Buying a property with a strong potential to generate competitive income is the first step towards starting a profitable short term rental business. The second step is setting the right vacation rental pricing strategy for your property.
While pricing your property right is crucial across the rental industry, it is of utmost importance in the vacation rental business. From market and supply, to demand from guests and competitors’ rates, there are dozens of factors that influence the nightly prices in your area. And many of these factors change dynamically, on a daily basis.
Unless you are able to continuously keep track of the elements affecting the daily rates of your vacation rental and put them together into a comprehensive, dynamic pricing strategy, you will not be optimizing the potential of your investment.
In this article, we’ll cover everything you need to know about short term rental pricing. From what it is and why it is so important, all the way to how to establish a strong strategy and what software tools you can use. This will help make the process not only easier and more efficient but also more profitable.
Table of Contents
- What Is Vacation Rental Pricing Strategy?
- Why Is Dynamic Pricing Important for Vacation Rentals?
- 4 Factors to Consider in the Pricing Strategy for Your Vacation Rental
- How to Build the Best Short Term Rental Pricing Strategy in 12 Steps
- Using the Best Dynamic Pricing Tools
- Boosting Performance with the Right Vacation Rental Pricing Strategy
- Vacation Rental Pricing Strategy FAQs
What Is Vacation Rental Pricing Strategy?
Vacation rental pricing strategy definition
Vacation rental pricing strategy is just a fancy term that refers to the daily rates that you set up for your short term rental property.
As an Airbnb host or property manager, you need to understand and appreciate the difference between long term and short term rentals.
With long term rentals, you conduct rental market analysis to establish a monthly rental rate, and you stick to this rate for the next few months or even years. You don’t adjust the rental rate unless there are major changes in the local market, such as an influx of new renters, a new construction project, or a drop in the standard of living.
Meanwhile, things look very different for short term rental properties and their hosts and managers. Your pricing strategy needs to be dynamic and constantly evolving to reflect all the ongoing changes in the local short term rental market.
Indeed, the nightly rates for vacation rentals can – and need to – be adjusted on a daily basis. This is because they get affected by a number of fluctuating factors that we will discuss in more detail shortly.
For instance, weekdays and weekends see different demand from guests, and your pricing strategy needs to reflect this. The same holds true for different seasons throughout the year.
Unless you conduct ongoing vacation rental market analysis and adjust the pricing of your property all the time, you are likely to be either underpricing or overpricing it. In both cases, you are leaving money on the table as you’re either not charging the maximum or you’re lagging behind on the potential occupancy rate.
Why Is Dynamic Pricing Important for Vacation Rentals?
Since the vacation rental industry is so dynamic, it’s crucial to have a well-established pricing strategy. This is the only way to guarantee that you are approaching the pricing of your Airbnb property in a systematic, organized, and strategic way.
In short, having a vacation rental pricing strategy ensures that you are making as much money from your vacation rental business as possible.
Let’s take a quick look at what happens if you charge too little or too much for your short term rental.
Risks of Charging Too Little or Too Much
Say that you invest in a market where the average daily rate is $120. You own a top-notch, 3-bedroom, 3-bathroom Airbnb listing with multiple amenities that has hundreds of 5-star reviews from past guests. So, you can potentially rent it out for $160. But because you don’t know the necessary knowledge of the local rental market, you list it for $130.
It’s likely that you get a lot of bookings and your Airbnb occupancy rate is quite high, which is great. However, with each booked night, you lose $30, on average, because you’re charging below the potential. If you rent out for 20 days/month, that’s $600 of lost rental income per month. You can imagine the negative impact on your ROI throughout the year.
Now, most hosts and property managers worry about setting a price that is too low for the local market. But the fact of the matter is that setting a price that’s too high is equally dangerous and counterproductive.
Let’s go back to the example above, but this time imagine that you ask for $200/night. Since your vacation rental is one of the best in the area, you are probably able to get some reservations. But you’re definitely not getting as many bookings as you would be if your pricing was more competitive.
So, if you’re getting 10 nights per month at $200/night, you’re earning $2,000 in rental income per month. And if you were getting 20 booked nights at $160/night, you’d generate $3,200 in monthly rental income. In other words, you’re losing $1,200 per month because you are overcharging.
Now you understand the pitfalls of falling for the wrong pricing psychology in vacation rentals. In both cases, you need to pay the recurring expenses related to owning and renting out a short term rental without earning as much income as possible. The effect on your ROI is clearly negative.
Benefits of Charging the Right Daily Rates
One thing that was not illustrated in the example above is the importance of dynamically adjusting your Airbnb pricing strategy.
It is not enough for hosts and property managers to calculate the optimal daily rate and set it up for their property once. Actually, they have to continue their competitive pricing analysis for Airbnb properties in the local market and adjust the pricing of their rental accordingly on a daily basis.
The reason for this is that the factors that affect the prices of vacation rental properties change all the time.
Meanwhile, if you have the right nightly rates for your short term rental, you’ll benefit from:
- Occupancy rate optimization: When your vacation rental pricing is in line with local trends, you will have low vacancy rates and high occupancy rates. At the same time, you won’t be unnecessarily pushing up occupancy while sacrificing daily rates and – as a result – income.
- Enhanced revenue management for vacation properties: The best pricing strategy strikes the right balance between nightly rates and occupancy rates. This results in the maximization of your short term rental earnings.
- Maximized return on investment: If you are charging as much as possible and having your property as booked as possible, this eventually leads to a strong rate of return on your investment property. It’s important to note that it’s counterproductive to try to keep your property occupied at low rates as there are certain expenses that go up when you have your rental booked, such as cleaning, restocking, etc. If earnings are low and expenses are high, both your revenue and your ROI will suffer.
Now that we’ve established the importance of dynamic pricing models for short term rentals, it’s time to take a detailed look at the factors that affect your strategy.
4 Factors to Consider in the Pricing Strategy for Your Vacation Rental
4 main factors for your vacation rental pricing strategy
In the establishment of the best vacation rental pricing strategy, you need to consider the following factors:
The Local Market
First and foremost, just like any other real estate business, the short term rental business is dictated by the local market forces. How much you can and should charge for your listing depends on the features and specifications of your area.
Here are the most important questions to ask yourself when working on your pricing strategy:
- Is my area a popular tourist destination?
- Is it a busy business hub?
- When are the high season and the low season?
- What are some special events that attract visitors?
- Do more visitors come during weekdays or weekends?
- How far is my property to points of interest and public transportation?
You can get answers to these questions by doing research on local websites and social media pages, talking to local hospitality experts, and keeping up with local events and trends.
Knowing the answers to these questions will help you build a strategy that is aligned with the local market and reflect its dynamics.
The Competition
The second most important factor in the creation of the pricing strategy for your vacation rental is the supply of short term rentals in the local market. This requires diligent and detailed vacation rental market analysis to identify the number, type, and specifications of your competitors.
Some of the questions to ask during your research include:
- How many vacation rentals are there around?
- What amenities and extras do they offer?
- How do they compare to my short term rental?
- What daily rates do they offer?
- When are their prices the highest and when the lowest?
- What occupancy rates are they able to generate?
- What is their monthly income?
- How much ROI do they get?
You will be able to gather the answers to some of these questions by looking at listings on Airbnb, Vrbo, and other vacation rental distribution channels. In specific, you can check out listings, their amenities, and their rates.
However, you won’t be able to understand the performance of these rentals unless you use specialized tools. We’ll discuss the best vacation rental software tools in a bit.
Once you know your competition, you need to factor this into your vacation rental pricing strategy. You need to aim to charge rates that are comparable with the rates charged by the hosts and property managers of similar properties, known as short term rental comps. Moreover, you need to adjust pricing dynamically along with competitors.
The Uniqueness of Your Vacation Rental
The third element to take into consideration when strategizing about the pricing of your vacation rental is your actual property. No two Airbnb properties are the same, and the pricing strategy should reflect the unique selling points of your property.
After you’ve studied the market and the competition, you will be able to identify the most popular and attractive amenities in the area. Then, you should see how your property compares to them and work on adding a few additional extras, if needed.
The more you have to offer to guests, the more you can charge them per night.
The Rental Expenses
Finally, the Airbnb management cost needs to be included in your strategy.
Running a vacation rental business comes with a wide range of recurring expenses including but not limited to:
- Property management fees (if hiring a professional Airbnb manager)
- Cleaning fees between guests
- Restocking with supplies
- Property, safety system, and amenities maintenance
- Property inspections
- Occasional fixes and repairs (keep in mind that vacation rentals suffer from more wear and tear than long term rentals)
- Property tax
- Rental income tax
- Airbnb insurance
The daily rates that you set up for your property should be able to cover these expenses and leave some profit for you in the form of positive cash flow. If your rental expenses are higher than your rental income, you’ll be losing money from your investment property, which is the exact opposite of what Airbnb investors and hosts aim for.
That’s why your business expenses need to be factored into your pricing model.
How to Build the Best Short Term Rental Pricing Strategy in 12 Steps
While creating a dynamic vacation rental pricing strategy sounds like a daunting task for beginner hosts and even property managers, it becomes very manageable once you break it down into specific steps. Furthermore, there are key tools that can help you put your pricing strategy on auto-pilot while maximizing revenue and ROI.
So, to build a profitable pricing strategy for your short term rentals, follow these steps:
#1: Have a Dynamic Pricing Strategy
Dynamic pricing for vacation rentals is at the core of a successful pricing strategy.
The demand for and supply of short term rentals change on a daily basis. On the demand side, certain days, weeks, and months are busier than others because of seasonality and local events. On the supply side, local hosts sometimes offer their listings for bookings and sometimes block them for personal use.
A well-designed strategy needs to reflect both demand and supply trends to be competitive. In a nutshell, your strategy needs to be dynamically changing in response to the needs of the local market.
#2: Keep a Close Eye on the Competition
Your pricing strategy needs to be largely determined by the rates of your competitors. If your rates are significantly higher than the prevailing prices in the market, guests will prefer other listings even if your property offers a bit more amenities. If, on the other hand, your rates are considerably lower than the market average, you will be leaving a ton of money on the table.
As a beginner host with a new listing, it’s a smart idea to ask for a bit less than the market average daily rate. This will help you attract your first few guests, impress them with the quality of your property and services, and get positive reviews from them. This will help in how to list on Airbnb and Vrbo and push your listing higher in guest searches, according to Airbnb SEO.
Once you have a good overall rating and a number of 5-star guest reviews, you can start increasing your nightly price, without going way above the market average.
In addition, the pricing of your rental needs to reflect how it compares to other listings in the area. In case your property is superior to all competitors, you can afford to ask for a higher rate, as long as you clearly mark all available amenities in your listing. Conversely, in case your property is inferior in terms of location or extras, lower your rate to compensate for the Airbnb experience difference.
#3: Make Your Vacation Rental Stand Out
To boost your strategy, it’s a good idea to work on your listing and invest some time and resources into making it stand out from the competition. Once you’ve analyzed competitors and know exactly what the rest are offering, make sure you offer more.
Location, amenities, and services are exceptionally important for the pricing and the performance of a short term rental property. While there isn’t much to do about location after you’ve purchased your vacation rental, the sky’s the limit when it comes to interior design, furnishing, amenities, and extras.
For instance, you can furnish your property in a classic manner that will never go out of style and make you look more classy than competitors. You can provide a small, yet convenient home office if your area is popular among digital nomads.
You can supply digital guidebooks to local attractions. You can offer discounts at local points of interest through an affiliate program with local businesses. And many more things to be unique compared to competitors.
The key in this regard is to conduct cost and benefit analysis of each new amenity or extra before working on it. Ensure that any additions to your listing will result in positive return. It doesn’t make sense to go overboard with design and furnishing if you will not be able to significantly increase your daily rates.
#4: Apply Seasonal Pricing Adjustments
Market demand analysis for vacation rentals is crucial to identify the high seasons and the low seasons in your market. For example, if you invest in a beach resort, you’re likely to get the most demand in the summer. If you buy a vacation rental in a ski resort, most visitors will come in the winter months. In other locations, demand is more nuanced.
This means that each season should benefit from its own pricing strategy to reflect high and low demand. By how much exactly you increase your rates in the high season and decrease them in the low season should depend on the strategy implemented by competing properties.
#5: Take Holidays and Special Occasions Into Consideration
While seasonality is likely to be one of the biggest drivers behind pricing, it is not enough to differentiate between summer and winter prices to optimize performance. Public holidays, local events, and special occasions are equally important.
For instance, Christmas, New Year, 4th of July, and Super Bowl Weekend are some of the times when you can afford charging more for your vacation rental and still retain a high occupancy rate. But that’s also not enough.
You need to look into local events such as conferences, festivals, concerts, and others. Since demand is likely to be high during these special occasions for the local community, you can raise your nightly rates and earn some extra income.
#6: Differentiate Between Weekdays and Weekends
Another easy thing to do to optimize your vacation rental pricing strategy is to take into account demand throughout the days of week.
If you cater to business travelers, you’re likely to see more traffic during the week. If, alternatively, you host couples and families, there will be more demand over the weekend.
You can adjust your pricing model accordingly to balance between prices and occupancy.
#7: Establish Minimum and Maximum Nightly Rates
When applying vacation rental dynamic pricing – and especially if you use automation tools – it’s crucially important to determine the minimum and maximum rate that you can afford to charge for your property.
The minimum rate should be the lowest daily rate that will still bring you positive cash flow and help you make money from your Airbnb business. It simply doesn’t make sense to go below this minimum threshold as you’ll start losing money from your investment.
The maximum rate, meanwhile, should be the highest price that any of your competitors ever charge. You cannot set the highest daily rate in your area and expect to attract guests and generate a good and consistent occupancy rate.
#8: Offer Discount Rates for Longer Stays
As part of your dynamic pricing strategy, you should consider providing discounts for longer stays.
Airbnb long term rentals – of a few days or even weeks – offer many important advantages to owners and property managers.
For example, you don’t have to clean the rental on a daily basis but only upon the request of the long term guests and you get to charge them a cleaning fee for this. You don’t have to restock all essentials all the time but only before first welcoming your guests.
In addition, you don’t have to worry about vacancy as your property gets booked for an extended period of time. This can bring down your marketing and advertising costs.
To encourage weekly or even monthly reservations, you should adjust your pricing strategy accordingly. You can easily offer a 10-20% discount or even more for longer stays.
#9: Provide Special Discounts and Deals
Another step in a comprehensive short term rental pricing strategy is to offer special deals and discounts in certain cases and to certain guests.
For instance, you can have a 10% discount when someone books the entire weekend instead of just Friday night or Saturday night. You can also offer a discounted rate for booking the entire property if you rent out individual rooms. You can also provide a discount for repeat guests or frequent customers.
Believe it or not, these special cases can really help boost reservations and increase income. And while they sound like a lot of manual work, a good dynamic pricing tool will help you implement all these ideas with minimal additional effort.
#10: Account for Recurring Business Expenses
Step #10 in the building of your vacation rental pricing strategy is to account for recurring business expenses
When you’re putting the strategy for pricing your vacation rental, you need to take into account the recurring costs of managing your Airbnb business.
For Airbnb hosts, some costs include marketing, advertising, cleaning, restocking, maintaining, repairing, and managing the property. Real estate taxes, income taxes, and insurance premiums also add up to the total cost.
Btw, check out the short term rental tax deductions you can benefit from to lower your taxable income and make some savings.
For Airbnb managers, the most common business expenses include the cost of marketing and advertising the rentals in your portfolio, the property inspections, and the fees that you pay to your team.
In either case, it’s a must to analyze the exact costs that go into the management of the property and factor them into the pricing strategy. Unless the daily rate exceeds the daily expenses, your business will be losing money instead of making money.
Having said that, you need to make sure that all expenses are rational and minimized – without compromising the condition of your property and the quality of the services that you offer to your guests. You cannot have unreasonably inflated costs and try to make up for them with equally unreasonably inflated pricing.
#11: Work on 5-Star Guest Reviews
While hosts and property managers appreciate the significance of having a high rating and a lot of 5-star reviews from guests, we need to discuss how this should be considered in the pricing strategy.
As soon as you first list your property on Airbnb, Vrbo, Booking.com, or another platform, you need to start actively working towards getting positive reviews from guests. This includes having truly honest information in your listing, keeping your property well maintained, cleaned, and stocked, being available for guest questions and concerns before, during, and after stays, and asking for reviews.
Once you have hundreds of positive reviews, you can push your daily rates up, above the prices of similar rentals with fewer reviews. Positive reviews testify in favor of the quality of services that you provide as a host and attract guests, making them willing to pay a bit more in exchange for a guarantee for a good, pleasant, trouble-free stay.
So, generating good guest reviews should be an indispensable part of your pricing strategy.
#12: Make Use of Pricing Automation Tools for Airbnb Hosts and Property Managers
The last step in creating an effective vacation rental pricing strategy is getting access to the top vacation rental management software tools available on the market.
Doing all the work required for steps #1-11 manually would require hours of work each and every week. Not to mention that manual vacation rental data collection and analysis is prone to human error, which gets quickly multiplied in Airbnb spreadsheet calculations.
Having a reliable vacation rental pricing tool, Airbnb channel manager, and a few other tools can help you streamline and automate the implementation of your pricing strategy. No matter how many properties you own, how many websites you list on, and how many rentals you manage.
Next, we’ll discuss where to find the best vacation rental software tools for your needs as a host or a property manager.
Using the Best Dynamic Pricing Tools
The Mashvisor platform offers all the tools and features that you need in order to optimize your vacation rental pricing strategy as well as other aspects of the management of your short term rentals.
To begin with, the Mashvisor Airbnb dynamic pricing tool helps you put your pricing strategy on auto-pilot, for maximum results. Our tool uses historical data on the performance of vacation rental comps in the local market as well as the specifications of your property to offer the optimal rates for every day of the week, week after week.
Meanwhile, you retain full control over your strategy by setting up the minimum and the maximum daily rates with which you feel comfortable. Instead of working on the pricing of your rental while keeping you in the dark, the Mashvisor tool features full transparency and shows you market insights so that you know exactly where each suggested rate comes from.
You can choose whether to approve rates before they get transferred to your listing or to have Mashvisor automatically manage your pricing strategy on Airbnb.
Moreover, getting started with the Mashvisor vacation rental pricing tool is extremely easy. All you have to do is to connect your listings, set up the minimum and maximum rates, and select whether to have your strategy on auto-pilot.
An important difference between Mashvisor and other dynamic pricing tools is that we work towards optimizing your revenue and return on investment – not occupancy rate, like many competitors do. After all, the ultimate goal of hosts is to make as much money as possible, not to have their rental booked around the clock.
Additionally, the Mashvisor vacation rental software platform offers a few more features that optimize the management of your listings:
- Vacation rental channel manager
- Multi-calendar
- Unified inbox
- Vacation rental website builder
- Airbnb calculator
- Vacation rental data
With the Mashvisor tools, you can manage a single short term rental or an entire portfolio of Airbnbs, without the stress associated with running a vacation rental business. Our tools will help you with everything from setting up the right price, through communicating with guests, all the way to managing multiple listings from one dashboard.
Boosting Performance with the Right Vacation Rental Pricing Strategy
As a new host, you may be thinking that the right way to boost the performance of your short term rental is to ask for a high daily price to maximize the profit from every booking. However, the key to a successful and profitable Airbnb business is creating and implementing a dynamic vacation rental pricing strategy that balances between nightly prices and occupancy rates.
In practice, this means factoring seasonality, competition, your property’s unique features, and your guest profile into your pricing model. This requires ongoing market and competitor analysis to be always up-to-date.
To have the best pricing strategy, you should use the right tools. The Mashvisor dynamic pricing tool, along with other vacation rental management features, helps you optimize and automate your pricing strategy, in an effortless manner. The ultimate result is stronger revenue and ROI, while you have the necessary time to strategize about your portfolio and continue growing it with all the new income you get after improving your pricing.
Vacation Rental Pricing Strategy FAQs
What Is Dynamic Pricing?
Dynamic pricing refers to a vacation rental pricing strategy that is constantly changing to accommodate ongoing changes in the short term rental market supply and demand. This pricing model applies different nightly prices for each day when a property is available for booking.
What Is Airbnb Smart Pricing?
Airbnb Smart Pricing is a feature provided by the Airbnb platform that applies dynamic pricing to listings, accounting for seasonal trends and competition. Hosts can choose whether to opt in for it or not. A common complaint about the Airbnb Smart Pricing though is that it boosts occupancy by underpricing rentals, thus making hosts lose money.
What Are the Different Types of Pricing Strategies for Vacation Rentals?
While there are different types of pricing strategies, the most effective one is dynamic pricing. Daily rates need to be continuously updated in sync with market trends to optimize performance.
What Is a Good Return on Investment for Short Term Rentals?
The good ROI on a vacation rental property depends on the market, the property type, the marketing strategy, and other factors. Usually a good cap rate, one of the most popular metrics of profitability in real estate investing, is considered to be 8-12%. Having a dynamic vacation rental pricing strategy can help boost return on investment for Airbnb hosts.
What Factors Should Influence My Pricing Strategy?
The most important factors that affect the pricing of vacation rentals include the location, the competition, the property itself, and the recurring business costs.
How Do I Set Competitive Rates Without Underpricing My Vacation Rental?
It is absolutely possible to have competitive pricing without listing your property for less than its worth. Make sure to study the competition and emphasize the ways in which your rental is different from and better than them. Then, you can ask for a higher rate and still attract bookings.
Can Seasonal Pricing Adjustments Boost My Occupancy Rate?
Yes, indeed seasonal pricing is one of the best ways to attract interest to your property and bring in guests. During low seasons, it is a smart move to lower prices to attract guests traveling off season.
How Often Should I Review My Vacation Rental Pricing Strategy?
A good dynamic pricing strategy should be adjusted on a daily basis. Vacation rental software tools can help automate this process, eliminating the need for interventions by the host or the property manager.
What Is the Impact of Guest Reviews on My Short Term Rental Pricing Strategy?
Guest reviews are an integral part of a well-designed pricing strategy. The higher your overall rating and the more 5-star reviews you have, the higher you can push your daily rates while retaining a good occupancy rate.