Optimized pricing is a crucial part of being successful that requires time and energy. It’s not a simple task but it is an important one that can help you achieve your full income potential.
Below we break down our process to help you become a pricing expert!
Step 1: Identify Comparable Properties
This step is relatively straightforward. Identify a group of properties that are as similar as possible in a given location that is close to your home. If possible, identify at least 10 or more properties to compare. This comparison will help you identify what your competitors are priced at. Look at their calendars at a variety of dates. Choose dates that land on weekend, weekdays, holidays, peak season, and low season. Get an idea of the range and averages. When choosing the comparable properties, make sure you are comparing not only size and location but also the type of amenities that are being offered. Some may have the same while others may or may not have the same amenities that you have. There may be amenities that are standard in your market such as heating or A/C while others may add more value. For example, if most properties do not have a pool but yours does, this puts you at an advantage and may enable you to price a little higher. Log this information into a spreadsheet so you can look back on it when necessary. This will help you identify how to price your property.
Step 2: Choose your Pricing Strategy
There are four pricing strategies you can choose from to help guide your decisions.
Maximum Occupancy
Maximum Rate Per night
Long-Term Price
Balanced Approach
Each strategy has its own Pros and Cons and selecting the right one is important to help you drive the success of your rental property. Will break down the benefits and drawbacks of each.
Max Occupancy: This strategy employs the concept of low-cost price leading to maximize the occupancy of your rental property. In other words, you have to match or beat the price & value in which your competitors are using in order to attract the max number of guests and price at a level that is impossible to pass up. For example, if you have a gap in your calendar and your average rate is $99/night, you may discount down to $30/night in order to fill the gap. The idea here is that $30/night is better than $0/night.
The benefits of this strategy are that it ensures a good occupancy rate and reliable income. The drawbacks are that it requires a fair amount of attention and monitoring of competitor pricing, can limit profitability, and can incur more wear and tear due to the high levels of occupancy.
This strategy is good for individuals who are seeking reliable income each month, have a low risk of damage or loss to their home (i.e. no expensive furniture or decorations, limited disturbance and disruption to neighbors, etc.), and low overhead costs.
Max Rate Per Night: This strategy employs the concept of a price-leader. The idea is to set a high, premium rate for the property to achieve the highest possible rate in lieu of occupancy to increase the overall net profitability of a single booking. So while you may sacrifice occupancy, your overall net profit for each booking is higher.
The benefits of this strategy are that it requires less time to manage the pricing since it is more or less fixed with very little discounting, if any. Another benefit is that fewer bookings mean less potential problems and you make a decent profit even if your occupancy is lower than 50%. The drawbacks are that you have lower occupancy and run the risk of getting less monthly revenue. Another potential drawback is that higher-price, luxury homes are typically more often targeted for fraud or theft. This is because the risk to reward ratio for someone using a stolen credit card is more equitable than someone risking using it for a discount motel. It just means that you may have to be more thorough in vetting potential guests.
This strategy is good for individuals who might have an extremely unique and/or luxurious property. It could also be good for those who have high operating costs.
Long-Term Pricing: This strategy is the standard monthly rental model in which you set a monthly rate based on lease term and it stays fixed no matter what.
The benefits of this are that it provides consistent income and very little management. You simply set the price according to your property size and location and rent to a tenant. The cons are that you need to list on multiple platforms, interview and vet potential tenants through screening and credit checks, it typically generates less profit than it’s short-term counterpart, and are locked into a rental agreement for a fixed amount of time.
This strategy is good for hosts who may be traveling or not in the area. It is also better for properties that may be located in heavily regulated locations.
Balanced Approach: The approach balances the aspects of all the strategies above in order to maximize the revenue. This will provide the most net profitability through achieving the highest rate but also the highest occupancy. Earning a higher RevPAR(Revenue Per Available Rental) is the goal. RevPAR is calculated by Monthly Revenue divided by 30 nights. For example, if someone rents their home at $200/night and books 10 nights, their RevPAR is $66.67 ($2,000/30). If another rents their home at $150/night and books 20 nights, their RevPAR is $100 ($3,000/30). You can see that even though they charge lower rates they are actually earning more money than the higher-priced counterpart.
The benefit of this strategy is that it is the best way to earn the most money. The drawbacks however is that it is also the most time-consuming since you have to analyze data and booking trends, identify what kind of seasonality your location has, compare competitor pricing, and manage your rates & discounting. While it is very time-consuming, the reward can be much greater.
This strategy is good for large companies with teams or individuals who are completely dedicated to their business and have fixed and/or lower operating costs.
Step 3: Analyze available market data
This is where software and technology can come in handy. While humans are more capable at making insightful analysis of data, computers are much faster at gathering the necessary information into data sets for us to analyze. Many booking platforms will have some data available for you to use and will have data specific to your property, like Airbnb’s ‘Performance’ tab that tells you how your property is performing. This is important to utilize to ensure that what actions you are taking are having a measurable impact. For example, by using the Occupancy and Rates metric you can see how your property is performing and compare it to similar listings. You can also use the ‘Conversion’ metric to see how well your property is standing out and how many first-page impressions you are getting. Using the metrics will help guide your decision making in what actions you may or may not need to take.
However, these metrics are only available once your listing is up and running and are only meaningful after about the first 30+ days of being online. Afterall, you need a reliable data set to be able to glean any meaningful insights. Other third-party data providers can be extremely helpful in providing this information and more before you even list your property. At Xenius our preferred data provider is AirDNA, a powerful data provider that provides interactive analytics such as booking trends, seasonality, rates, future demand, and more to help you drive performance. Utilizing a tool like AirDNA can help you make accurate predictions and insights because it provides a large wealth of information on an entire market. With filters and tools to specify what kind of property size you have it enables you to hone in on the property-type or get the overall market view. Leveraging a tool like this will help you stand above the crowd and guide your rate settings to improve your ability to maximize your revenue.
Step 4: Choose your base pricing
Choosing the right base pricing is a crucial part of your rate strategy. In this process you will want to select at least four types of base pricing: Weekday, Weekend, Price Floor, and Holiday. This step combines the step 1-3 to identify your base prices. You will utilize comparable properties, your pricing strategy, and market data to determine what your base pricing will be.
Weekend/Weekday Pricing: Because weekends are typically in higher demand across all markets, the weekend price should be higher than your weekday pricing. How much higher will depend on the seasonality for your market. For example, if your market is predominantly a weekend market (meaning most travelers only visit Friday-Sunday), then your weekend pricing may be significantly higher than weekday pricing . If demand is spread through the weekdays as well, particularly during the peak seasons, then weekend pricing may only be slightly higher. Conversely, weekdays are typically in lower demand. Using the similar analysis in identifying your weekend pricing will help you decide what your pricing should be. Selecting your weekend & weekday pricing will depend heavily on which pricing strategy you choose in Step 2. For example, if you choose Max Rate of Long-term strategy, then the rate variability may be quite small, if any. Whereas if you choose the Max Occupancy or Balanced approach, you may find the rate variability to be substantial. Keep in mind,your rate strategy should be your guiding principle in how to price your property, however, the comparable properties and market data should be your guide in what amount to price your property at.
Price Floor: The price floor is the absolute lowest rate you will accept for your property. This should only be utilized for last-minute bookings or special promotions. Your price floor should be determined by utilizing the same steps as above, however, you should also identify what the operating costs are for your property and utilize that in order to set a price floor. The idea here is that as long as it is not costing you money to host a guest, a lower rate is better than none. For example, let’s say your operating cost is $90/night no matter if the home is rented or not. If you do not have a booking for the next two nights, then keeping your rates at $150/night and getting no bookings is the equivalent of having to pay $90/night yourself for those unbooked nights. Instead, employ your price floor to attract a last-minute booking to at least cover the costs. Remember, $90/night is better than $0/night. This is also true for maximizing your RevPAR in a Balanced approach.
Holiday Pricing: Holiday pricing should be determined for the holidays which generate the most demand. These vary from market but typically are Thanksgiving, Christmas, New Years, Memorial Day, and Labor Day. Because the demand is greater for these periods of time, it is best to price them at a higher rate. How much higher will be determined by the market data and comparable properties in the area. Get an idea of how many travelers are coming to visit during those periods and what your competitors are pricing at and set your rates accordingly. You can always discount as the dates get closer but it is best to keep them high, particularly if they are 30+ days out, in order to maximize your revenue.
Depending on your market’s seasonality it may be good to determine a High a Low season base pricing as well. For markets that have a high degree of variability in demand this would be good. For example, a market may have high demand in the Spring and Summer months but significantly lower demand in the Fall and Winter and therefore it would be necessary to set the base pricing for those seasons accordingly. These prices should be determined using the above approach, creating a group of high season base pricing and low season base pricing.
Step 5: Identify your discounting principles
Determining your discounting principles will be influenced greatly by the pricing strategy you choose. With some strategies, such as the Max Rate and Long-term strategies, you may not discount much if at all. Nonetheless, it is important to specify what kind of discounting you would implement, if any. Common discounts will focus around the booking window and length of stay. For the booking window discounts, the formula follows as such: If the check-in date is less than x-days aways, then x-discount is applied to the base rate. For example, if the check-in date is less than 7 days away, then a 20% discount is applied to the base rate. You can utilize this formula to decide if you want to discount numerous times as the dates go unbooked and check-in is closer. This way, you will ensure your home gets booked for something rather than nothing. Keep in mind, this discount strategy does not apply to all homes and is better applied to strategies that focus on maximizing revenue, such as the Max Fill and Balanced Approach strategies.
Length of stay discounts are also a popular option for discounting and applies to every strategy, particularly the Long-Term. The idea is simple. For any stays that are longer a discount is applied to the overall rate. For example, for stays of 7 days or more you would apply a discount of 15% or stays of 30 days or more would receive a discount of 30%. The length of stay and the discount amount are set at your discretion and depends on what kind of bookings you want to attract. Typically, because longer stays equal a greater RevPAR (Revenue Per Available Rental) it is a good idea to offer some kind of LOS (Length of Stay) discount to incentivize travelers to stay longer. Identifying what comparable properties in the area are using can be a good way to decide what kind of LOS discount to apply for your own home.
Other discounts depend on seasonality. For example, a market that may have their peak demand during the winter months would offer a “low season” discount during the summer. This kind of discount will depend heavily on what kind of demand your market has throughout the seasons. For example, in a desert market the winter months are typically in high demand while the summer months see very few visitors. Therefore, discounting up to 50% during the summer months may be an attractive option. Again, set these discount amounts at your discretion, measure the amount of market demand, and identify what your competitors are doing to help you decide what the right amount is.
You can create other discount principles based on your market depending such as what kind of discount to offer if a guest asks for one. Remember, some discount principles may be beneficial while others may be detrimental to the overall goal. It will depend on the pricing strategy that you have chosen for your property. Once you’ve determined the discount principles to use, stick to them. It’s OK to adjust as time goes on and market demand grows or lessens but it is important to use your principles as a guide to ensure you’re making the right decision to offer a discount.
Summary
Optimizing your pricing is a difficult and time consuming task but it is one that will yield great benefits. Taking the time to Identify Comparable Properties, Choosing a Pricing Strategy, Analyzing Available Market Data, Setting a Base Price, and Identifying Discount Principle will set you and your home up for success. These steps and actions are meant to help you maximize your profit and reach your revenue goals.
Between managing the pricing, guest experience, marketing your listings, and managing your cleaning & maintenance team, operating a rental is a full-time job. That’s why we’re here to make it easy for you. We can provide a tailored management solution to give as much help as you want, whether you need full-service management or just some help with the pricing. Contact us today to learn how we can help you maximize your rental profit and save you time.
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