Price is one of the big decision factors that guests consider when comparing accommodations. For that reason, it’s important to set a competitive price within your market.
If your rates are too high, you risk getting fewer bookings and you’ll give your guests high expectations as to what amenities and services they expect. Failure to meet these expectations can mean bad experiences and, therefore, negative reviews.
On the other hand, pricing your rentals too low isn’t the right way to go either. Although you will get more bookings in the short term, you will minimize your profits in the long term.
The key is to find the sweet spot: prices that will grab your potential guests’ attention and will cover your costs and make a profit. However, it is not an easy task. There are many things to consider: seasons, nearby events, competitors, length of stay, etc. Implementing dynamic pricing in your vacation rental will help you stay competitive 365 days a year, while still making money.
What is Dynamic Pricing?
Dynamic pricing utilizes algorithms to calculate and adjust prices in real-time. With this pricing strategy, you can optimize your rates to boost bookings and increasing your profit margins.
It’s a strategy that the accommodation industry has used for decades. It leverages technology to adjust your nightly rates based on supply and demand. Think of it as your wizard that’s constantly working for you to increase your revenue.
So how do you set your nightly rate? First of all, there are several aspects that you must previously analyze to establish your base price. Among them: your operational expenses, your competitors’ rates, or the high season dates in your region. This initial analysis phase will be essential to determine your pricing calendar and, once completed, will allow you to apply the dynamic variations you deem appropriate.
Similarly, your flexibility in adapting to the current situation will also be decisive. Occasionally, events beyond our control can contribute to demand soaring or dropping. For example, in 2017, more than 250.000 visitors attended the Coachella Valley Music Festival, and an additional 75.000 attended the Stagecoach Country Music Festival. The combined regional economic impact far exceeded $403 million. So rentals located in Palm Springs should consider these festivals as high seasons and adapt your pricing accordingly.
The ability to change the rates of your short-term rental and adapt to the current situation will allow you to get the most out of your vacation rental business.
Differences between Dynamic Pricing and Revenue Management
Although Dynamic pricing is one of the many strategies of revenue management. However, this doesn’t mean that you may easily use the two words interchangeably. Both concepts consider that your rates vary based on a variety of predetermined rules and rely heavily on data and technology in order to make the most accurate predictions as to what the right price should be.
However, these terms shouldn’t be confused with discount strategies because dynamic pricing and revenue management increases prices, particularly if there’s increased demand.
Dynamic pricing software for short-term and vacation rentals
You don’t necessarily have to set up your pricing rules manually. With the help of dynamic pricing software like PriceLabs and Beyond Pricing you can automate everything. These tools allow vacation rental professionals to set rules to manage pricing and night stay restrictions and save them hours in the process.
Dynamic pricing software connects directly to your property management system or Airbnb account. After synchronizing your accounts, the tools will review your prices and issue the necessary adjustment recommendations. Once you approve them (or modify them), they will be reflected in your calendar.
How do they calculate dynamic rates?
These tools will use your average base rate as a starting point. If your average nightly rate in high season is $300 and $100 in low season, then your base price will be $200. Although each tool calculates prices differently, essentially they consider the following factors:
Seasonality: The tools adjust your base price according to the season of the year. To do this, they analyze historical trends of vacation rentals and hotels in your region.
Days of the week: They analyze the price of accommodation in your area based on the day of the week and apply the necessary increases or discounts.
Lead-time: This refers to the time between the moment users’ books your rental and their check-in date. Dynamic pricing tools use this data to offer discounts to last-minute reservations (to fill in the gaps in your calendar) or to bookings made in advance (to guarantee the maximum possible occupancy).
Vacation days and important events: These tools will determine the most in-demand dates after analyzing the occupation of your local competitors. You can also add a list of the main events in your area to reduce the margin of error.
“Orphan” days: There’s nothing worse than having gaps in the middle of your busy calendar. For this reason, these tools will generate automatic discounts to incentivize booking these “orphan days”.
Personalization: Ultimately, it’s the owners and managers who decide which strategy they want to pursue. Therefore, you can establish a minimum and maximum price range that the tools will respect no matter what.
Airbnb Smart Pricing
Airbnb also has its own dynamic pricing automation system. It’s an integrated tool within the Airbnb calendar and allows you to automatically adapt the price of your property based on the demand of listings that are similar to yours.
The platform takes into account more than 70 factors, such as the check-in date, market demand, seasonality, listing reviews or the services offered. Airbnb even values the number of daily visits to your listing and the time that users spend on your page. Airbnb also allows you to select a minimum and maximum price per night, so hosts always have control over their business.
What to take away
Should you use dynamic pricing in your vacation rental business? Depends.
Adapting your rates to supply and demand or seasonality will allow you to be much more competitive and increase your profits. However, make sure you keep an eye on the prices and see if it adapts to your managing style.
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