Vacation rental pricing is an exercise central to property management. Indeed, the practice of establishing a base rate with market data; accounting for your market and competitors in your rates, is key to your revenue, and therefore, success. “The primary aim of revenue management is selling the right product to the right customer at the right time for the right price”. So now we will begin to explore how to get that right price.
Vacation rental pricing
With vacation rentals being such a dynamic and sensitive market, it follows that our rates should be alive to this, and understanding the factors of dynamic pricing is critical in selling your unit and selling it profitably. And, dynamic pricing is underpinned by price elasticity – the relationship between pricing and demand – and pricing appropriately for the perceived value or conditions of any given situation.
In reality, there are numerous factors to balance out in an optimal rate in order to maximize your revenue. Within reason, lower rates mean higher uptake, but clearly the motivating force of owners and managers is to achieve the highest nightly rate possible, so there is a tug of war between maximising demand and profit. Indeed, occupancy itself comes hand in hand with optimal rates. We will also discuss other influences – for example, you must account for costs, factor in different distribution channels and segments and understand that booking window and seasonality also impact what a potential guest is willing to pay.
So, where do you start with pricing? Furthermore, what influences rate and how do we optimize it?
In this first blog post, we look at where to start; establishing base rate.
Establishing a base rate with market data
Whatever the inputs or factors you consider in your pricing, you have to start somewhere; a number you think is a reasonable base rate for a listing – and it should be specific to a listing. Broadly speaking, a base rate is a target ADR. Best practice for establishing a base rate with market data is to identify your unit’s classification (i.e. house with 2 bedrooms, 1 bathroom) and filter down ADR data for that classification within your market and area. You can do this by manually rate shopping properties in your segment on OTAs such as Airbnb, Booking.com and Vrbo, or you can source the aggregated data for representative and specific visibility throughout the year. Read about utilizing market data here. You can also look to your own inventory for an example of a similar property – its ADR and occupancy are real and could help guide you. As you can see in the following graph, rate can vary hugely from market to market, so it is important to be market specific:
Irrespective of how you get there, the idea is to pitch your unit rate competitively amongst units of similar specification that are subject to shared demand.
Therefore, the key to establishing a base rate with market data is refining this rate output as much as possible. Localise the market- a unit in Queens will achieve different rates than one in Manhattan. Similarly, proximity to transport hubs and tourist attractions in your area will affect value. Assessing the reasonably-occupied 1 bed apartments in your zipcode with air conditioning will give you a clear idea of what guests are paying.
What market data can’t tell you
While market data is the truest and most effective way of pitching your listing competitively, it still has limitations.
Another factor to consider is the quality of your listing. I’m sure everyone has visited very different versions of 2 bed apartments with 1 bathroom – we should try to understand the perceived value of aesthetics and amenities for example and compute that into rate. If your property has that less quantifiable value of quality over and above its neighbors, people will likely pay more!
Finally, it is important that you have a handle on the costs associated with your listing. Of course how much it costs you to host a night in your property will depend on length of stay, so work from your minimum stay. For example, costs might include fees, PMS or dynamic pricing percentages, online, and practical operations costs such as checking in and maintenance, and may extend to running costs. With some idea of what a reservation costs you, you can factor this in to establish margins. Whether you take a cut of booking revenue as a management fee, or keep the lot, as a manager you need to make sure that your shortest booking ADR total will at least cover your costs.
Establishing a base rate with market data for new listings
Once you have a base rate you are comfortable with, there is one very important qualification – start lower for a new listing. Think of the base you’ve determined as the target average once your listing is established, rather than the amount it should make off the bat.
Remember that ratings and reviews are critical to bookings and correlate with ADR. Your new listing does not yet have a rating or reviews (read more) and that drags the perceived value down relative to your competitive set – you should account for this in your initial pricing. This could be through a lower base, or through initial offers, which have the added benefit of reportedly pleasing the OTA algorithms: The potential bookings you could lose as a result of inflated starting rates is one financial loss, but even more critical is the long term health of your listing. We discussed that search ranking is integral to performance and is also self-perpetuating. Don’t risk it diminishing; capitalise on the increased visibility associated with a new listing. Keep the momentum by initially pricing underneath your potential; encouraging clicks and booking conversions early, and you will reap the benefits of maintaining that visibility and performance as your listing steadily commands a higher perceived value and rate.
Vacation rental pricing is ever-changing
Overall, it is important to remember that vacation rental pricing is not an exact science – perceived value and base rate are often not immediately quantifiable and your market is in constant flux, so the key here is to track your performance and not be afraid of AB testing and adjusting different base rates.
And so, it is important to
- Use market and inventory data to calculate an appropriate base rate for a property
- Refine base rate with property specifics
- Reduce your initial rate to capture early bookings and maintain a new listing’s search ranking
- Track performance and adjust rate as often as necessary
And this is all before we really get into dynamic pricing! Stay tuned for the next article covering just that; what affects pricing and how do we optimize rates day to day.
In the meantime, why not explore the benefits of applying professional market data to your strategy? Click to learn more or to book a demo: