Many hosts hit a ceiling when it comes to revenue maximization of their vacation rental business. Pricing the listings can feel complicated and even confusing. After all, if you price your rental too high, it may drive away potential renters. But, on the other hand, if you price it too low, you will earn less profit. Many factors such as seasons, as well as supply and demand, can impact your pricing decisions, and making frequent adjustments to your rates based on market data is the key to successful revenue management. But this takes time and effort.
The answer to all problems: dynamic pricing! Here is all you need to know about it. We’ll also recommend our favorite tools.
What is Airbnb dynamic pricing?
In short, dynamic pricing is a type of pricing that changes in real-time to reflect changes in the short-term rental market. Therefore, with every slight fluctuation, your price will shift to help you maintain a reasonable price that maximizes your profit.
Limitations of manually setting your rates
If you are new to dynamic pricing, chances are that you currently set your rental price manually. While this does give you complete control over the price of your rental, there are several limitations to pricing your rental in this manner.
For one, the short-term market demand is in constant flux and can change quickly. Therefore, your price can become too high or too low, perhaps unexpectedly. If you manually set your price, you may not even realize the shift is happening.
While you can adjust your price for the given seasons, the demand fluctuates dramatically within those time frames. Therefore, if you solely adjust for each season, you probably aren’t adjusting enough or frequently enough.
Then, of course, there are your competitors. Monitoring their rates and comparing them to yours will get your head spinning quickly. But thankfully, there is an easier way: automation with dynamic pricing.
Factors that influence dynamic pricing
While you probably considered factors like the seasons and your competition, dynamic pricing pays attention to several critical factors and data points to adjust the price of your rental.
Just as you adjust your price based on the seasons, a dynamic pricing tool will do this too. However, it does it in conjunction with the rest of these factors to make that price in the busy season as fruitful as possible.
Day of the week
If your location attracts business travelers, your prices will likely be higher on the weekdays. However, if your rental attracts more vacationers, your weekends will probably be the higher-priced days. The dynamic pricing tool pays attention to the types of travelers booking with you to account for these changes.
Supply and demand
If the demand for homes in your category or area is low, your dynamic pricing tool will lower your price to entice more guests. But, conversely, if the demand is high, It will boost your price so that you can bring in a little extra cash.
If significant events are occurring in your area, the pricing tool will likely recommend you raise your nightly rate to bring in the extra revenue that special events bring in. These events can occur throughout the year at random, unexpected times. So it is helpful to have your dynamic pricing tool looking out for these events.
Number of days left to book
When you have open, last-minute availability, the pricing tool will recommend lower rates to pull in last-minute guests, but rentals that are further out will be pricier.
Historical performance of listing
Your dynamic pricing tool also pays attention to the performance of your rental over time. It will take this into account as it prices out your rental.
The dynamic pricing tool also pays attention to what is happening in your competitor’s rentals. For example, if they are fully booked, but guests are still searching, it will boost your rates to help you pull in profit from those vacationers still looking for a place to stay.
When adjusting your rate manually, you probably paid some attention to competitor rates. Dynamic pricing tools do this, but they constantly adjust your price as needed.
The dynamic pricing tool also considers the different amenities your rental offers. These make an impact on the price your tool will recommend.
If your rental has lots of stellar reviews, you can charge more. Your dynamic pricing tool knows this and prices accordingly.
The benefits of dynamic pricing
There are many benefits of dynamic pricing. But as a host or multi-property manager, you also have to be aware that dynamic pricing has some downsides (though not many). For one, it’s an added cost to your software stack. And second, you’re relinquishing some control of your pricing strategy to a third party. On that last point, it’s important to note that most pricing tools still give you a minimum and maximum price (amongst many other variables), so you’ll never run the risk of taking a loss. And that’s it for downsides! So now, let’s look at what you’ll gain as a host.
Save time on analyzing market data
To host a vacation rental effectively, we know that you need to wear many hats. Typically, you won’t have extra time to pay attention to all of the factors a dynamic pricing tool considers. After all, there’s a good chance you have a lot of other aspects of your life that need attention between your other rentals, family, friends, and even your career. A dynamic pricing tool allows you to stay updated on everything you need to without sacrificing your time.
Pricing right for target guest
Dynamic pricing engines learn with each price recommendation that they make. The engines themselves create a profile of the guests that you attract, the placement of your listing within your market of competitors, and the amenities you offer. They also chronicle the prices that have historically worked in your local area and the season in which your listing earns the highest financial returns. This “profile” of your typical guest will help you optimize your listing to attract higher volumes of that same type of guest. This property specialization will likely result in higher booking rates from your target guest.
Get prices changed automatically on distribution channels
The dynamic pricing tools out there do everything for you, and you don’t even need to log in to every platform separately to update your pricing. A quality dynamic pricing tool will be able to push out your new rates wherever they need to be.
Optimize occupancy rates
Dynamic pricing assists in optimizing your occupancy rate because your pricing engine aims to secure as many bookings for the highest price possible. While optimized earnings are the primary aim of dynamic pricing tools, a secondary aim, or even byproduct, would have to be increased occupancy at your property listing.
An increase in occupancy creates a shortage in the supply of your listing, which could create greater demand. Listings often booked become popular as their reputation spreads. The fewer days on your calendar, the more buzz your property will create.
Unlike manual pricing strategies, dynamic pricing considers all the vacation rental analytics variables. Remember that decreasing occupancy without considering analytics can cost you. However, an intelligent pricing tool won’t have that effect since it also considers the minimum pricing you set and balances it all with potential income generation.
To achieve the highest possible price, dynamic pricing engines analyze the market environment and an extensive range of other variables, including booking pace, average price, date popularity, and more. Some of the more advanced pricing tools also learn as they generate more pricing recommendations. They will build a profile of the prices that work and the prices that don’t, and the times of year that certain pricing strategies work best for your listing.
Improve Airbnb ranking (booking.com & Vrbo too!)
The Airbnb algorithm considers multiple factors when it determines search ranking results. While the company hasn’t revealed the exact formula, we know that reviews, popularity, whether Instant Book is enabled or not, pricing, and Superhost status all affect how well your listing ranks in their search results. One of the variables that can affect ranking is how often the host or manager is active on the Airbnb platform. That includes how quickly you respond to requests and messages and how often you set your rates. So with dynamic pricing, your pricing will change regularly, which will give Airbnb the signal that you’re actively managing your properties instead of simply listing your place as a “side hustle.”
Dynamic pricing boosts your overall profit. By using smart pricing engines, your pricing will be kept competitive 24/7. Unlike the Airbnb smart pricing tool, most reputable pricing tools use advanced AI systems that collect and analyze short-term rental data specific to your local market. That data is then used to find the right price for your listing at the right time.
It’s a similar concept on the other platforms, albeit slightly different. For example, Booking.com says, “The number of bookings you receive is vital to your ranking because conversion (the number of guest searches you turn into solid bookings) is the main indicator of how well your property performs on our website.” So, by having your pricing optimized for occupancy and income, you’ll convert more visitors into a reservation. Booking.com will detect that “buzz” and boost you in the search rankings.
Gain an edge over your competition
Dynamic pricing gives you a one-up on your competitors. They will likely base their prices on best guesses, cyclic pricing patterns, rough competitor analysis, and even inflation percentage increases.
A competitive edge doesn’t just mean a price advantage. Dynamic pricing gives insight into nearly every aspect of your business. Being able to access these critical data sets and using them to optimize your listing means that dynamic pricing goes far beyond simply arriving at a price figure.
Never miss out on a sudden spike in demand
If you live in an area susceptible to price changes due to seasonality, it can be challenging to develop the right pricing strategy. If you charge a fixed price, you’re leaving money on the table. Researching events or staying on top of surges in demand takes a lot of time.
Dynamic pricing tools do all that by themselves. The software monitors regional prices constantly. So if there’s an uptick in activity, the price adjustments are made automatically.
Top 5 dynamic pricing tools
You have several options to choose from when it comes to dynamic pricing software. Here are the top five tools for dynamic pricing.
This AI-based dynamic pricing tool watches 900 price-impacting factors around the clock. DPGO also provides a growth performance analysis to watch your business grow over time. They offer two different plans: a flexible one that charges 0.5% of the booked price and a fixed plan that charges $1 for each booked night.
AirDNA is a machine-learning pricing tool uses data from 10 million rentals to look at market demand and supply to provide pricing recommendations with reasoning.
Like the others, PriceLabs pays attention to several factors and real-time market data to recommend pricing. They also allow you to adjust pricing in bulk. The pricing on this one starts at $19.99 per listing.
Wheelhouse was built by a team of data scientists to look at several factors to make pricing recommendations. They also offer several pricing options: 1% of revenue, $19.99 per listing per month, and enterprise plans for portfolios with over 100 listings.
Like the others, Beyond uses several factors to determine the best price for your listing at a given moment. They also promise to help guide you through implementing revenue management in your listings.
An alternative to dynamic pricing: Airbnb smart pricing
You may know that Airbnb offers its own smart pricing. This feature, once enabled, allows you to update your price automatically based the performance of similar listings. Click this link to learn all about it.
Dynamic pricing is one of those “turn on and forget it” optimization tools. Hostfully’s all-in-one vacation rental software has integrations with all of these dynamic pricing tools and more. By using our platform to manage your business, you can free up a lot of your time for other important tasks. Consider trying out a free demo today.
This article is an updated version of the guest article posted by DPGO.