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Pricing Series-Adjusting Rent in Response to Changes in Demand or Competitor's Pricing

VERSION 1 
Created on: Jun 13, 2012 12:11 PM by laura - Last Modified:  Jun 13, 2012 12:24 PM by laura

By George Volsky

 

Pricing involves two acts:  (1) setting an initial price (covered in this article) and (2) adjusting the initial price—the topic addressed here.

 

Why Adjust A Price?

We lower a price when a rental home may not rent at the existing price.  We increase the price when we think we can get higher rent.

 

How do we know a price must be changed?  We seldom know for sure.  We must take educated guesses.  Those who regularly guess best regularly generate more rental income.

 

What’s at stake?  As noted in “Pricing Fundamentals Explained-Overview,” poor pricing could lose 1 peak-season rental, 2 mid-season rentals and 2 3  off-season rentals —, or 32% of a home’s revenue.

 

This article shares the author’s pricing philosophy, and discusses some tools that add “education” to the guesswork.

 

Philosophical Perspective

Consider this: almost every rental home is a good bargain to someone at some price. There is no shame in offering a sub-par home as long as the renter knows it is sub-par.

    •    Use lots of pictures to show the renter precisely what to expect.

    •    Use description to advise renters about nearby noise or other problems.

    •    Remember that your company reputation and total rentals will suffer if renters are disappointed, so do not embellish or hide details.

    •    Only manage homes that homeowners expect you to portray exactly as they are.

    •    Also keep in mind when pricing, that almost every vacation rental home will have vacancies no matter how low you set the price.  Occupancy rates are, on average, 36% for our industry. Thus, it’s important to know when the home you are pricing is most and least popular to renters. 

    •    There are weeks when no one wants to rent at any reasonable price. 

    •    Off-peak rent reductions may push competitors’ prices down without adding bookings.

    •    Each vacation destination has different kinds of homes with different seasonal appeal.

    •    Lowering a price may not drive more rentals—it could start a price war.

 

In pricing, it is also important to have a healthy appreciation for what you don’t know.  Generally, you seldom have a complete picture of the many complex factors that together dictate whether you should change a price or hold fast. For example, you often don’t know:

    •    Whether your area will book fewer rentals or whether renters are just booking late;

    •    Whether you are behind because renters are booking later or prefer a competitor;

    •    Whether lack of snow or a competing destination’s pricing is putting you behind;

    •    Whether your competitor has discovered a way to reach your renters first.

 

Finally, remember that each place you advertise is a marketplace that offers a different number of competing homes and a different number of renters on any given day.

    •    One day, there may be 3 homes like yours, but just one renter (price rules).

    •    Another day, there may be 3 renters, but just one home like yours (raise the rent).

    •    Without a sense of this, your occupancy rate is determined by others.

    •    Those who track the marketplace best end up with the highest rental revenue.

 

A pricing philosophy that includes these tenants should generate a healthy fear that prevents emotion or rigid rules from affecting your pricing.  It should also spur you to devote as many resources as possible to tracking the ebb and flow of demand for your homes.

 

The Pricing Process—Changing a Price

Assuming your initial advertised prices were in line with competitors’ prices, here are a few steps to follow when considering changing a price:

    1.    Avoid locking yourself into prices that can’t be changed (brochures, magazines, etc.)

    • Website prices can be changed but brochure prices may need to be honored.
    • For print advertising with long shelf life, use price ranges (“from $1,000).

    2.    Put a clause into your Listing Agreement that empowers you to discount rents.

    • This allows you to discount without having to notify the homeowner.
    • Make your authorization as broad as possible (e.g., up to 40%).
    • You will lose renters if you need to contact homeowners for each discount.
    • Homeowners agree when they realize you share the same goal – to garner the highest rent possible .
    • Explain to non-compliant homeowners they may lose rentals if you’re not empowered to discount rents.

     3. Monitor your company's year-to-year booking pace to know whether you are ahead or behind:

    • Each home in your program (e.g., 21 booked days last year at this time vs. 24 today);
    • All homes in your rental program (302 booked days last year at this time vs. 334 today);
    • Same for homes within specific price ranges ($1-$999; $1000-$2000, $2,000-$3000 etc.)
    • Same for homes within specific buildings or locations (oceanfronts, ocean view, etc.);

    4.    Monitor/compare competitor’s year-to-year bookings so you have a frame of reference.

    • E.g., bookings are up for your rental program but down for one building/area.
    • Bookings are down for competitors in the same area.

    5.    Monitor competitors’ website “discount” pages so you can react to discounts.

    6.    Monitor changes in renter preferences for specific neighborhoods, buildings or home types.

    7.    Ask homeowners to make home improvements that will attract renters

    8.    Whenever the booking pace for any one home (a “target” home) appears low:

    • Calculate the number of nights booked for the target home last year at this time;
    • Calculate the percent by which this year’s nights are ahead or behind last year;
    • Do the same for similar homes in the same neighborhood;
    • If the percent change for the target home shows it is behind its neighbors:
    • Inspect the home and check renter comments to see whether refurbishing is needed—prompt the homeowner to discount until the home is upgraded.
    • Determine whether it is priced higher than its neighbors (priced too high).
    • See whether competing homes have lower price per guest (more beds).
    • If you have no similar homes in your rental program, look online to check the pricing of similar homes in competing rental programs.
    • If the booking pace for the target home is similar to its neighbors in your program:
    • Compare the prices of your homes to similar homes in competitors’ rental programs to determine whether your homes appear to be more expensive.

    9.    Consider discounting your prices when:

    • Your competitors’ discounts threaten to divert renters from your homes;
    • Your booking pace is lagging but your competitor is on pace.
    • Your stats suggest renters may be avoiding aging or subpar homes.
    • Your stats indicate renters are avoiding aging or subpar neighborhoods/buildings.
    • A competing resort is diverting renters from your area through packaging or discounts.

    10.  Consider raising prices  (for at least some time frame) when:

    • Your booking pace is clearly ahead of prior years’ booking pace.
    • Specific homes are almost fully booked for the season.
    • A homeowner feels his home is booking too slowly but your stats show his home has more bookings than the same time last year.
    • A financially stressed homeowner (facing foreclosure) wants to discount, but is effectively seeking to divert renters from homes that will be in your program for many years (if the homeowner insists on discounting ,you might minimize the diversionary impact by not promoting it on your website specials page).

    11.  Consider not discounting when you find (after doing research) that:

    • You are slow but competitors are slow too (poor economy, bad weather)
    • Your competitors’ booking pace is even slower than yours.
    • Your booking pace is ahead of last year and “lead-time” windows are good.
    • Your booking pace is good, and value-added promotions may offset competitors’’ discounting (free gas).
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