Optimizing Short-Term Rental Revenue: Basic Pricing Strategies

property management May 21, 2024
Real Estate Pricing Strategy

Creating a successful short-term rental pricing strategy is crucial for maximizing revenue and ensuring high occupancy rates. Whether you are a seasoned property manager or a new host, understanding and implementing these key basic steps will help you optimize your rental income and stay competitive in the market.

Step 1: Choose Dynamic Pricing Over Fixed Pricing

Fixed pricing involves setting a constant rate for your rental property, regardless of market demand. While this approach simplifies pricing, it can lead to potential revenue loss during high-demand periods. For instance, if there's a local event or peak tourist season, a fixed price may not capture the additional willingness to pay, thus missing out on higher earnings.

Dynamic pricing, on the other hand, adjusts rental rates based on fluctuating demand. This strategy allows you to maximize revenue during peak periods and attract bookings during slower times by offering competitive rates.

The primary advantage of dynamic pricing is the ability to avoid leaving money on the table. By adapting to market conditions, you can ensure your property is always competitively priced. However, while platforms like Airbnb offer Smart Pricing, their algorithms are designed to maximize bookings, which can sometimes result in your property being booked at the lowest possible price. Therefore, it is wise to consider third-party pricing tools.

Tip: Use third-party pricing tools that account for holidays, seasonality, and local events (e.g., Coachella in Indio, California). These tools can provide more granular control over your pricing strategy.

Step 2: Setting Up Your Base Rate and Minimum Rate

The base rate is the average daily rate you aim to achieve for your property. Setting this rate involves researching comparable properties in your area to ensure competitiveness. The minimum rate is the lowest price you are willing to accept for a booking. This rate should cover your operational costs and help avoid attracting problematic guests who may book at excessively low prices, sometimes low-paying guests are the most demanding, complain the most, disrespect your property, and leave low reviews.

Setting accurate base and minimum rates requires a combination of business intelligence and experience. Third-party pricing software can offer valuable insights and data to help you establish these rates effectively.

Step 3: Understand Your Booking Lead Time

Booking lead time refers to the period between when a reservation is made and the check-in date. Understanding your booking lead time helps in predicting booking patterns and adjusting prices accordingly. Utilize tools like AirDNA or third-party pricing software to gather data on booking lead times. These tools can provide detailed analytics to help you better understand and predict guest behavior.

Step 4: Figuring Out Your Occupancy Target

Balancing Occupancy and Pricing: There is a delicate balance between occupancy rates and pricing. Lower rates can increase occupancy but might reduce overall revenue. Conversely, higher rates can decrease occupancy, potentially leaving nights unbooked. The goal is to optimize both occupancy and pricing to achieve maximum revenue. This requires continuous monitoring and adjustment based on market conditions and booking trends.

Setting Occupancy Targets: Establishing occupancy targets can guide your pricing adjustments. Once you know the booking lead time in your area, you can set up your occupancy targets. For example, if the booking lead time is 30 days, aim for 50% occupancy 30 days before the check-in date. The idea is that 50% of your guests book before the 30-day mark and the rest afterward. As the check-in date approaches, occupancy should increase, while further out dates should have lower occupancy. If your occupancy is below this target, consider lowering prices to attract more bookings. Conversely, if occupancy is above the target, you can either increase the rates or maintain them. 

Example Timeframe and Occupancy Targets:
Timeframe (Days Out)
Occupancy Target
7
100%
14
80%
30
50%
60
30%
90
15%

This approach ensures that as the check-in date approaches, your occupancy increases, while dates further out maintain lower occupancy. Adjust prices according to actual occupancy compared to these targets.

Step 5: Maximize Occupancy with Orphan Days and Discounts

Orphan days are small gaps between bookings. For example, if your minimum stay is 5 days and there are 4 days left between two 5-day bookings, these 4 days are orphan days. Filling these gaps is crucial for maximizing occupancy and revenue. You can offer special deals or discounts to attract bookings for orphan days. Filling these gaps is crucial for maximizing occupancy and revenue. You can offer special deals or discounts to attract bookings for orphan days. This can help maintain a steady stream of guests and reduce the number of unbooked nights and automate the management of orphan period discounts with third-party pricing tools. These tools can dynamically adjust prices to fill these gaps

Last-minute bookings are common in the short-term rental market. Offering discounts for last-minute bookings can help ensure high occupancy rates. Pricing tool like Pricelab offers various methods for last minute discounts, including:

1. % Flat Discount. Example: If you set a 25% flat discount within 5 days, then a 25% discount is applied to each of the next 5 days, starting from today.

2. % Gradual Discount. Example: If you set a 35% gradual discount within 7 days, the discount starts at 0% for a date 7 days away and increases by 5% each day (35% divided by 7). By the time it’s today (day 0), the discount will be 35%. This approach spreads the discount out evenly over the days.

3. Fixed Discount. Example: If you set a fixed price of $70 for the next 10 days, then the price for each of those days will be set to $70.

Additional Tips for New Listings

If the listing is new, start with a below-average price to attract the first few bookings. People are hesitant to book without prior reviews. Ensure the initial guests have a very positive experience by exceeding expectations, offering great value for a low price. After receiving some positive reviews and seeing an increase in demand, you can gradually raise the price to the market average. It’s crucial to execute this correctly when the listing is new because Airbnb boosts new listings initially. Consider closing existing listings and creating new ones, especially after renovations.

 

Lastly, while pricing tools like Pricelab are invaluable, they are not a "set it and forget it" solution. The real success lies in the strategy behind using these tools. Always prioritize strategy over mere tool reliance. Stay tuned for more pricing strategies in my other articles .

By following these basic steps and integrating strategic insights with robust pricing tools, you can optimize your short-term rental pricing, enhance occupancy, and significantly boost your revenue.