Short-Term Rental Pricing Strategy: How to Price Competitively and Keep Occupancy High

Don’t just go with your gut—follow these proven strategies to squeeze every last drop of revenue from your short-term rental.
Seth Kniep
Dec 1, 2021
Real Estate Investing
Price too high, and your guests will choose your competitors. Price too low, and you’ll be booked solid, but unprofitable. The key is to find a sweet spot where your pricing results in 60–80% occupancy and your revenue is maximized.

Before we learn how to optimize your short-term rental pricing strategy, let’s take a quick economics lesson. Recall our equation for calculating monthly revenue:

Revenue = Nightly Rate x Occupancy % x 30 Days

Your goal as a short-term rental investor is to maximize revenue, which is accomplished by balancing nightly rate and occupancy. As the nightly rate is increased, occupancy decreases (the more expensive a place is to stay at, the less people will want to stay there). Different combinations of nightly rate and occupancy result in different amounts of revenue. This effect can be visualized using the graph below: 

Chart, line chartDescription automatically generated

As you can see, you want to avoid being on either the left or right extreme. On the left you have a very low nightly rate coupled with high occupancy. On the right, you have a very high nightly rate coupled with low occupancy. In either case, revenue is far too low for a sustainable business.

Revenue is optimized when nightly rate and occupancy are balanced. When setting your rates, your goal is to end up as close to the peak of the revenue curve as you can—the “goldilocks zone.” Below, we’ll show you four steps to optimize your short-term rental pricing strategy so that you can find that sweet spot and maximize your revenue.

Analyze your Competition

When developing a pricing strategy, the first step is to analyze your competition. You can do this using a comp table, similar to the one that we used in our article on appraisals. The only difference is that with this comp table, we’re going to compare nightly rates, not property values.

You’ll want to pick several properties within a 3-5 mile radius to compare and evaluate them based on their number of beds and baths, host rating, overall quality, and special features. Your comp table will end up looking something like this:

TableDescription automatically generated

Once you’ve got the comp table set up, you can use it to inform your idea of what rate your own property should command. However, you don’t need to be as precise as you’d be if you were valuing a property to make a purchase decision. Set a rate that feels reasonable and see how many bookings you get. If you achieve stable occupancy, you can slowly increase your rate. If you don’t get good occupancy, your rate will probably need to come down.

Experiment

It’s rare to get your pricing exactly right on the first try. When we’re first getting a property set up, we analyze our competition to get a rough estimate of how we should set our own prices. Whatever we’d ultimately like to charge, we start out charging 10–20% lower. In the beginning stages, this helps us to attract guests and rack up five-star reviews. 

Key Point: It’s better to start too low than too high.

We recently used this exact strategy for one of our new properties in Gatlinburg, TN. Most of our competitors priced their rentals around $325–$350 per night. We came in at a flat $300, and this affordable price made it easy to attract our first few guests. We went above and beyond for these guests, ensuring that they left us five-star reviews. After earning these initial reviews and getting the property established, we slowly increased our rate. 

Even if we’re having great success with a certain nightly rate, we still evaluate rates for each of our properties every month. This monthly tune-up keeps us connected to local trends and helps us squeeze every last drop of revenue from our properties.

On the subject of experimentation, it can also be worth experimenting with different minimum stay lengths. Different minimum stay lengths attract different types of guests. For example, party people usually only book a one night stay. If you set a two-night minimum, you can weed out the party people. Longer stays also mean you won’t spend as much time transitioning between guests, which will increase the number of nights per month you’re booked and make you more profitable.

Embrace Seasonality

Most tourist destinations have an off-season. For many places, the off-season is in the winter. But in winter sports destinations, like Breckenridge or Vail, winter is actually the on-season. For destinations with extreme summer temperatures like Phoenix or Palm Springs, summer can be the low season.

Do your research upfront so you know what to expect when it comes to seasonality. Wherever you invest, you need to know when the off-season is and adjust your prices accordingly. If you don’t, you could see a major drop in occupancy that stifles revenue.

You also need to be aware of events that can spike demand for short-term rentals in your city. We have a lot of this in our home city of Austin, where we own several short-term rentals. Between SXSW, Austin City Limits, UT games, and other events, there are many events throughout the year that boost demand for our short-term rentals. We strive to anticipate these events and raise our rates accordingly during these times. For example, during SXSW, we might increase our nightly rates by 150-200%. If you’re not watching the calendar for these opportunities, you could be leaving a lot of money on the table. 

Make Use of Dynamic Pricing and Revenue Management Tools

Dynamic pricing software has become increasingly prevalent in our world. You’ve likely already encountered it in some aspect of your daily life (airlines use it to calculate optimal ticket prices). Dynamic pricing relies on the principle that the ideal price for a good or service changes daily due to market conditions and seasonality. A system that can constantly analyze large pools of data to calculate an optimized price will almost always outperform a human decision maker. So, by using dynamic pricing software to set nightly rates for your short-term rentals, you won’t just boost revenue; you’ll also save a ton of time by outsourcing your pricing strategy to software.

To start, you can check out an algorithm built directly into Airbnb called Smart Pricing. When Smart Pricing is enabled, Airbnb automatically adjusts your nightly rate based on demand for similar listings in your location. You’re not committed to the rates Airbnb sets, and you can always go in and make manual adjustments. The only exception is if a guest has already booked (once someone books at a certain price, their price is locked in).

Host feedback on Smart Pricing is mixed, with some hosts claiming that its minimum price suggestions are aggressively low. For that reason, you might explore an alternative, like the Smart Rates tool from AirDNA. Smart Rates is well-reviewed by many hosts and provides more data and control than Airbnb’s built-in pricing tools. Smart Rates also gives you the flexibility to choose between optimizing revenue and optimizing occupancy. The optimize occupancy feature could be helpful to new hosts who want to quickly get as many stays as they can to earn five-star reviews and get their property established. 

If you’re using Guesty, you might consider using their revenue management tool. It’s not quite the same as the dynamic pricing options from Airbnb and AirDNA. While those options set prices based on market data, Guesty’s revenue management tool automatically adjusts prices based on a list of rules programmed by the host. It allows you to create “strategies” with variable rules for price and minimum stay length. You can also create different types of rates for different kinds of bookings. For example, you could set it up so that a guest pays more to have a flexible cancellation policy. You can also run promotions that allow guests to save, thereby attracting more guests to your rental.  

Conclusion

The optimal Airbnb pricing strategy depends on finding a balance between nightly rate and occupancy that maximizes monthly revenue. To find a starting price, analyze your competition, then set your initial price 10–20% lower than what you think your stabilized nightly rate will be. Maintain this lower rate until you get several five-star reviews, then slowly raise your rate until occupancy tapers off. You also must be aware of seasonality and special events in your area and adjust prices accordingly. If you tire of constantly doing market research and manually adjusting your rates, there are several great dynamic pricing tools that can save you time and boost your revenue.

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Seth Kniep

Married a pearl. Fathered 4 miracles. Fired his boss. Turned a single dime into $104,857. Today, a self-made millionaire, Seth and his team of 8 badass coaches teach entrepreneurs how to build passive income on Amazon.

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