What is Dynamic Pricing for Vacation Rentals, and What are the Benefits?

Dynamic pricing

Are you unsure if your vacation rental is priced at the most optimal rate, or do you think you could earn even more? Competitive pricing can be one of the most mind-numbing factors in handling a vacation rental business. However, it is the most crucial aspect of your revenue management and optimization.

This is where dynamic pricing comes into play. So, what is dynamic pricing, and why is it essential for your business? This is an important question that you need to answer to ensure the success of your vacation rental business. 

What is Dynamic pricing? 

Dynamic pricing is an example of price intelligence that has emerged since 1980s when airlines adopted a dynamic pricing set up. It has since been prioritized over fixed pricing in many industries like hospitality, travel, public transport, and retail. These industries have realized the importance of dynamic pricing to set flexible rates for their products and services.

Now, let’s answer what is dynamic pricing in vacation rental industry. In the case of the vacation rental industry, dynamic pricing is a price optimization technique for your vacation rental based on market supply and demand, days of the week, lead time, seasonality, etc.

Though today e-commerce is the biggest user of dynamic pricing, vacation rental owners have also started answering the question – what is dynamic pricing for their business? Once they understand the benefits of dynamic pricing, they don’t rely on manual pricing as heavily as they did before. It helps them optimize their revenue and occupancy during varying demands.

Why is manual pricing not the best option?

Earlier property managers used to rely on fixed prices that didn’t consider changes in market demand or seasonality. But unfortunately, this approach doesn’t work anymore.

Setting rates for vacation rentals would be simple if you only had to consider the differences between high season and low season. However, what makes it difficult is that demand within those periods fluctuates drastically.

You can alter your pricing according to market demand manually only to a certain extent. For example, maybe you’re aware that there’s usually a spike in need during a holiday or a local event. You might even have historical data to back up your assumptions. 

However, demand is highly volatile; it can go up or down without any indication at any given time. Therefore, there’s no guarantee that this year will be the same as last year.

If you’re basing your predictions solely on experience, unforeseeable changes in demand can quickly render them worthless. And you can end up setting your prices too high or too low. For example, when COVID-19 hit the world or the Russia-Ukraine crisis started, it changed the global demand for vacation rentals. Unfortunately, the previous year’s data could not have predicted the change in demand in this case. 

Then there’s the question of comparing your rates against your competitors. Again, it’s not impossible to do the research manually, but doing it multiple times a year, trying to cover your entire competitive set, is very time-consuming. 

This is where dynamic pricing comes into play. 

How does Dynamic pricing work? 

The dynamic pricing tools for short-term rentals will use your average base rate as a starting point. For example, if your average nightly rate in high season is $300 and $100 in low season, your base price will be $200. Although each tool calculates costs differently, essentially, they consider the following factors:

  • Seasonality: The tools takes into consideration what season of the year it is. To do this, they analyze historical trends of vacation rentals and hotels in your region.
  • Days of the week: They analyze the price of accommodation in your area based on the day of the week and apply the necessary increases or discounts.
  • Lead-time refers to the time between the moment users book your rental and their check-in date. Dynamic pricing tools use this data to offer discounts to last-minute reservations (to fill in the gaps in your calendar) or to bookings made in advance (to guarantee the maximum possible occupancy).
  • Vacation days and important events: These tools will determine the most in-demand dates after analyzing the occupation of your local competitors. You can also add a list of the main events in your area to reduce the margin of error.
  • Orphan days: There’s nothing worse than having gaps in the middle of your busy calendar. For this reason, these tools will generate automatic discounts to incentivize booking these orphan days.
  • Personalization: Ultimately, the owners and managers decide which strategy they want to pursue. Therefore, you can establish a minimum and maximum price range that the tools will respect no matter what.

Why do you need dynamic pricing tools for your vacation rental? 

Now that we know what is dynamic pricing, let’s understand what is a dynamic pricing tool and why do you need one. A dynamic pricing software is a tool that uses real-time data to suggest you an optimal price for your rental. There are several factors that go into making dynamic pricing work. These include:

  • Re-evaluating your vacation rental’s nightly price because the algorithms analyze the market data and your properties’ performance. It then suggests prices that a guest will be willing to pay for your vacation rental.
  • It ensures that your nightly prices are always competitive according to your market so that you never offer your property for too low or too high. 
  • Dynamic pricing also allows you to maximize your occupancy by facilitating you to put minimum night restrictions in place for your listing. By mandating a certain number of nights to be booked for each booking, you can ensure that you are not incurring added maintenance and cleaning costs because of one-day bookings. Also, it ensures that you don’t have unbooked nights during high-demand seasons and periods when you are likely to get paid higher because of events or festival celebrations in your vicinity. 
  • Since everything is automated and the decisions are made based on daily market data updates, you don’t have to spend hours doing market research and updating your prices. This leaves you with a lot of free time in your hands that you can use to focus on other administrative aspects of your business. 

If you’re constantly spending too much time on any of these three areas, you might want to consider a dynamic pricing tool to help automate some of these processes and become more successful.

Benefits of a dynamic pricing tool

In the vacation rental industry, technology gives you a competitive edge. Using sophisticated tech solutions to take care of your pricing and revenue management is no exception.

According to the Short-Term Rental Tech Report 2020, one-third of all property managers use some kind of dynamic pricing software.

A dynamic pricing tool analyzes historical and market data to provide tailored automated pricing recommendations. Below are some of the benefits of using a dynamic pricing tool. 

  • Dynamic pricing software allows you to react more quickly to an actively changing market. 
  • Advanced dynamic pricing solutions are based on intelligent algorithms that consider all relevant external factors, seamlessly adapting to the market conditions and the revenue manager’s strategy. 
  • Dynamic pricing solutions allow you to optimize your rental’s performance by frequently adjusting your nightly rate based on real-time market data.
  • The price-setting process is almost entirely automated, allowing the property manager to focus on more strategic tasks. This means they can become more competitive, increase profitability, strengthen their price image and successfully implement set KPIs (key performance indicators).
  • Vacation rental owners can maximize their occupancy by setting minimum night restrictions. The software automatically implements these restrictions and alters them according to the customizations set for orphan days, adjacent day bookings, long-term bookings, and short-term bookings. 

Now that you know why you need a dynamic pricing tool for your rental business let’s talk about how to choose one. 

How to choose a dynamic pricing tool? 

By now, you must be intrigued by dynamic pricing tools and would want to try one out for yourself. However, before you pick software for your business, ask yourself these questions to ascertain that you pick the right fit for your business. 

  • Which dynamic pricing tool is integrated with your property management software or channel manager? Your PMS may not be integrated with every tool, and you want to choose one that can seamlessly integrate with your channel manager and PMS. 
  • What is your budget for the tool? Depending on your annual revenue, you may choose a monthly payment plan. However, if the booking volume is still undetermined, paying a percentage for each booking will make more sense. While the fee seems small monthly, it can become hefty over time, especially if your portfolio grows.
  • Which software has a more user-friendly interface? This question is about your personal preference. What would you prefer more? You can sign up for free trials of different dynamic pricing software to understand which one clicks for you. 

How to implement a dynamic pricing strategy?

By now, we know what revenue management is, what to look for in a revenue manager, and the key metrics used to evaluate your listing’s performance and form a pricing strategy.

Let’s talk about how you implement this information to see your results. 

  • Manually manage rates: You can regularly make alterations to the daily rates of each listing after reviewing your competition and evaluating external influences like local events, news, weather, and more. This will give you complete control over your prices, but it is time-consuming and prone to human error. 
  • Hire a contract or in-house revenue manager: Delegate the revenue management task to a full-time resource or outsource it to a revenue management company. Hiring a full or part-time help to manage your vacation rental pricing can allow you to focus on other aspects of your business. They will also come with relevant experience contributing to your overall growth. 
  • Implement dynamic pricing and revenue management software: Vacation rental managers increasingly employ dynamic pricing tools for their revenue management. These tools have great potential to increase your ROI by not only optimally pricing your properties but also helping you improve your occupancy. 
  • Blend data with human experience: A tool that is built for vacation rental managers in conjunction with a dedicated revenue manager who knows how to utilize the full potential of these tools can give you a robust set of resources that allow you to be detailed in your approach.

Make your pricing intelligent with PriceLabs.

PriceLabs is an artificial intelligence-based dynamic pricing solution for vacation rentals. Property managers and vacation rental hosts worldwide use PriceLabs to use data-driven pricing suggestions and automate pricing to optimize revenue. 

It is a third-party revenue management solution that integrates with several property management systems. In addition, the platform draws data from Airbnb and Vrbo to give you daily updates on the ongoing trends in your market. 

As soon as you import your listing on the platform, you can review prices for present and future dates. They will appear in the form of a calendar. The calendar shows recommended fees for each available night in the future. You might notice that each day has a different price. In general, the prices fluctuate around the base price (either calculated by PriceLabs, or provided by you) based on the following factors, and you should be able to see those in action:

  • season (time of the year, peak vs. lean season)
  • day of the week (weekends vs. weekdays depending on the location)
  • supply and demand fluctuations due to a holiday or event
  • How far out date is (close in dates get a last-minute discount)

Minimum Stay Restrictions

Dynamic pricing is not limited to changing the nightly prices of the rental but also includes setting minimum stay restrictions for your listing. Vacation rental owners and property managers commonly use the Minimum length of stay restrictions to manage their bookings for different seasons and booking windows. It is an advanced feature that helps property managers optimize their occupancy. 

Property Managers usually extend a minimum length of stay during high-demand seasons. This helps them make up for low occupancy during low-demand seasons. 

You can increase your vacation rental’s occupancy rate using the minimum nights restriction tool. It is essential to understand when to mandate longer stays and when to let your guests decide if they prefer a longer length of stay. PriceLabs not only facilitates customizing your minimum length of stay restrictions but also provides recommendations regarding how flexible you can be with your policies. 

Min Stay Recommendation Engine of PriceLabs is the newest addition to its list of features that have removed the heavy burden of devising a minimum stay recommendation policy from hosts’ shoulders. The dynamic min-stay settings allow hosts to change their min-stay settings by lead time, gap length, adjacent days, and market trends. The feature also suggests the ideal minimum stay setting for your listing. 

You can check how to get started with dynamic pricing using PriceLabs or schedule a demo with their support team by emailing support@pricelabs.co

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