What Is Dynamic Pricing And Is It Right For You?

Author: Matt Landau
Category: 
December 21, 2015

As the vacation rental tide rises, more and more ships are rising with it. And one common characteristic of the most successful vacation rental professionals is to be fully aware of this emerging landscape and all the ways they can get ahead of increasingly resourceful competition.

Being aware does not necessarily mean implementing all the new tools. Rather, it's about knowing what's out there and roughly how the ecosystem works. They do this so that in a crunch or time of growth, they're able to lift the hood of the business like a mechanic and know more or less what levers to pull.

What Is Dynamic Pricing?

A good example of one of these newly emerging categories of tools and services designed to help owners and managers improve their bookings is a niche called dynamic pricing. It's a science used by the hotel industry for decades which leverages technology to adjust nightly rates based on supply and demand: think of it like a hotel's own personal rate wizard hired to get them more money based on logic the owner or manager determines ahead of time.

However, I -- for one -- had no idea how dynamic pricing worked. So I turned to the collective wisdom of the Inner Circle for help. Fortunately, two members of our community run their own dynamic pricing start-ups: Evan Hammer, CEO of SmartHost and Andrew Kitchell, Founder of PriceMethod.

Evan Hammer, SmartHost

Evan Hammer, SmartHost

Photograph of Andrew Kitchell, Founder of BeyondPricing (PriceMethod).

Andrew Kitchell, PriceMethod

And in an active open forum chat (Members Link Here) these two entrepreneurs each shared five reasons they felt dynamic pricing could be utilized to generate more money -- the goal of the conversation being to understand the value of dynamic pricing, not to promote their services. Our community then voted on the top three, which we agreed to share with the public for optimal learning below.

The 3 Ways To Increase Profit With Dynamic Pricing

The beauty of what you're about to read is that it can be done whether you're using a paid service or not.

1. Re-evaluate price per night on a regular basis

When first starting off, most VR hosts go on a reconnaissance mission to understand what similar properties cost per night in order to assure they aren't asking too much or too little for their vacation rental. Those with more than one property break their units into groups (using proximity, number of bedrooms, capacity...etc. as uniting factors) for better relevance.

While most owners/PMs kinda know other rentals nearby that offer similar value, a "true competitive set" is a different ball game because it's based on every single property that appears near us in search results on Google and on major listing channels. Armed with this intel, the most savvy hosts in the world make more educated decisions on their price per night.

Quick Question: Should I Price Above Or Below The Competition?


There is no right or wrong side of the seesaw to price your rental: it really depends on how aggressively you want to make money. Knowing your true competitive set will give you the power to make the most educated and precise decision possible.

The only downside of this positioning exercise is that it takes time. And because of the perceived diminishing return on time spent, most owners or managers only do it once per year (if they're good). But wait too long and you risk drifting off the map (this could mean being way under or way over market average) and thus being less competitive.

If you want to stay as competitive as possible. A dynamic pricing tool would allow you to automate the research process and make comp sets -- and the window they afford into the ever-changing pricing landscape of your market -- a regular part of your day-to-day business decisions.

Whether you use a dynamic pricing tool or not, re-evaluating your pricing is always smart. Andrew from PriceMethod put it like this: "You can't sell next week's vacancies for the same price as vacant nights a few months out. Technically, this is because there is a larger potential audience for those future vacant nights, as more people will shop for those nights. Your potential audience plays a big part in determining how to price a rental."

2. Know that vacation rental rates fluctuate far more than you may realize

If you're not watching your competitors nightly rates regularly, you may be very surprised to see how often prices fluctuate...especially in urban markets.

If you don't believe me, check in on the same handful of random properties every few days for the next few weeks. You'll be amazed to discover how much variance there is. This can be a result of special events, school holidays, or even just foliage seasons or surf breaks.

So what can one do with these trends?

A statistician would likely analyze the local pricing patterns and draw conclusions about demand (i.e. prices seem to be sky rocketing around the 20th of next month...oh it's probably because of the famous Food & Wine Festival attracts visitors from the tri-state area...and because of these factors, people can justify increasing their nightly rates). But unfortunately, most of us are not statisticians, nor do we have any passion for charts or graphs.

Considering the average vacation rental traveler looks at more than 30 properties before booking, I have gleaned that he who monitors the region's rates becomes an area expert with a pulse on true (not just gut instinct) vacation value. Pricing matters and the rentals that are priced most accurately give themselves a major competitive advantage. 

Evan from SmartHost told me this is especially important if your market have dynamic demand: "If travelers to a market have preferences for certain seasons, weekends, or events, it's smart to set different rates to capitalize on those different levels of demand."

A dynamic pricing tool gives you the ability to run these searches, monitor the trends, and act on fact-based information, all within an arm's reach.

3. Tweak your minimum stay requirements

We've all made a special exception on minimum stays when we really want the booking: "Just this one time," we'll exaggerate. "Please don't tell anyone that I broke the minimum stay rule for you."

And if you had all day to sit at your computer and make piecemeal decisions based on what kind of booking you needed, you'd likely be even more creative with you minimum stay rules. I personally love to play Tetris with my booking calendar, allowing special 1-, 2- and 3-night stays based on my strange obsession with flush bookings. TETRIS! IT JUST FEELS SO GOOD!

But when you enter Growth Mode of Listing Site Independence,  no one is able to sit at their computer to make these one-off calls because, our time is more efficiently utilized in other ways. And that's where a dynamic pricing tool comes in. A tool like Andrew's or Evan's would automate your minimum stay requirements based on "if/then" logic or rules that you lay out up front. Think of it like a little team of minions verifying that the length of each and every booking is in your bank account's best interest.

Is Dynamic Pricing Right For You?

First, not unlike a handful of other "vendors" in the Inner Circle, Andrew and Evan are pioneering in the vacation rental start-up industry because they choose to spend their time educating potential clients as opposed to selling them. I believe this style of educational marketing is the gold standard for any company that wants to grow the right way. So I'd like to commend them on their helping (not selling) and encourage you to explore their respective services if it seems like the right fit for you.

Second, dynamic pricing is a tremendous option that can result in more profit IF (and that's a capital IF) your vacation rental business fits the right profile.

I would personally not suggest a dynamic pricing tool if you are still in Stage 1 or 2 of Listing Site Independence. But when you reach a point you're looking to optimize, streamline, and make small tweaks that -- in a well-oiled machine -- could have major ramifications, these services could yield huge rewards.

Kindly, Evan and Andrew have offered to open the comments section below for any questions about dynamic pricing that you may have. This feedback for your unique position will come free of charge in the nature of "Help, Don't Sell."

About the author 

Matt Landau

Matt Landau is the Founder of the VRMB and the Inner Circle, two online resources dedicated to helping vacation rental owners and managers generate more bookings.

      1. Just thought I’d jump in here as its been a question mark for some time and knowing what to do is a bit of a leap of faith. Managing several hundred properties prices is always a challenge especially when they are all regional and all the seasons and events are known a year in advance.

        We have now used a scrape methodology to ascertain what prices are set by bedroom number, location, proximity to water and other key elements. This has given us a snapshot and with the calendar matching we have a good visual idea of where we are based on what can be seen online.

        The things we have noticed are that the prices advertised may not reflect the booking price. With the vast number of bookings still direct with managers and owners the data is innaccurate, but 5% each way is probably OK. This data is gleaned from large portals, not the lower prices often found direct with offers. These portals are now being gamed with channelled higher prices to cover commissions.

        The second thing we noticed is that most of the competition do not change their prices regularly and if they do, we think its automated as its the same businesses. 90% are static.

        Thirdly we have noticed a shift from week to value by night. Instead of saying its £1000 for a week we and others now say and publish: its only £20 per person per night.

        We have looked at the Airbnb advised prices and if these are included then we are sometimes 30-40% too expensive even at rock bottom prices. Tends to be one bedroom or studios.

        One of the biggest issues is owners. We agree on tariffs and they expect to get it, with minimum leeway (5%), so rate management would generally be upward. Discounts are generally only offered after discourse with prospective guests.

        These tools are really useful to have as it makes for comparative studies and gives snaphshots of performance compared to the competition and allows discussion with owners. Not sure outside of city pads how effective the real time dynamic is but data is useful!

        1. Hi @richardvaughton:disqus – Great observations. Thanks for sharing.

          Like anything in the vacation rental business, the results you’ve found vary by market. However, I find your results to be accurate with what we see sometimes. The prices in some markets do remain static.

          But we believe that this will change quickly. I think you believe that too.

          It’s true that the “advertised price” may not always match the “booked price”. There is still a large percentage of vacation rental transactions happening offline via negotiation. That data is only really known by the owner/manager and the guest.

          As a result, we monitor listings everyday to see what a property was advertised at the day before it became “unavailable”. It’s not 100%, but a good place to start.

          You point out one of the issues being owners. We’ve seen a lot of our customers (mostly VR management companies) use our product to help educate owners. Using objective market data to get owners to provide more pricing flexibility to their management company is a great way to create more opportunities to increase revenue for everyone involved.

          We love this use case because the flexibility allows them to use the competitive market data we provide more often. Which gives products like ours more value to our customers in the industry. 🙂

          1. Thanks Nick,

            All valid points and well put.

            The source of properties are owners and like all things in life, they come with many opinions and requirements, but are due respect, as its their own hard work and investment to even have a second home.

            What would be very useful to many managers and owners is a document with proven cases of dropping prices to improve overall income. We keep working the numbers on short breaks for them and we often hit the CBB rule (can’t be bothered, which seems to be around below £100 net) which is frustrating and it is almost always due to the fixed management/turnaorund fees.

            Peak season full weeks is much easier and although we hear so much about short breaks its hard to implement less than 3 days out of season. Two bookings in the summer are actually 30% more than a single 7 days break, but the management companies can’t work it or their fees wipe out almost all the extra.

            When we owned and managed privately we had 82% occupancy and followed all these rules, but it was only 7 properties and we did the cleaning, marketing, everything. It was quite profitable, but marketing was a fraction of todays costs.

            I think the price management option is really valid, I think it needs to be on higher value properties out of season as absolute margin is better and negates the CBB factor. In season tweaking properties at late booking dates makes sense. The only downside here is that the poor properties are the ones invariably left and we do see callers trying to get a bargain as they are left!

            Fascinating times ahead. If I owned a block of apartments in a city, it would be my first priority however. Scales of economy on marketing, higher footfall over longer periods and much easier access to local labour.

            Education is needed in traditional business and more efficiences within property management are also needed, but how I do not know!

          2. I don’t want to speak for the other founders in this thread working on this (Hi @pricemethod:disqus), but we’re trying to help you get these answers through software.

            In general, the products on the market today do a good job presenting the raw data. Even that is a tall task within the industry because there isn’t a clean repository of it sitting somewhere. It’s scattered, incomplete, and not representative of the entire market.

            In my opinion, the innovation is taking the raw data and providing actionable insights all through software. The actionable insights also need to take the manager/owner input (minimum night stay, taxes, fees, etc) as factors.

            But can it be done? Considering all the smart people in the industry working on this (new and seasoned), I’m very optimistic.

            Exciting times ahead indeed. 🙂

  1. Airbnb offers Dynamic pricing as a guide for hosts. I feel that it does not take into account the uniqueness of a property and is a broad stroke. I can understand the concept when applied to hotel rooms but specialness is important as guests are not looking for ordinary.

    1. Hi Rickie,
      the last sentence in your comment really is so poignant that I felt I had to elaborate a little. We have 6 vacation units and over the past year i tested 2 of them with dynamic pricing and the others were left at ordinary / seasonal pricing. The primary take away for us was that the guests in the dynamic pricing units, were noticeably less communicative & less responsive to our follow up requests for posting reviews. We also did a phone follow up and the consensus was that the dynamic pricing intimated that we were just capitalizing on special events in our area, which of course was true. We have decided that it is far more important to our model, to be perceived as friendly locals, wanting to provide a value family vacation. The small increase in revenue pales when compared to happy guests referring us to their family / friends.
      We are definitely not hotels, nor are we the impersonal “mock hotels” that Tripadvisor & others want us to be.
      I am yet to be convinced that dynamic pricing is applicable to us.

      1. Hi Peter….. I have 25 units in Toronto Canada. Also did a test with BeyondPricing which is another service. Some of the swings in prices made it unrealistic to rent out once you consider the time , effort and cleaning involved. It is getting harder to rent ou tthese days…when I first started ,Airbnb only had 700 listings in our city.Now I think they’re up to about 6000…..fortunately most of these are shared accommodations whereas we offer full private studios etc.

      2. Peter,

        This is such an interesting comment, and very worth discussing.

        Sometimes, I consider this the ‘Elephant in the Room’. In short, we have to ask… Is dynamic pricing bad? Let’s dig in.

        We all know that hosts & owners work exceptionally hard to make their listings feel like homes, and not commodities. This amazing fact is what makes our industry the future of the accommodations space.

        However, we also know that it takes a lot of work to maintain these homes. It takes furniture & decor, real estate, websites, staffs, cleaning teams, fresh linens, insurance, repair work, soap/shampoo/etc, local knowledge, and more, just to maintain a home. That is just the material/cost of doing business, outside of the hours it takes to answer/help guests.

        Also, while one might be able to earn more during high-demand periods, in many markets there are seasonal swings when occupancy rates drop dramatically. In these markets, earning enough during high demand times enables people to make it through the periods when occupancy drops.

        I/we recognize that in one light, dynamic pricing can seem “less friendly”. However, for many people, charging more for big events enables them to keep their listings clean, comfortable, or safe. Additionally, one could argue that increasing costs during period of high demand enables them to keep their listing more reasonably priced for the rest of the year.

        I think there are a number of ways to view dynamic pricing, and thank you for bringing up this issue!

        Cheers,
        – Andrew

        andrew@pricemethod.com
        http://pricemethod.com

      3. Throwing my two cents into the mix.

        Peter, if you’ve found that raising your prices to capitalize on events detracts from your relationship with your guests, then you should take that info into account. Is there a middle ground? Could you raise prices to increase revenue but not so high enough that they create a bad impression.

        Another aspect of dynamic pricing is updating the prices regularly. Would lowering or raising prices as you approach a date be perceived differently from special event pricing?

  2. Ok.. I’ll jump in! I have owned a very unique property in North Conway, NH for almost 25 years (www.FourSeasonsLodge.com).

    We accommodate up to 20 guests in 10 bedrooms and have one of the only private INDOOR pools in New England.

    I almost have no one to compare my pricing. I have winged it for 25 years and it’s been working.

    I am VERY interested in dynamic pricing.

    How do I start? 🙂

    Thanks SO much,
    Teena

    1. Hi Teena, what a beautiful property!

      For such a unique property (10BR/20 guests), dynamic pricing will be a bit more challenging. This is because your listing likely has a _very_ unique booking pattern. In areas with more listings, booking patterns can be a very useful indicator for dynamic pricing.

      For a home like yours, the most effective means of evaluating your pricing strategy might well involve studying your listing’s “funnel” in order to compare how different months are your listing perform, and how pricing impacts your booking rates.

      For example, funnels can be built around a few key indicators, all of which you can track:

      1. Page views;
      2. Rates page views;
      3. Inquiries (# of inquiries, and time-until-stay-date);
      4. Reservation Requests (# of reservation requests, and time-until-stay-date);
      5. Bookings

      Essentially, tracking these metrics will give you an understanding of your funnel, which is a great way that very unique properties can gauge how different pricing impacts their booking rates. (for example, if you raise rates, but you still get the same number of bookings from the same amount of visitors, that’s great to know!)

      Additionally, understanding your “funnel” means you can see changes in seasonal demand. I’d write more here, but this is already turning into a long response 🙂

      In areas with more similar units, we’re able to look at many other metrics that can help discern prices (i.e. Is your home the first-to-book or the last-to-book? How are hotel prices changing? What are occupancy rates on a given day in your neighborhood? etc.)

      However, for _very_ unique listings, understanding your listings “funnel”, and how adjusting prices impacts your funnel, is a great place to work toward!

      All this takes a lot of work, which is why you see a number of great companies building tools to help you all with this 🙂

      Hope this helps!

      Andrew Kitchell
      CEO of PriceMethod
      andrew@pricemethod.com

  3. I know it is a bit late I chip in, but anyway: We have also tried to look at what is around, but again we find there is very little to compare to (AirBNB suggests 1/3 of the rates we sell for in August). We are in Portugal, but as there are so few to compare to we have to find properties in Spain for comparison too – and as distance to the beach is wildly different, patterns will be different in e.g. spring and high season.

    The questions we ask ourselves are more complicated:
    – if we increase prices, will we get a different profile of guests which we may feel less comfortable with (last summer we had people who did not care about price but made our very short “never again” list)
    – if we increase prices off-season, could we get the same income with fewer guests and thus a more relaxed time?
    – how price sensitive are the guests we love seeing coming back?

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