Dynamic pricing is continuously adjusting the price of something based on supply and demand. This can be applied in a variety of situations and can be highly effective when used to price vacation rental properties.
Most people set weekly or monthly rental rates well in advance. If you do this, you're losing out on one of the biggest benefits of short-term rental properties: the ability to adjust rental rates frequently to optimize the property's performance. For example, if a recession hits, you can choose to lower rental rates in response to falling demand and avoid a spike in vacancies. And if vacation demand surges 20% from one year to the next, dynamic pricing can help you take full advantage.
Why dynamic pricing can be so advantageous
Consider the traditional way of pricing vacation rentals. Let's say, for example, that you own a condo in South Florida. Peak tourism season runs from January through April, things are still pretty busy in May through June and October through December, and vacation traffic is slowest in July through September. So you might advertise your vacation rental with the following weekly rates:
Here's the problem with a pricing structure like this: If demand spikes for a particular week and the area is short on available rentals, you still get the same weekly rate you normally do. Conversely, if demand is low, your rates might be too high to attract anyone at all, and your vacation rental could sit vacant, earning no money at all.
Dynamic pricing aims to solve these issues. Through analysis of real-time market data, dynamic pricing algorithms raise and lower rental rates in response to supply and demand.
Continuing our example, let's say supply starts to dwindle for a particular week in January. A dynamic pricing model may automatically raise your asking price to $2,800 for the week.
Conversely, if the vacation rental market in your area is especially slow in a particular stretch in September, the dynamic pricing model could drop your rate to $1,200 to try to fill the condo. After all, some revenue is better than none -- I'd rather have my condo occupied 100% of the time for $1,200 per week than occupied 50% of the time for $1,500 per week. Wouldn't you? This is a simplified example, but this is the basic idea.
Here's the point: Dynamic pricing can significantly boost your income. The dynamic pricing platform Beyond Pricing claims that implementing these types of automated price adjustments can boost occupancy rates by as much as 22% and can increase total revenue by as much as 40%.
How to implement dynamic pricing in your vacation rentals
You can try to assess market conditions and continually adjust prices by hand, but today's technology has made dynamic pricing far easier and more efficient. There are several dynamic pricing software options you can use for your rental properties, some of which integrate with popular vacation rental platforms like Airbnb and VRBO.
To be clear, these products aren't free. I already mentioned Beyond Pricing, which integrates seamlessly with Airbnb and other vacation rental platforms. For their dynamic pricing service, you'll pay a fee of 1% of the booking revenue generated by the property. If the property's revenue increases by anything close to the 40% the company claims is possible, the fee could be well worth the cost.
If you’ve had trouble filling your vacation rental or if your unit seems to be filling up extremely quickly, you might not be pricing your property as efficiently as you could. A dynamic pricing software program can help solve this problem and dramatically increase your property's revenue.