What is Dynamic pricing?
A pricing strategy that allows the price of a product or service to change in response to changes in supply and demand. In the context of short-term vacation rentals, dynamic pricing means that the price of a rental property can vary depending on the time of year, the day of the week, or even the time of day.
How does dynamic pricing impact guests?
For guests, the pros of dynamic pricing include the ability to find lower prices during off-peak seasons or on weekdays. This can make vacation rentals more affordable for guests on a budget. Dynamic pricing can also give guests more flexibility in their travel plans, as they can choose to book a property when it is most convenient for them and at a price they are comfortable with.
On the other hand, the cons of dynamic pricing for guests include the potential for higher prices during peak seasons or on weekends. This can make vacation rentals less affordable for guests during these times. Additionally, dynamic pricing can make it more difficult for guests to plan their trip, as they may only know the price of a rental property once they are ready to book.
What does dynamic pricing mean for property owners?
The pros of dynamic pricing include maximizing revenue by charging higher prices during peak seasons or on weekends. This can help property owners to make more money from their rental properties. Dynamic pricing can also help property owners fill more rental days by adjusting prices to attract more guests during off-peak seasons.
On the other hand, the cons of dynamic pricing for rental property owners include the potential for lower prices during off-peak seasons. This can make it more difficult for property owners to profit from their rental properties during these times. Additionally, dynamic pricing can also make it more difficult for property owners to predict their revenue, as prices can change on a daily or even hourly basis.
An example of dynamic vs. flat pricing
For example, let’s say a vacation rental property is located in a popular beach town. During the summer months, demand for vacation rentals in the area is high, and many families and tourists are looking for a place to stay. As a result, the property owner can set a higher rate for their property, such as $200 per night.
As summer ends and schools start, the demand for vacation rentals decreases, and the property owner can lower their rate to $150 per night. During the fall, the demand for vacation rentals further decreases, and the property owner can lower their rate again to $100 per night.
As the winter months approach, the demand for vacation rentals in the area is typically low, and the property owner can set an even lower rate of $75 per night. However, if an event or festival in the town attracts visitors, the property owner can increase their rate for that specific period.
In this example, the property owner uses dynamic pricing to adjust their rates based on changes in demand throughout the year. By setting higher rates during peak seasons and lower rates during off-peak seasons, they are able to maximize their revenue and fill more rental days.
How does dynamic pricing impact revenue for a property owner?
Let’s assume a vacation rental property is available for rent 365 days a year, and the owner chooses to use a flat pricing strategy of $100 per night. Using this pricing strategy, the total revenue for the year would be $36,500 (365 days x $100 per night).
Now let’s assume the same property owner decides to use a dynamic pricing strategy instead. Using this strategy, the owner sets a higher rate of $150 per night for the summer months (June-August) when demand is high, a lower rate of $100 per night for the fall months (September-November) when demand is moderate, and an even lower rate of $75 per night for the winter months (December-February) when demand is low.
Using this dynamic pricing strategy, the total revenue for the year would be as follows:
- Summer months (June-August): $45,000 (90 days x $150 per night)
- Fall months (September-November): $15,000 (90 days x $100 per night)
- Winter months (December-February): $11,250 (90 days x $75 per night)
Total revenue for the year using a dynamic pricing strategy: $71,250
As we can see, by using a dynamic pricing strategy, the property owner can increase their revenue by $34,750 for the year, compared to using a flat pricing strategy. This is because they are able to adjust their prices to match changes in demand throughout the year, resulting in higher revenue during peak seasons and lower revenue during off-peak seasons.
How does dynamic pricing increase occupancy for an Airbnb or Vrbo?
Let’s use another example. Assume a vacation rental property has a flat pricing strategy of $150 per night, and the annual occupancy rate is 60%. Using this pricing strategy, the property is rented out for 218 days out of the 365 days in a year.
Now let’s assume the same property owner decides to use a dynamic pricing strategy instead. Using this strategy, the owner sets a higher rate of $200 per night for the summer months (June-August) when demand is high, a lower rate of $150 per night for the fall months (September-November) when demand is moderate, and an even lower rate of $100 per night for the winter months (December-February) when demand is low.
Using this dynamic pricing strategy, the occupancy rate for the year could be as follows:
- Summer months (June-August): 80% (72 days out of 90 days)
- Fall months (September-November): 60% (54 days out of 90 days)
- Winter months (December-February): 40% (36 days out of 90 days)
The total occupancy rate for the year using a dynamic pricing strategy: 64%
As we can see, by using a dynamic pricing strategy, the property owner can increase their occupancy rate by 4% for the year, compared to using a flat pricing strategy. This is because they are able to offer lower rates during off-peak seasons, making their property more affordable and more attractive to potential guests, resulting in more bookings.
Closing Thoughts
In summary, dynamic pricing is a pricing strategy that allows the price of a product or service to change in response to changes in supply and demand. For guests, the pros of dynamic pricing include the ability to find lower prices during off-peak seasons or on weekdays, while the cons include the potential for higher prices during peak seasons or on weekends. For rental property owners, the pros of dynamic pricing include the ability to maximize revenue by charging higher prices during peak seasons or on weekends, while the cons have the potential for lower prices during off-peak seasons, which can make it more challenging to make a profit.