To make the most of your investment and maximize your revenue as an Airbnb host, you’ll need a solid understanding of your property’s key metrics. This article will show you how to devise a winning pricing strategy with tried and true pricing tips to set you apart from your competition.
Before you start adjusting your vacation rental pricing, do this….
Your pricing strategy will be crucial in determining your vacation rental property’s success, but there are some foundational pieces you’ll want to have in place before deciding your prices. Optimizing your Airbnb listing with a well-written and complete description is essential. This means making sure you have professional photos, photo captions and a catchy headline to grab the attention of your ideal guest.
Once you’re satisfied that you’ve put your best foot forward with your listing, it’s time to drill down into your property’s numbers under the following five categories so you can start pricing like a pro.
1. Learn your crucial vacation rental metrics
Vacation rental metrics – also known as key performance indicators (KPIs), are factors in understanding and ensuring your business is profitable and moving in the right direction. This list of vacation rental metrics will assist you in seeing where you may have some inefficiencies and help you make sound financial decisions as you scale your rental business:
- Occupancy Rate (OR)
- Average Daily Rate (ADR)
- Average Length of Stay (LOS)
- Net Operating Income
- Revenue Per Distribution Channel
- Percentage of Bookings Per Distribution Channel
2. Calculate your lowest acceptable nightly rate
As a property manager, one of the most important numbers you need to know is your lowest acceptable nightly rate (otherwise known as your “break-even rate”). You’ll need to add up your operating expenses to obtain this figure. Don’t forget to include your mortgage, utilities, and other additional costs like your cleaning service, maintenance fees, supplies, toiletries, and essentials.
Monthly operating costs ➗ Days in the month = Daily short term rental operating cost
Once you’ve discovered the amount you spend daily to operate your property, you’ll be armed with the knowledge of precisely the amount of money you need per night to make sure you’re breaking even.
3. Perform market and competitor research on Airbnb, Vrbo and Booking.com
When you purchased your property (or signed on a new client for your vacation rental business), you most likely did some market research on the area’s popularity and typical rates. But it’s also advisable to stay knowledgeable about what types of property in your area with similar amenities are charging per night as the seasons change. You can do this research easily by searching properties on Airbnb, Vrbo, and Booking.com in your area and checking off all the same amenities in the search filters to see what rates other Airbnb hosts are offering.
Pricing Strategy Tip: Keep in mind that the Airbnb platform suggests new properties offer a discount of 30% so hosts can begin generating bookings right away. It’s a quick way to gather positive reviews to help boost the listing.
4. Treat Airbnb’s smart pricing tool as an extra opinion
Airbnb offers hosts the option to use their smart pricing tool. Using this tool means your pricing will be based on seasonal demands, daily trends and special events. While it can be tempting to use this tool as a “set it and forget it” strategy, some hosts have reported that the pricing generated from this tool leans towards low pricing to generate bookings rather than strategically choosing the best price possible for the host. This tool has also been known not to take into consideration future area events. Failing to forecast these future events means that your nightly rate could be drastically lower than other short-term rentals that are aware of the event and you’ll have missed out on benefiting from the event’s high demand.
Pricing Strategy Tip: Considering all that, we suggest using the Airbnb smart pricing tool as a guideline when plotting out your Airbnb pricing strategy or looking for pricing tips. You may also want to look into paying a few extra dollars for dynamic pricing software (more on that later in the article).
5. Use RevPAR to make strategic pricing decisions
RevPAR is a commonly used metric to assist in creating a solid pricing strategy. The term RevPAR stands for revenue per available rental and is the calculation that considers your average daily rate (ADR) as well as your occupancy rate (OR).
Determining your RevPAR is the best way to figure out how to maximize your revenue by either lowering your ADR resulting in increased occupancy, or raising your ADR, which could result in a lower occupancy rate but will also save you money on expenses like turnover costs, guest gifts, maintenance and supplies.
In the scenario below, a Manhattan loft charges an average daily rate of $295 with an occupancy rate of 90%. This pricing strategy results in an annual revenue of $96,907.50. The loft offered by another Airbnb host has a higher average daily rate of $350.00, which lowers his occupancy rate to 80% but yields a higher revenue of $102,200. Also, it saves money in turnover fees, supplies, and time spent communicating with guests.
Note: RevPar, ADR, OR… these are all analytics and KPI unique to vacation rentals and hospitality. And while it may seem like a lot to crunch those numbers, understanding how they perform is crucial to improving your business’ profitability.
Buy market research data packs to understand seasonality
Doing market research so you can make informed decisions for your pricing strategy can be overwhelming and feel a lot like homework – but it doesn’t have to. Companies like AirDNA, Key Data Dashboard, and AllTheRooms have done this work for you and offer property managers, and Airbnb hosts real-time market analytics and comparative data to help you set and forecast your pricing to maximize profitability.
Understanding how your market behaves in the low season will help you formulate a better pricing strategy for your business. Additionally, because market research companies have access to thousands of data sets, they can provide pricing recommendations, rate strategies, and how to get the maximum rate for each season.
If purchasing data for your market research isn’t quite in your budget at this stage, there is no need to worry. These sites also offer limited free reports that can be a great starting point in helping you devise your pricing plan.
Pricing strategy for special events in your area
Festivals, concerts, conferences and other special events are a massive boost to revenue for property managers and vacation rental owners. If you’re lucky enough to live in an area that hosts world-class events, you can see a massive increase in nightly rates and occupancy.
According to EDM.com, this year’s edition of Ultra Miami saw a rise of 19.1%, with prices rising from $456 to $543 per night. But, this pales in comparison to the rate jump that Airbnb hosts saw for this year’s Glastonbury Festival in the UK, where the average nightly rate went from $217 to $697 a night – an increase of a whopping 221%.
When it comes to special events, you want to ensure you aren’t left out of the loop as an Airbnb host. We recommend doing your due diligence regarding upcoming events by checking out these online tools and setting your prices accordingly.
Pricing Strategy Tip: During your research, you’ll want to look for spikes in seasonality. When you spot one, add a premium to your base nightly rate. Conversely, when you see dips in occupancy rates, you’ll want to lower your nightly rates to ensure your pricing is competitive.
Study your property’s performance booking window and use the “Far Future Premium” to optimize your revenue
Every vacation rental is different and needs to be analyzed separately to create an optimal pricing strategy. Part of that analysis is understanding your rental’s booking window (or booking lead time). This term refers to the time between receiving a reservation and the actual date of the guest’s check-in.
According to transparent.com, factors that determine the lead time between booking and check-in are property type, location, booking channel and time of year. It’s important to note that some properties book last-minute 90% of the time, while others may book a year in advance. Knowing this about your property can help set the best price for your rental.
Using the “Far Future Premium” pricing strategy
Once you’ve discovered your property’s booking window, you can start using the “far future premium” pricing strategy to optimize your revenue.
How this strategy works: Suppose your property regularly books six or more months in advance. In that case, you can add what is known as a “far future premium,” which means setting your price as high as you can (while still being competitive) before reaching your peak booking time. Once you’ve passed your peak booking time, if you’ve yet to receive a booking, you can begin to incrementally lower your rate to ensure you secure a booking while still maintaining a high RevPAR.
Note: To use the Far Future Premium strategy, you’ll need to determine the lead time between the bulk of your reservations happen in advance of check-in date. To do this, you can use the enhanced reporting tool in your property management software (PMS). PMSs like Hostfully allow you to select the lead time. But if your PMS doesn’t have that option, pull the reservation date and check-in times, subtract them in Excel, and determine the average number of days.
Don’t let “Orphan Nights” or “Gap Nights” dig into your revenue
Once added up, orphan nights or gap nights can dig into your yearly revenue. The good news is that they can be avoided by simply staying on top of your calendar and being clever with your pricing. If you find an orphan or gap night in your schedule, you can choose to reduce your rate for that specific day by 5%. As you get closer to that date, if it still hasn’t been booked, you can then increase the discount to 10%, or until you’ve reached your minimum acceptable nightly rate.
Set your “Base Price” to contrast with competitors and get more visitors
Did you know that when potential guests visit Airbnb and begin their search without selecting travel dates, what they’ll see be shown is your base rate and primary photography on the main search page?
Knowing this and choosing to post your lowest seasonal rate will entice visitors to take a deeper look at your listing. Once they’ve looked through your photos, read over your listing and entered their travel dates, your actual price for those dates will be higher than what they saw advertised on the main page, but may not be a factor at this point because they’ve already imagined themselves at your property and fallen in love with what you have to offer.
Increase your rates by 10% across the board but increase your marketing reach
Sometimes, particularly in marketing, more is more. A strategy that can help you hold a high RevPAR is working with a multi-channel distribution strategy. How this works is instead of being loyal to just one online travel agency like Airbnb choose to post your listing on as many sites as possible while raising the price by 10% across the board.
While you’ll most likely see a drop in occupancy from raising your prices on Airbnb, you’ll benefit from expanding your reach on sites like Vrbo, Booking.com and any other niche sites you choose, which can cause additional traffic to your listing and generate more bookings at your higher rate.
Target long-term rental stays with pricing and niche sites
Longer stay bookings can be attractive for hosts who want to worry less about occupancy rates, turnover and dealing with extra guests. These pricing and advertising tips will help you attract guests who want to stay for up to a month or more:
- Offer a discounted monthly rate to attract long-term rentals.
- Showcase your “work from home” amenities
- Highlight neighborhood amenities, like gyms, grocery stores, coffee shops and other conveniences in your area to make them feel at home.
- Advertise your property on niche sites that cater to digital nomads and location independent guests that are looking for extended stays on sites like Homads.
Use dynamic pricing tools
Dynamic pricing tools are specifically designed to help automate and optimize pricing for property managers. These tools study the market in real-time and use algorithms to update and adjust your property’s nightly rates.
These apps can look at past trends in an area and have the ability to predict future market prices. For example, a the impact of a local event on pricing is something that the software can predict and account for to maximize your revenue.
Dynamic pricing tools are beneficial because they can adjust nightly rates to reflect demand before guests start booking. Airbnb’s pricing tool only changes the pricing once it notices a spike in booking and can miss out on capturing a higher nightly rate. Dynamic pricing apps also help optimize weekday prices so you lower vacancies caused by gap days (also called orphan nights.)
However, these tools aren’t a “fix-all” as with anything. If you choose to use a dynamic pricing tool, it’s recommended that you continue to oversee your pricing and employ your first-hand knowledge of the market and your property to ensure your pricing strategy is working for you.
Dynamic pricing partners to consider
If you’re interested in investing in a dynamic pricing app to help you optimize for the right price, here are a few that we recommend and also integrate with our property management software.
- Wheelhouse– Provides you with a personalized strategy taking into consideration your base price, minimum nightly stays, and even far-future pricing strategies.
- PriceLabs – Another robust dynamic pricing tool that will help you automate your pricing in just minutes and has a 30-day free trial to get you started.
- Beyond – A revenue management solution for short-term rental managers and owners to get, grow and keep revenue.
- DPGO – Their AI-driven software analyzes over 200 market data parameters and promises to increase your occupancy rates by up to 90%.
Consider lowering your cleaning fees
Ever try to book a vacation rental at a good price and get a whiplash when you see the cleaning fees right before completing the reservation? Guests feel the same way. Now this isn’t to say that you should absorb cleaning fees. But finding a middle ground where you slightly raise your nightly price and having a lower price for cleaning could help you convert more visitors into guests.
Pricing is critical in realizing your financial goals as an Airbnb host. Having a solid understanding of your vacation rental metrics and RevPAR number will give you the tools to implement the pricing tips listed here so that you see maximum revenues in your short-term rental business.