November 30, 2017

You Should Be Using Dynamic Pricing

What’s the Deal with Dynamic Pricing?

Dynamic pricing in the vacation rental industry is still in its early developmental stages, even though hotels, airlines, and other retailers have been using the strategy for decades.

 

The Methodology

The basic idea is that based on market forces, such as local rental patterns, seasonal demand, and special events, you set different prices for your property to maximize income.

If you don’t know the right price for your property on any given night, you’re leaving money on the table. If you’re underpriced because you don’t know about a special event driving up demand, then you will lose out on revenue. If you’re overpriced because, for example, you’re unaware of how much lower the winter season is than the peak summer season, then your property won’t book up and you’ll lose out on revenue. Pretty straightforward.

When you buy into a commercial dynamic pricing app, such as Beyond Pricing, you get a local market profile like this:

The light blue curve shows you the peaks and valleys of your market. All homes in the same market conform to the same curve. Based on the specific appeal of your home, you will set the overall curve higher or lower so that the pricing matches the profile of your home.

You can see some insane dynamics in this curve. The way this curve is set, the pricing is under $250/night from November all the way through the middle of May. So what’s up with those spikes, especially that one in September?

Take a look at the detail for that one September night:

$1020 for one night, for a unit that’s priced at under $250 for three quarters of the year! You can see to the right of the graphic that most of that premium comes from a local event. Most likely as a host you would already be aware of this event, but you wouldn’t necessarily know how to price your home!

The other factors are seasonality, day of the week, and how far out the date is.

What else do we see from the graph? Those spikes tell us two things:

1.      The peak season is from mid-May to early September.

2.      During peak season, there is a tremendously heavy bias toward weekends, meaning that weekends are extremely high in demand, while weekdays during the peak season are only marginally better than the low season.

This is vital pricing intelligence! The high season weekends are your opportunity to really cash in on your vacation rental. If you don’t have this information at your fingertips, you will book up your peak season weekends at a price well below what you could have earned, and your weekdays will sit empty because you are expecting too high a price. It is the high season, after all.

 

Garbage In, Garbage Out

The true lynchpin of dynamic pricing is your Base Price. The Base Price determines how high or low the overall curve is set. Setting the correct level is a bit of an art form and requires close monitoring over time to get it right. You can't just set it and forget it. How do you know when you’ve got it right?

Using Beyond Pricing again as an example, they say that you should strive to stay as close as possible to 50% booked over the next 30 days and 32% booked over the next 90 days. Using this information, they score your rental on a 100 point scale:

You might think that it would be better to have a higher booking percentage than that. However, their rationale for these benchmarks is that 50% of Airbnb bookings are made within the last 30 days, so having too high a percentage means you are overbooked, which in turns means you’re priced too low. The folks at Beyond Pricing are the first to admit that this is not the absolute truth, and dynamics vary by market. However, this is a good general guideline, and to maximize your income you should try to be disciplined about staying on the knife edge as much as possible. It will require constant monitoring and tinkering with your price as you get to know your market better. We at Voyajoy review our prices at least twice a week.

 

Trust the Data

Many homeowners insistently cling to a minimum price that is much too high, thinking that it would be criminal to allow their home to be priced any lower.

This is all well and good if the property books up at that price. However, if your home is not booking up on weekdays and during the slow season, are you really content to just let it sit and not earn income? Isn’t the point to make some money? Most homeowners significantly overvalue their rental. If you want to earn income you need to lower your price, and possibly even significantly.

Remember, some revenue is better than none. Also, by booking at a lower price, you now have data telling you what works. When your property sits unbooked, you’re gaining neither income nor useful intelligence.

 

Price Tweaking

One other great thing about the top pricing engines is they allow for customization as needed.

You will quickly learn that these pricing engines are not perfect, and you’ll need a safety net from time to time. Even if you work to stay disciplined about not overbooking or underbooking your property, your property will often still have vacancies at the last minute, which you can offer at a fire sale using automated last minute discounts.

The Players

One of the questions we get asked a lot is whether the dynamic pricing on Airbnb is worthwhile.

Generally, some dynamic pricing is better than none, so from that standpoint, you should consider using Airbnb’s pricing engine. It Is also free.

However, the caveat to this is that Airbnb’s primary motivation is not to maximize income for hosts. Their chief goal is to maximize the number of bookings, period. They take a 15% fee from travelers and a 3-5% fee from hosts, which is 18-20% total. They are incentivized to boost bookings no matter what, especially as they are competing for bookings with other platforms. Therefore, they drop owner prices to entice travelers.

This is why many hosts who use Airbnb’s pricing engine complain that the rates are too low overall, even though they spike for special events and high seasons. Therefore, we recommend that if you are going to use Airbnb, you should set your base price higher than you normally would. Again, like with other pricing engines, you still need to monitor things closely and make sure you’re not getting overbooked or underbooked.

The other major players in this market are Beyond Pricing, Wheelhouse, and PriceLabs. A full comparison is outside the scope of this post, but if you haven’t guessed, our preference is Beyond Pricing for its combination of accuracy, geographical coverage, and platform coverage.

 

The Bottom Line

Do yourself a favor and sign up for a commercial service now. It generally costs around 1% of your bookings. Let’s do the math on this. If you price your home at $200/night on average, then it costs you $2/night booked. 365 nights booked is $730/year. If the pricing engine books you 4 nights during the year that you wouldn’t have gotten without it, then it’s worth it. Trust us. It’s worth it.

Chang Kim

My name is Chang and I manage operations at Voyajoy. I've been in the short-term rental space for the last four years and have an operations career dating back 20+ years. I've learned about vacation rental management the hard way and have seen how quickly this industry has changed in a very short time. My objective is to use this experience and knowledge to give our valued clients big competitive advantages.

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