All property owners and managers’ ultimate goal is to generate a healthy stream of income. Achieving that might look easy on paper, but in reality, it needs the knowledge and practice of applying disciplined analytics and valued data, leading to an accurate prediction of the market trend. In this regard, many pricing engines are now available to facilitate and boost revenue management for vacation rental operators.
Property managers vastly use pricing tools to help them optimise their strategies and experience a hassle-free and hands-off operation; yet, they need to receive accurate and reliable information to achieve the desired output.
In a webinar hosted by Zeevou Academy, a panel of professionals from a number of leading (dynamic) pricing providers addressed different approaches to creating a better revenue forecast that leads to better financial decisions.
This review article reflects the panel’s valuable opinions shared during the discussion regarding the principles of strategising flawless revenue management.
How to Adjust Metrics for Better Revenue Management
Before looking at individual metrics, it is recommended to break down your performance into three levels to better understand your business’s performance in the market and evaluate your revenue management strategies.
There are typically three different levels, and once you realise what they are, you can start looking at specific metrics in each category separately.
– 1st level: portfolio. It might not be relevant if you have one or two listings, but as your portfolio expands, it becomes more important to apply analytics to understand all of your properties’ performances.
– 2nd level: segmentation. It helps you see the performance of different studios and units in various parts of a city.
– 3rd level: individual units. This level is about analysing your owners’ properties specifically.
Getting these levels, you can start to divide the related metrics to attain your business’ real-time data and also better assess your prior approaches, level by level.
Revenue Forecasting and Backcasting
Forecasting is critical but could be challenging since every day is different from the other. But accurate forecasting would be achievable through basically pacing market curves, tracking your progress against the curve, and comparing your business with competitors.
Backcasting or down forecasting could be helpful in vacation rental revenue management, offering more accuracy. It is critical to come back and see the data evolving and how it was used as your forecast benchmark.
You may simply be going back to the equation or parameters put into the pricing tool to know where the margin of error is, then optimise it to reflect more realistic data.
But bear in mind that you must not hold too tightly to forecast, and what you should align yourself to is the budget and where you want your business to stay in the future.
Pricing Tools in Revenue Management
From a strategic point of view, automating your work seems necessary not to be left behind in the fast-paced world of technology. With this regard, many pricing tools are available to make the operation process far manageable for you.
Pricing tool operators can facilitate managing your property revenue and improve the process. They can provide occupancy forecasting, availability forecasting, nightly rate forecasting, and so on.
But pricing softwares work more effectively when you define your risk strategy to them. As there are so many different risk strategies that an individual can take, determining them could guarantee your goals to be achieved by your pricing software operators.
A property deal analyser or vacation rental income calculator can greatly aid in defining your risk strategy. By analysing nightly and occupancy rates, along with considering other metrics, it provides a clear picture of your property’s profit. This data can inform you on how to price your property effectively and make better decisions about pricing changes.
Different Types of Pricing in Revenue Management
To plan a proper revenue management strategy for your vacation rental, knowing the types of pricing used vastly in revenue management is essential.
Occupancy-based vs Demand-based Pricing
Occupancy-based pricing is about considering your business situation regardless of the market trends. As an example, when you set a limitation for the occupancy rate, e.g. 50%, you will start rising prices if your occupancy is beyond 50%, and when it is below that limit, you will be decreasing fees.
In demand-based pricing, you look at the market in terms of occupancy or demand data. Therefore, unlike the occupancy-based approach in which you study your own portfolio, here, you focus on the market and what’s happening in the market.
The third piece is to look at both and combine those. For example, in a situation like the COVID-19 pandemic, you might see many cancellations coming in the market, but you don’t observe the same trend in your own business. Thus, you should know what is happening in terms of demand and booking in the whole market to make practical decisions and adjust the reasonable prices.
Dynamic and Fixed Pricing
Dynamic pricing at its core is matching demand and supply. It also can be defined as selling a specific unit at different prices based on changes in demand.
So, dynamic pricing must match the demand for a particular mentor type and develop a supply to figure out the best price for a maximised revenue. Employing dynamic pricing around actual demand and booking patterns effectively drives revenue around or even over 20%.
The process of switching between dynamic and fixed pricing is automated on pricing tools, and it is a routine process because of lead time changes and price instability.
But the falsy with dynamic pricing is that you tend to see the average rate throughout the year, so you’re not necessarily raising rates every day. Therefore, you may get deep down a little bit in the low season. But in high season, you start to earn meaningful revenue from each owner, property, and then across the portfolio, which eventually compensates for the low returns of low seasons.
Historical Data as a Data Source for Revenue Management
You can get access to several valuable sources of data to optimise your decision making. However, you need to ensure you use a reliable source of data, as the quality and relevance of the data will have a great impact on your revenue management decisions.
The typical starting point for pricing management is benchmarking based on historical market data and previous achievements. However, it vastly depends on the type of market. If you are in a fast market, you can look at 2020, but if your market is somehow slow, the 2019 trend could still be helpful for you.
It is also significant to know which booking patterns can use historical data as a revenue management source of information. For example, seasonality stays are relatively constant hence can rely on historical data.
On the other hand, the information about what attracts guests at weekends cannot be answered by historical data. Thus, depending on what sort of information you are looking for, the historical data may or may not be useful.
It is also true that when facing a new challenge that has not happened before, historical data is not much efficient to learn patterns from. Therefore, it is necessary for property managers to stay tuned and adaptable and constantly tailor their strategies according to real-time market data.
Historical data shouldn’t be a solid base or a foundation for pricing strategies. Likewise, once the current pandemic passes, historical data can only be used as input.
Consequently, a good pricing strategy looks at historical data to make some predictions but then relies on current booking patterns to ensure it is responding to the market directions.
You can learn everything you need to know about this topic by listening to Can Historic Data Be Relied on for Revenue Management Going Forward webinar.
Concluding Remarks
Using historical data would be more practical in the revenue management process whilst having an eye on the current market trends since the vacation rental business is not always stable.
Moreover, it seems crucial to look at other factors, such as your budget and competitor sets, to have a clear picture of your business status within the market.
Knowing different types of pricing and how to switch between them, case to case and time to time, you will be managing your income better and gaining the most profit from your rentals.
Applying those, you will define an excellent revenue management strategy leading to your ultimate goal.
