays, length of stay and more.
Rates are not necessarily intelligent to your occupancy or performance. Using internal data to track booking pace and occupancy, adjust rates and repeat forecasting ensures that your rates are continuously intelligent to the many influences and factors of demand.
Costs can exceed 1% of total booking revenue, which of course is a greater percentage of actual revenue after fees. Further, if your operation works on commission, that’s a huge proportion (~5-10%) of your revenue if you alone bear the cost.
It is critical that you understand the logic of any platform you use. To give an example, one pricing software may generate expected or actual rates, irrespective of DBA, whilst another could artificially raise rates further out. In other words, if November dates are opened, a platform may either suggest rates that those dates are actually expected to sell at, irrespective of whether it is currently 6 days or 6 months away, or it may apply a graded premium based on you having longer to sell the availability. These nuances are of course manageable by instructing the software with customisations, but you must identify and understand them first.
Most crucially, this software is limited by its reach and the parameters you set for it. For example, if it is working to an ill-informed base rate, constrained by an inappropriate maximum or even working to customizations that aren’t sensible, then rates won’t be optimal. So, you can see how it would be a mistake to assume that this technology will always be sufficient on its own. It can be an amazing tool to facilitate your strategy and apply it more efficiently, but a sound understanding of your strategy and the components that drive it is imperative to maximize your revenue.
Often, this comes down to underpinning your strategy, parameters and expectations in short-term rental market data. Set, pace and adjust proactively.
Short-term rental pricing: setting optimal variable rates
- Variable rates are essential for realising maximal revenue potential
- A number factors influence rate variation
- Dynamic pricing is, by its nature, in constant flux and should be reviewed and proactively adjusted
- Price automation software is useful and efficient as a vehicle for your strategy but is not comprehensive
- A sound and data-based pricing strategy is important whether you implement through automation or not
Acknowledging the importance of variable rate is only worth anything if the variations are founded and effective, so next we will look at some forces that shape those variations.
In the meantime, take a look at what market data can do for you: