Vacation Rental Pricing - The Basics
March 24th, 2008 by Jeff SchnaubeltWhen it comes to vacation homes, there’s a fine line between maximizing profits and pricing your home so high that it is too expensive for the average family. You might be surprised to know, however, that pricing your home too low can also be bad for business.
So, just how much should you charge? There’s no easy answer. The right rates are determined by seasonal demand, various competitive pressures, and by local & world events. It's important to have a pulse on the market, and this is where a professional property management company can really come in handy.
Don’t Price it Too High…
Not surprisingly, there is a point at which the price will simply be more than what vacationers are willing to pay. This is represented by the red band on the above chart. Rental prices can be increased to a certain level (point C) without too many adverse effects. After that, however, any further increases (even small ones) will cause the number of reservations to fall off dramatically.
Due to a recent computer glitch on www.tahoestay.com we observed the effects of excessive prices firsthand. It was a Leap Year related problem. Anybody who tried to book a home received a quote that was substantially higher than the actual price. For example, if somebody tried to book a 2-night stay, the quoted price was for a 3-night stay. On average, the total costs were about 25% higher than they should have been. It was clear that these prices were much too high; TahoeStay.com, which usually receives about 10 bookings a day, received none over a two day period. This pricing was obviously in the point D (or beyond) area.
Or Too Low…
Referring to point A on the chart, you can see that rental prices that are too low can actually reduce the number of rentals you receive. This has to do with how price affects the potential guest’s perception of the property. Prices that are too low will raise red flags. Is the property well-maintained? Is it in a bad location? Are the beds uncomfortable? There must be something wrong with it. I should just spend a little more and rent a good vacation home. We all love a deal, but most of us do associate a higher price with better quality, whether we are aware of it or not. Another reason why you shouldn’t price your vacation rental too low is, well, because you don’t have to. Referring to the chart again, you will see that, ignoring the decreased rentals associated with prices that are too low, the yellow line is almost flat until point B. That means you can increase your prices to that level without experiencing any decrease in the number of rentals. If guests are willing to pay more, there is no reason why you shouldn’t charge more.
But Just Right…
The optimal price is represented on the chart as the green line between points B and C. Point B represents the maximum price that can be charged before the number of rentals begins to dramatically decrease, so it is desirable to be as close to that point as possible. However, any price that falls between these two points is considered optimal.
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March 24th, 2008 at 3:10 pm
You are right about that. There is definitely a sweet spot somewhere in the middle of too high and too low.
I have found the negative of being too high, is not as bad as being too low. Being known as having cheap property is much worse, then being called too luxurious and too expensive.
Plus, it’s a lot easier to come down in price then it is too go up.
March 24th, 2008 at 4:19 pm
Very nice illustration of the importance of finding the right price.
March 24th, 2008 at 4:30 pm
In today’s real estate market (in general) everybody seems to be looking for deals, but the high-end market seems to be somewhat resistant to this phenomenon. Thankfully, the Phoenix Metro vacation rental program we operate is mostly high-end properties. We were able to raise our prices considerably due to the situation we had in January-February with the Auto Auctions, FBR Open, two college bowl games and of course, the Super Bowl. But now, things are normalizing once again, the snow birds are leaving, and we’re often left wondering how to get the optimal price and maximum occupancy rates. This blog is quite helpful in that regard. Thanks!
March 24th, 2008 at 5:43 pm
Thanks for the insightful article. I have found this to be so true in 18 years of experience renting out a seasonal cottage. I have made all of the mistakes mentioned above and if I had read this article first, it would have saved me many headaches!
I have also witnessed first hand, that if you price too high, not only do you rent less, but people feel a sense of entitlement. They are more likely to take things home with them (called stealing), or they trash the place like a hotel room. It IS a fine line to price it just right! Thanks, great to know others are dealing with the same issues!
March 24th, 2008 at 8:47 pm
I know that when I search for a vacation rental it is usually online and in an area that I can’t go see the property. I never go cheap as I don’t want to waste a weeks vacation in a bad property. Time is worth more than a good deal.
In the Japanese construction market it in is common to take the lowest bid and the highest bid, throw them out, then average the rest of the bids. The bid closest to this average gets awarded the project. Similiarly your method has the goal of matching the right price to a property, which is more productive both for the owner and the renter.
March 25th, 2008 at 7:46 am
Great insight. I agree - I never book the cheapest property because I assume it’s priced low due to poor quality or condition. I am comfortable paying a price right in the middle which tells me it’s good quality but doesn’t have a lot of bells and whistles, which I don’t need.
March 25th, 2008 at 9:31 am
me …….. I will take the highest priced ………… but only on Fathers’ Day ………..
March 26th, 2008 at 8:56 am
Yes, though it may be obvious that too-expensive will drive off business, it’s just important to remember you can scare off prospects with bargain basement pricing. In marketing perception is reality. If you value your property low, so too will shoppers. Worse you could attract a clientelle which will not be respectful of the property, and that can lead to some serious costs and lost income.
March 30th, 2008 at 7:50 am
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