Two Minutes. One Decision. 10% Increased Annual Vacation Rental Profit

One of the very simplest, most influential tips I share in my one-on-one consultations with subscribers  revolves around the following questions:

“But Matt, I already operate at full occupancy. What room left do I have to improve?”

“Matt, we are already successful and we’re not interested in buying a second vacation rental. What can your advice do for people like us?”

“Hey Matt, we run pretty much the best vacation rental in our area. Fully booked, thrilled guests, an amazing staff. Why would we want to change anything?”

The answer is simple: to make more money.

And fortunately for us, the vacation rental industry provides lots of upward mobility.

 

Have You Been In Operation For More Than 1 Year?

 

If you are already operating a top-notch vacation rental there is one decision that can, in about 2 minutes time, increase your annual revenue by literally as much as you choose. As long as you don’t abuse this tip, you will be amazed with its results.

That decision is to increase your rates.

And before you say “Aw that’s so remedial,” please hear out my own personal experience…

Now, this is a strategy move that is not for everyone in the industry.

For instance, if you are brand new to vacation rentals (i.e. you don’t have enough historical data to make solid predictions) or if you are not already very successful (i.e. you are still struggling to optimize your business), then this move may not be for you…

But because my readers are among the creme of the crop in this industry, I think this advice will apply to more than less.

 

How To Make The Decision Whether To Increase Rates?

 

I sat down with my new business partner about 2 years ago and he demanded we increase our prices by 10%.

He pointed to our extremely high occupancy rates, incredible brand loyalty, frequent repeat guests, and (most of all) amazing value as indicators that a rate increase would work well.

For a successful rental offering a tremendous service, the luxury of increased rates is your reward.

I, on the other hand was hesitant. I always loved the fact that we were the cheapest place in town. I loved the $110/night price point. I knew people came for that reason alone.

But because of his experience (and his convincing) we made the adjustment and increased our prices across the board by 10%. *Note: One of our special terms was that repeat or frequent guests would receive the same price they always had, honoring their loyalty (and even making them feel special for being a privileged group).

 

The Results Of My Experiment?

 

Two years later, I now look back at that decision as the simplest most profitable decision my company ever made. Across the board, our revenue went proportionally up by 10%. In fact, since our occupancy slightly increased, the profits were even more.

Take some time to determine whether a slight increase in rates is fit for your business. If it is, and you execute it properly, you’ll enjoy the sweet fruit of your decision.

For anyone who have purchased The Vault, you’ll know that this is only one of the ideas that’s right for some owners/managers. It is one of the great ways to generate even more cash from any given rental (the sky is the limit).

And yes! It can be that simple!

I’d love to hear any owner/manager opinions about this decision as it applies to their property.

I have heard great success stories (please post below) but am sure there are some negative experiences in the mix…

About the author 

Matt Landau

Matt Landau is the Founder of VRMB. He spends most of his time inside of VRMB's Paid Community, the leading collaboration platform helping vacation rental owners and managers build more profitable & sustainable businesses.

    1. Hi There, i definitely agree with you but i would like to add that this depend on (1) the number of reviews you might have on premium channels like VRBO, TripAdvisor, … (2) if your rentals have a really strong value on the market (ex: premium location, sea view, ..)

      We manage more than 50 properties in Portugal and we also use a technique (for properties that we consider “normal” like similar to dozens of other apartments in the destination) we fix a minimum amount that we have to make per month and after reaching date (depending how far we are to that month) we start doing pure revenue management….increasing the prices let´s say after reach 60% occupancy rate (depending on how far we are of the checking date, and season,..) or we make really awesome last minute discount because for us an “apartment” not sold it´s a loss we can´t recover (of course we do this with good sense and we don´t “offer” free stays)!!! Let me know what you think about this strategy! Note: However i think that European market it´s a little bit different specially when you are speaking about short term and revenue management on properties located in capitals!

      1. Great points Goncalo. A rental most certainly needs to cross a “tipping point” in order to put this into action. Definitely not for the first timer or anyone who is struggling with bookings.

  1. Hi Matt!
    When I used a rental agency, their policy was to offer 25% for monthly bookings. After I had received less money for March (spring is the absolute peak time in Florida) than July, I decided that a change was needed.

    I have been tweaking my prices to try and maximize profit, and still have at least 90% occupancy.
    Thanks to platinum listings and excellent reviews I have many inquiries. Most think we are too expensive, but I prefer to have renters that book because they like our place and not because it’s a bargain.

    I sometimes see properties that are booked years in advance, and it makes me think that those owners could make so much more money if they were willing to be booked less far in advance.

    1. Oh Marie, this reminds me of a great lesson I learned as well: higher prices most certainly attract more quality guests. In fact, I now automatically reject anyone trying to bargain for a discount. Again, this isn’t something I’d recommend to first-time owners. But if you have established a successful brand, you are entitled to these changes.

    2. @Marie-Louise & @loscuatrotulipanes:disqus – This is exactly what I experienced and hear from other homeowners. Try to advertise your place as a low cost accommodation and you will get those low-end customers. I have a very flexible pricing model and offer different rates based on my calendar situation and the season. Every person that gave me a grief about “some issues” is the one that booked at the lower rate range. It’s a phenomena – people that pay more tend to complain and demand less. The second argument in favor of 10% rate increase is the occupancy rate. So many homeowners are bragging about their 90-100% occupancy. It sounds like they feel it’s an indication of success. To me it only means they rented their place cheaper than they could have and worked harder than they should have. My method is to keep occupancy rate at 75%-85% and raise rates by 10-15% when the occupancy rate is getting close to 90%. At the end I make as much money (even more on a long run), I work less than I would have, my guests are awesome and happy, my property experiences less wear and tear. All around winner!

      1. It’s easy to generalize about lower price=lower quality guests, but I can also come with another input.
        I have a small cottage beside the home that I live in. Last year I decided to rent it out. Living in Sweden our main target is Germany.
        The first year I rented at medium price and half of my guests were not English speaking, which meant I had to get by on google translate and my very limited school-German. Everyone brought a a bottle of wine as a gift to the hosts :-), and on more than one occasion the house was left in immaculate condition so I didn’t have to clean.

        This year I raised the price in peak season by 15% and the demographics changed slightly. Still mainly Germans, but everyone spoke good English. No more wine, and much more cleaning (I think they were more used to staying in hotels).

        1. Now we are speaking about cultural differences. I was strictly referring to my clientele which is 90% americans. I am pretty sure Germans behave differently in different spending groups.

          1. I would beg to differ (except for the English).

            From low budget to mid-budget I’m sure the leap is great no matter what culture. That’s where you have the people that want to spend their money on partying and their living quarters are secondary.
            Discounting your prices too much might also give way to the people that want something for nothing.

            But when you get beyond that, I’m not convinced that “higher prices most certainly attract more quality guests”. From other forums I have learned that the luxury segment can include guests that give you nightmares.

            A bulk of my American renters are retired and they are usually wonderful – really enjoy and take care of our property, but many times their budgets are limited compared to people that work.

  2. Hi Matt,
    Before being an owner of vacation rentals, I owned and rented out apartments and homes and discovered the following.
    “Eureka Idea”
    One week I placed an ad for an apartment and did not get the usual amount of calls so the following week I increased the rental amount and got dozen of inquiries and showings. Therefore I learned that If your rates are cheap, people tend to think that your place likewise is cheap; lacking in appearance, things not working properly, not clean, has limited space, etc. This also applies to vacation rentals.

  3. Hello All
    Matt and I had talked about this a year ago and he asked me to share my experiences with increasing my rates. Well I am happy to report it is good and there is no looking back.

    YTD Oct 2012 my occupancy was 73% when I increased my rates by 10%.
    YTD Oct 2013, a year later my occupancy has decreased to 72% but my revenue has increased by 12%. Figure that, I only raised my rates 10%.

    I would agree with Matt’ comment below that increasing your room rates have a good chance of sticking if your occupancy percentage is already in the high sixties.

    1. I think it’s important to note that Paul EARNED this ability to increase his rates with hard work. As is the title of my next article: You Cannot Buy Bookings, You Must Earn Them.

      1. With regard to “one decision…” and the concept of increasing rents; having initially listed my first vacation rental with a local rental “broker”, I soon learned my home was just a number on their website. After a season or two of lackluster results I took back the responsibility of generating bookings. In the succeeding 6 years I have annually increased my rates on each of the 4 homes we now own, all in the same geographical region. The result? 100% occupancy during the high season. Increase in gross revenue (on my first home) after the 6 years?100%. Based on the annual demand and feedback from guests, my assessment is that I have not yet achieved maximum pricing.

        I monitor the listings on that original rental broker site (my competition) and have found most of their 150 plus listings are either the same rate as 6 years ago, or nearly so. Most of the listings achieve 60% or better occupancy during the high season.

        My conclusion is the broker is happy to collect its 20% commission with the least amount of effort possible. One way the broker(s) achieve this is to artificially suppress rates, in general. Lower prices means less effort needed to properly market, (photograph, describe, promote, collect reviews). Heck, if the weekly rate is low enough compared to the competition, the homes would rent with just one picture.

        And from the broker’s perspective, who is making a percentage of the gross rent, there is little economic incentive to increase rates and thereby increase the effort necessary to produce bookings (example: 20% of a $3000 rental is $600 vs 20% on the same home renting for $3500 nets the broker just an additional $100.) Its much easier to maintain low prices and simply “take orders” instead of raising prices and needing to “sell.

        Having established my own “brand” and reputation for offering quality homes AND quality service, I have attracted the attention of a few of the owners of other high-end homes in the area and am now responsible for managing these homes. As another example of increasing prices: my first non-owned home that I took over from the broker mentioned above, I increased the weekly rate 15% in the first season (which to the delight of the owner covers my commission), was able to secure bookings for every available week during the high season. I was then able to collect reviews, add professional photos and increase the rate another 15% the following year with no push back from the market.

        In conclusion, I believe the brokers (at least in my region) do a considerable disservice to the owners whom they represent by failing to properly price the homes. Lazy? Ignorant? No, I think short-sighted and content to take the easy money with least effort expended.

  4. Internet is big media to rent your property quickly with your options

    because websites drive unlimited leads which will track for you

  5. You definitely must EARN the right to raise your rates, but if you’re fully booked when you should be then you are obviously doing that. I typically look at how quickly and how far out my properties are booking for the future 12 months. If they are booking up much faster than my competition then it tells me my rates are too low!! If I have a property that had much higher occupancy for the year than the other similar properties (especially in my own inventory) then I know I need to raise rates at least a good bit more than inflation for the next year.

    1. Thank you for your insight. Much appreciated. I completely see your point and will restructure pricing on Monday.

  6. Great article! I flipped my long term rental to vacation in April…first bookings in May. It’s located in a nice older neighborhood (not a cabin in woods or lakeside) in Spokane. Having lived and owning businesses in both, Texas and Spokane, I know how hard business can be in Spokane but was curious how pricing would be since I would be renting to out of towners. I also knew from owning 2 lifestyle stores in Spokane that majority of homes are outdated in appearance. My background is interiors so I had a ton of fun repainting, furnishing and accessorizing in mid-century mod knowing I would be renting primarily to people from Seattle area, Canada, Montana and California. I also knew I increased value immediately by appearance of home…tastful and relaxing. This is peak season and I am almost 100% occupancy..but what about Fall/Winter? I am beginning to book out and more so than other rentals in area. When I initially priced it was based on comparable homes and I priced at the higher end of it but thought they were all a little low and wondered how long they’ve kept same price. I have been debating increasing and am a firm believer in 10% increase annually. But I am new… I also regularly check out vacation rentals in Seattle and where I live which is in the islands north of Seattle and see that most set rates as two person occupancy then add a fee per person after up to their maximum occupancy. I’ve had a few guests be incredibly pleased that they can have eight people stay for $169/night! That is an incredible value…too much if you ask me. I think I can restructure my pricing so a couple would not pay too much, a family will pay a little more and a full house pays less than hotel but more than the rest.

    I have been hesitant to implement as I am working on increasing my reviews. I have less than a couple of other rentals but as many or more than most who have been around longer.

    What do you think? Too soon or priced too low?

  7. I know I am late to the discussion, but I just started reading the blog. My wife and I own a vacation rental in Texas. We bought it in April 2015 and had the first renters in mid May, after quite a bit of updates and reconstruction. We had a pretty good summer/fall and we were happy with it. No, it was not booked every weekend, but we had enough renters to cover the mortgate, bills and the repairs/updates we were doing.
    Then in the end of 2015 and the first month of 2016 the inquiries skyrocketed. People started looking for summer rentals for the 2016 season. Since we had not been on the market in time for the prevous season, we had missed out on a lot or rentals.
    This summer is booked solid, every weekend from the first week of April until the middle of Ausgust. We also have several mid-week rentals, my wife just yesterday told me that from June 2 until mid August we only have 15 free nights. To us this is just amazing, our goal was basically to get a vacation home for us and rent it out in the hope of at least offset some of the cost. Now it looks like we will do a nice profit, even after making some bigger structural repairs and improvements (e.g. adding new air conditioning in the form of mini-splits/heat pumps, doing some needed foundation repairs, etc).

    We did raise the price for next season, the new prices are somewhere between 15% and 18% higher than this year. We also started charging a little bit more for weekends compared with weekdays, in an attempt to get more rentals in the weeks from price sensitive guests and thereby opening up more weekends.
    Our vacation house has 5 bedrooms with one “bonus bedroom”, and sleeps 22 people in beds (double occupancy in the larger beds), we also have couches with built-in queen sleepers as well as air matresses. So the house sleeps up to 30 people. We are one of the largest (at least to capacity) rental properties at this lake, and we have direct access to the lake from our property, with a private dock.
    So I think we have a very attractive property, which we hope will keep the guests coming despite the raised rate.

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