How can I set the price of my rental property so that I make the most money with the least bookings?

In the vacation rental market, property pricing is crucial. We need to employ the correct revenue management techniques and tools to get the most out of our inventory in order to improve the performance of our rental units.

Table of Contents

1. Demand Elasticity (RevPAR)
2. Long-term Stay Costs and RevPAR
3. Segmentation of the Market
4. Allocation of capacity
5. Quality

RevPAR

One of the most essential measures or Key Performance Indicators (KPIs) for measuring the performance of a hotel room or serviced apartment unit is revenue per available room, or RevPAR. It indicates how much revenue the available rooms/units generate on average over a given period of time.

The revenue is divided by the total number of available hotel nights to arrive at this figure. The occupancy rate can also be computed by multiplying it by the ADR, or Average Daily Rate.

Revenue per available room night (RevPAR)

Occupancy rate Equals RevPAR ADR

Higher occupancy rates and ADR are required in order to attain higher RevPAR. In reality, though, this is not an easy task. Because the demand curve or price-response curve is downward-sloping, occupancy rate and ADR are inversely connected. As a result, establishing the correct balance between occupancy rate and ADR is one of the most crucial variables in increasing revenue and profit.

Demand Elasticity:

The concept of demand elasticity aids us in better understanding the relationship between ADR (price) and revenue.

Some markets and properties, such as cheap hotels, have inelastic demand. In other words, raising the price reduces the quantity demanded by a small amount, resulting in a gain in revenue.

However, demand for particular properties or sectors, such as luxury hotels, is elastic, and raising the price significantly reduces the amount demanded. As a result, revenue is reduced.

Similarly, if demand is inelastic, dropping the price (ADR) affects revenue; yet, if demand is elastic, decreasing the price improves revenue.

Cost and RevPAR

Although RevPAR is an important performance indicator, it has one major flaw. The cost of reservations is not taken into account. Cleaning costs, for example, are a significant expenditure in the serviced apartment market.

If cleaning is provided on a weekly basis and the nightly rates of monthly stays and four-night stays are similar, a monthly stay generates the same RevPAR as seven four-night stays. However, in the second scenario, three more cleanings are required, therefore the operational cost is higher As a result, compared to seven four-night stays, the monthly stay yields greater profit.

Another key revenue management KPI is GOPPAR (Gross Operating Profit per Available Room), which is computed by dividing gross operational profit (revenue minus operating costs) by total available room nights.

Total available room nights = (Revenue – Operating cost) GOPPAR

In the example above, the monthly stay has a higher GOPPAR than the four-night stay, indicating that the monthly stay is more profitable.

Stays for a Long Time

Long-term stays can provide consistent revenue and are generally safer than short-term bookings with higher ADR. They frequently increase GOPPAR by increasing occupancy and lowering operating costs.

We can try to attract long-term bookings by imposing minimum stay limitations of 5 nights or even longer, and gradually lowering the minimum stay restriction for subsequent days. This allows us to keep the calendar open for visitors who want to book long-term stays while also allowing us to offer more affordable prices without having to worry about short-term bookings with cheap rates blocking our calendar.

It’s worth noting that customers who plan longer stays are more price sensitive, so taking advantage of weekly and monthly discounts is a good idea.

Segmentation of the Market

Market segmentation is another effective method for increasing revenue and profitability.

Based on their booking behaviour, we can divide passengers into two key divisions in the hotel industry: business travellers and pleasure travellers.

Business travellers are less price sensitive, book later, are less flexible, and often stay for shorter periods of time. Leisure travellers, on the other hand, are price sensitive, book early, are more flexible, and typically schedule longer stays.

We can’t question each guest if they’re travelling for business or pleasure in practice. We can, however, try to target each category by imposing restrictions and offering conditional discounts based on its booking patterns. For example, in order to attract leisure visitors, we can provide non-refundable early bird discounts to customers who book months in advance, or quote higher pricing for inquiries received from corporate travel brokers while also offering a more flexible cancellation policy.

Allocation of capacity

If you’re in charge of a property with numerous units, one method to maximise profits is to figure out the best solution to the “capacity allocation” problem.

Because airlines, hotels, and vehicle rentals all have perishable stocks, it should be established how many seats/rooms/cars to allow low-rate clients to reserve when there is the chance of future high-rate demand in all three industries.

When we manage a large number of units and the high-rate demand is expected to be less than our capacity, it is prudent to allocate a small number of units to low-rate bookings with long stays in order to maximise profit. In other words, if you know that short-term bookings account for 70% of your units, why not offer the other 30% to guests who are willing to stay for a month but have a limited budget?

Quality

Do you believe the same occupancy rate and market share can be maintained if the price of a hotel or serviced apartment is increased?

Although price and demand are inversely connected, if we improve the quality of our service, we can increase the ADR while maintaining the same occupancy rate (get higher review scores). We are, in effect, altering the demand curve by improving the quality of our service!

According to research by the Cornell Center for Hospitality Research (Anderson 2012), if a hotel improves its review score by one point on a five-point scale, it may raise its pricing by 11.2 percent while maintaining the same occupancy rate. It indicates that boosting your Airbnb listing’s review score by one star will increase its RevPAR by about 10%.