Ever found yourself with vacant properties in high season? Or been worried you’re selling nights too cheaply? If so, you need to work on your vacation rental pricing strategy.
Without a robust pricing strategy in place, you could be leaving money on the table.
And there’s much more to pricing like a pro than just adjusting rates by season.
At Hostfully, we work with vacation rental property managers to help them streamline their business and become more cost-effective. So we took a look at the vacation rental pricing strategies the most successful property managers use.
In this post, we’ll cover:
- Why you need a pricing strategy
- What to consider before setting prices
- Different pricing strategies to increase your profits
Without a vacation rental pricing strategy, it’s very difficult to plan ahead, manage your vacation rental revenue and make sure your business is sustainable and profitable.
A pricing strategy helps you understand when you can charge higher rates to meet demand, and when to reduce prices to stay competitive and achieve maximum bookings.
If you plan well ahead, you can avoid being left with too many vacancies. You also won’t lose out on profit by charging low prices when there’s a huge demand for properties in your area.
A pricing strategy should be flexible and constantly evolving. You always have to be on the lookout for new information that can affect your nightly rate.
Part of designing a strategy involves researching to see what your competitors are doing, and what’s happening in the market.
Let’s take a look at what you need to bear in mind.
What should you consider before pricing your property?
Successfully monetizing your vacation rental property business requires having a great pricing strategy. But before you start putting your strategy together, you need to do your research.
Expenses: fixed and variable costs
Calculating expenses takes time and effort, but it’s vital to take stock of all your current costs before setting prices.
After all, how can you decide what to charge guests if you don’t know what your property costs to maintain?
List out every single one of your expenses, and don’t forget to leave a buffer for occasional, unexpected costs like repairing the dishwasher or fixing a leak.
Look at your costs both on a monthly and annual basis to make sure you’re seeing the full picture.
There are two main categories of expenses to factor in:
- Fixed costs are the same every month. They include things like taxes, insurance, staff wages, TV, wifi, software subscriptions, and OTA fees.
- Variable costs change depending on usage. Water, electricity, and gas bills will vary throughout the year. Cleaning and maintenance costs may fluctuate as well, depending on how many bookings you have and the number of guests staying in each property.
These are the main costs to consider, but you should also factor in property upkeep—painting, decorating, furniture, appliances, utensils, bedding, and anything at risk of breakage or wear and tear.
Good accounting software for vacation rentals can help you keep track of all your expenses.
The local rental market
One of the most important things with pricing is being tuned in to what’s going on in your area.
Being familiar with your area and competing properties makes it easier to set your prices, so you need to know your location well.
Here are a few things to think about:
- Are there many short-term rentals in your area?
- How does the quality of your property compare with others?
- What amenities do you offer, and which are close by?
- How popular is your location with domestic and international tourists?
- Which times of year are the most and least busy?
Follow regional news, keep up with the local events, and join residents’ Facebook groups to keep tabs on what’s happening in the area.
Your unique value proposition
Part of creating a vacation rental pricing strategy is discovering what makes your property special. And every property has a unique value proposition.
There are many ways your property can stand out from others in the area. For example:
- Interior design—Maybe your property has particularly chic decor, or stands out for being traditional, modern, or elegant.
- Amenities—You offer a wide range of amenities, like a larger-than-average swimming pool, hot tub, outside space, barbecue area, or pool table.
- Location—Maybe your unique selling point (USP) is a beachfront location. Or maybe your property is surrounded by nature, in the heart of downtown, or close to tourist attractions and landmarks.
- Suitability—Maybe your property is perfect for a certain guest profile. For example, if you offer a home office ideal for business travelers or those on a “workation.” Or a gated pool that’s perfect for families with small children.
6 ways to build a powerful vacation rental pricing strategy
Now, you’re ready to start making smart pricing decisions that will increase your profits.
Let’s take a look at the 6 steps to build a vacation rental pricing strategy like a pro.
1. Consider seasonality and upcoming holidays
You know your occupancy rates at different times of the year, so you can increase prices in high season and drop them during off-season.
It’s also important to be aware of holidays that might affect demand for your properties. For example, local celebrations, concerts, school holidays, etc. If you know an international music festival is coming to town, you can increase your prices for those dates.
As well as considering local and national holidays, don’t forget your guests’ calendars. For example, if your property is in Spain but most tourists in your area are French, you’ll want to be aware of French national holidays too.
2. Look at what competitors are doing
Just like any business, in the short-term rental industry it’s vital to monitor what competitors are charging and set your prices accordingly.
If all your competitors’ rental rates drop but yours stay the same, travelers are unlikely to choose your vacation home. Similarly, you don’t want to find out you’ve been selling nights too cheaply and your competitors are earning much more than you.
However, it’s important to compare like for like. While it’s good to have competitive pricing, you shouldn’t always compete on price with properties that offer a significantly less luxurious experience. And if you offer budget-friendly apartments, there’s little point comparing your prices to premium villas.
When you know your property’s USP, you can pinpoint what sets you apart from competitors and price accordingly.
3. Set a minimum night rate
After calculating all your expenses, you’ve probably realized that going below a certain nightly rate will make your properties unprofitable.
To avoid being out of pocket, decide on a minimum nightly rate and commit to never going below that, even during quiet times. Setting a minimum price means you’ll never cut rates beyond what you can afford.
If your property costs go up, don’t be afraid to increase the minimum night rate accordingly.
4. Adjust your booking window
If your properties get booked up months in advance for peak season, you could benefit from shortening your booking window.
While it seems convenient to have such high occupancy, you could be missing out on revenue as you can charge more for last-minute bookings.
If you shorten your booking window, by the time peak season approaches availability will have decreased and you can increase your rates.
Instead of shortening the window, you can also use a far premium, which involves increasing rates for guests who want to book a long time in advance.
5. Try proximity-based pricing
A proximity-based pricing strategy takes into account how many similar, competing properties there are in your area.
If you’re surrounded by similar properties, reducing your rates can make you more attractive to guests. However, if the choice is limited, you can charge more, as guests have fewer options to choose from.
6. Set minimum and maximum lengths of stay
You may have guests interested in booking your property for long weekends throughout the summer. However, when you factor in the cleaning and maintenance costs of frequently turning over the property, short stays may not generate enough profit.
It’s always good to set a minimum length of stay, especially during peak season, to avoid high turnover costs. Similarly, you should also set a maximum length of stay. Guests who book for long periods may expect a cheaper nightly rate and, while long stays are convenient, you don’t want to reduce your nightly rates so much that you become unprofitable.
Automate and scale your vacation rental pricing strategy using dynamic pricing
Dynamic pricing for vacation rental hosts involves varying the price of your properties based on a variety of factors.
You can do dynamic pricing manually, but it’s very time-consuming and requires a lot of market research and admin time to update prices. So it’s best to use dedicated tools to automate the process.
For some property management companies, especially those who are just starting out or scaling, and less familiar with their local market, dynamic pricing tools can be a great investment.
These tools collect vast amounts of historical and current market data, as well as data about your vacation rental home. Then, the algorithm automatically adjusts your prices so you’re always charging the best possible price for any given night. Dynamic pricing software uses machine learning so, over time, prices get more and more accurate.
You can set a minimum rate so the tool never brings your prices down too low, and you can override the prices anytime you choose.
All that said, dynamic pricing tools do come with drawbacks. Homeowners stand to earn more from bookings, but property managers have to absorb the cost of the tool, and sometimes the increase in profit is minimal. Always weigh up the costs and benefits to see if a dynamic pricing tool is right for your business.
You also need to be sure it integrates with your property management system (PMS). For example, if you’re using Hostfully, we integrate with best-in-class pricing tools like Wheelhouse, PriceLabs, and Beyond. This means you can easily centralize price adjustments across different channels so your rates stay synced up across Airbnb, Vrbo, and more.
Supercharge your revenue: price your vacation rental like a pro
You might think that the best way to increase your vacation rental profit is through chasing guests and aggressively marketing your property.
Sure, marketing and distribution are important.
But a flexible vacation rental pricing strategy is also key to boosting profits.
To apply one, try some of these tips:
- Take into account all your costs, the local market, and your property’s USP.
- Get familiar with local and international holidays and events calendars, and monitor how demand fluctuates throughout the year.
- Charge far premiums for advance bookings.
- Set limits, like minimum and maximum stays.
- Use a dynamic pricing tool to automate calculating and applying rates across all your channels.
Do all that–and invest in a PMS like Hostfully to streamline vacation rental management and you should be well on the way to making your first million.
Frequently asked questions about vacation rental pricing strategy
What is dynamic pricing?
Dynamic pricing for vacation rentals is when you adjust prices based on demand. When demand is high you can charge more; when business is slow you reduce prices to remain profitable.
Property managers can manually adjust prices according to market data and their knowledge of the local area. However, this is very time-consuming so dynamic pricing tools use algorithms to analyze historical and current market data and automatically set the optimum nightly rate for your properties.
What are the types of pricing strategies?
The most common type of pricing strategy is demand-based. When demand is high you can charge more for your property; during quieter times, you can lower prices.
You can also set prices according to:
- Your property’s size and value, amenities, and proximity to attractions
- Proximity to competing properties
- How far in advance guests want to book
- Local events and holidays that may cause surges in demand
- How much your competitors charge for similar properties
What is a good rate of return on a vacation rental?
Around 10% is a good rate of return for a vacation rental. However, this will vary for every property and business.
When calculating your rate of return, you need to factor in all your property expenses. For example, fixed costs like insurance, wages, taxes, and OTA fees, and variables like cleaning, maintenance costs, and bills.
What percentage of rental income goes to expenses?
The percentage of your rental income that goes to expenses could be around 50%. In real estate, the 50% rule states that when you are calculating profitability, half of the gross income a property generates should go to expenses.
How can I increase my vacation rental income?
You can increase your vacation rental income by:
- Use dynamic pricing software to ensure you’re always charging the best possible price
- Set up a direct booking website to get more commission-free bookings
- Diversify your listings to boost visibility on more channels and, therefore, occupancy
- Improve your listings, use professional photography, and ensure you’re optimizing for search engines.