As the vacation rental industry matures and continues to grow more sophisticated, more and more managers are adopting advanced revenue management and dynamic pricing strategies to help their owners make more and to stay ahead of their competitors.
The question for many managers is: what exactly is dynamic pricing and how can I get started implementing some of the techniques.
What is yield management?
Yield management, broadly defined, is selling to the right person at the right time for the right price. This can include a range of different techniques including:
- Dynamic pricing
- Cancellation fee policies
- Length of stay adjustments
- Channel management
“Yield” was traditionally an airline term and hotels started calling it “revenue management.”
What is dynamic pricing?
Dynamic pricing is simply changing your prices based on changes in supply and demand.
Why is dynamic pricing important?
Demand changes a lot from season-to-season, week-to-week, and even day-to-day.
Below is a graph showing changes in occupancy for the Homewood area of Lake Tahoe.
As demand changes, so should prices. Below is an example of how Vacasa, one of the more sophisticated property managers in the VRMA when it comes to dynamic pricing, prices one of their properties in Homewood:
As you can see, Vacasa is not simply looking at what their competitors are charging; they are looking directly at what demand is doing and adjusting their prices accordingly. However, sometimes supply changes, too.
In Philadelphia this past September, the number of units available more than quadrupled leading up to the Pope’s visit. Moreover, the majority of these new units greatly overpriced their place. As supply increases, prices should actually go down.
So what happens when you don’t dynamically price?
Owners and managers who aren’t dynamically pricing are leaving millions of dollars on the table by setting a flat price (or a few seasonal prices).
Money is lost in two ways:
1) Underpricing during periods of high demand, leading to lost revenue
2) Overpricing during periods of low demand, leading to lost bookings
Figuring Out Demand
This is all good and well, but most managers aren’t sure how to figure out what demand will be.
There are some new sophisticated software tools to help automate dynamic pricing and demand prediction, but there are also some very basic things you can do.
1) Historical Demand Curves
Many third parties offer data on historical occupancy rates, which you can use as your starting point. As you can see in the example from Vacasa above, historical occupancy is a great starting point to determine how demand changes throughout the year.
Your own historical data is also a good indicator if you have a year or two of it.
2) Real-time Demand Changes Using Your Own Properties
Hotels will look at how quickly their, say, 200 rooms are booking compared to what they saw the previous year. This works for hotels because they are trying to optimize revenue across the whole PORTFOLIO of 200 rooms.
So if a hotel doesn’t realize until half the rooms are booked that demand is greater than expected, they can make it up by charging more for the second half of rooms.
If you do this as a vacation rental manager, half of your owners will get booked at too low of a rate.
However, it’s still better than if ALL of your owners are booked at that low rate.
3) Real-time Demand Changes Using the Whole Market
The biggest change that’s happened in the last couple of years is managers increasingly using real-time market demand data to determine how to change prices. To do this, you can either use third-party services, you can build your own “bots” to track changes in supply and demand for vacation rentals in your area, or you can do it manually.
Here is an example where we simply searched on HomeAway for the number of units available for different date ranges throughout the year. You’ll notice there are fewer units available when demand is higher:
Ian McHenry is the co-founder and president of Beyond Pricing. Read more about automatic pricing for vacation rentals at BeyondPricing.com. Ian was also a speaker at the 2015 VRMA National Conference in New Orleans, Louisiana. Save the date for this year's conference, which will take place October 16-19 at the Sheraton Wild Horse Pass in Chandler, Arizona. Visit the conference website to learn more and register.