Pricing is a tricky issue for many. Before I came into this industry, I spent many years in a commercial pricing environment and one simple truth that I learnt was that prices are set by supply and demand.
Supply and demand doesn’t care whether you think a property should be a certain price. Either high because it has an emotional value to you or low because you think that’s all people will pay. It doesn’t matter whether you can pay your bills.
An example from me recently.
I had spent several hours recently doing some renovations on the decking at my property. It was hot and hard work but it needed doing and that afternoon was my only opportunity. At the end of it I was hot and bothered but had to go and pick up my child from school. I got there with 10 minutes to spare and I saw the shop just down the road. The idea of an ice-cold drink snuck into my head (demand), so I decided to pop into the shop (supply) to get one. When I got in there the shopkeeper was looking more frazzled than I was and he let me know that his drinks cabinet had broken down. NO COLD DRINKS! Suddenly, the balance of supply and demand had changed. I still had a demand for a cold drink but not for the room temperature drink that the shopkeeper could supply. So, I left without buying a drink.
Understanding the interplay between supply and demand is crucial for property owners, property managers, and travellers alike.
On the supply side, the availability of holiday rentals can be influenced by a variety of factors. These can include location, property size, amenities, and the potential for profitability. Economic factors, including property maintenance costs and the opportunity cost of not using the property themselves, also come into play. Seasonal variations in supply can be significant, with owners often offering their properties during peak vacation periods and potentially withdrawing them during off-peak times. Recently a lot of new Holiday Lets have opened as the tax rules surrounding long term lets changed so in the last couple of years supply has increased.
Demand in the holiday let industry is influenced by a range of factors as well. Consumer preferences, economic conditions, and external events like the COVID-19 pandemic can all impact demand. Traveler preferences can shift based on factors such as location desirability, accommodation types (e.g., beachfront, riverside, cosy cabins, urban apartments), and available amenities. Economic factors like disposable income and the affordability of travel also play a pivotal role in determining demand levels. Additionally, external events like major sporting events, festivals, and seasonal holidays can lead to spikes in demand in specific locations.
The balance between supply and demand in the holiday let industry has a direct impact on pricing and availability. When demand exceeds supply, the market supports higher rental rates, and properties may get booked well in advance. Conversely, in periods of oversupply or reduced demand, property owners may need to lower prices or offer incentives to attract renters. Effective pricing strategies, marketing efforts, and property management are key for property owners and managers to navigate the fluctuations in supply and demand and optimise their rental income.
In summary, the holiday let industry is a dynamic market where supply and demand dynamics are constantly at play. I choose to use dynamic pricing software (Pricelabs for me, others are available) as this considers the forces of supply and demand for me. It does this for me every day and updates my prices every day.
So, what is dynamic pricing?
Dynamic pricing, also known as demand-based pricing, is a pricing strategy that adjusts the cost of a product or service in real-time based on fluctuations in supply and demand. It is a strategy commonly used in various industries, including the holiday let industry. Dynamic pricing aims to optimise revenue by setting prices at levels that maximise profitability while considering changing market conditions.
Here’s how dynamic pricing interacts with supply and demand in the holiday let industry:
- Real-Time Adjustments: Dynamic pricing systems continuously monitor factors that affect supply and demand, such as booking trends, seasonal variations, local events, and competitor pricing. When demand increases or decreases, the pricing system adjusts rental rates accordingly.
- Optimising Revenue: During periods of high demand, dynamic pricing algorithms typically raise rental rates. This allows property owners and managers to capture the increased willingness of travellers to pay more for accommodations. Conversely, during periods of low demand, prices may be lowered to attract more renters.
- Balancing Occupancy: Dynamic pricing seeks to strike a balance between occupancy and revenue. While higher prices can lead to increased revenue per booking, excessively high prices may result in reduced occupancy. The goal is to find the pricing sweet spot that maximises total income.
- Competitive Insights: Dynamic pricing systems often consider competitor pricing data. If similar properties in the same area are charging higher rates, the system may recommend increasing prices to remain competitive. Conversely, if competitors lower their rates, the system may suggest adjustments to match or undercut them.
- Seasonal and Event-Based Pricing: Dynamic pricing is particularly valuable in capturing the nuances of seasonal demand and special events. For example, prices can be adjusted higher during peak vacation seasons or major local events, such as festivals, conventions, or sports events.
- Last-Minute Bookings: Dynamic pricing can also account for last-minute bookings. If a property remains unbooked close to the arrival date, the system may recommend lowering prices to attract spontaneous travellers.
- Data-Driven Decisions: Dynamic pricing relies on data analytics and machine learning algorithms to make pricing decisions. These algorithms consider historical booking data, market conditions, and other relevant information to optimise pricing strategies.
- Flexibility: The key advantage of dynamic pricing is its adaptability. It allows property owners and managers to respond quickly to changes in market dynamics, ensuring that prices remain competitive and revenue is maximised.
However, dynamic pricing must be implemented carefully to avoid customer dissatisfaction or pricing volatility. It’s essential to strike a balance between optimising revenue and maintaining customer trust. When executed effectively, dynamic pricing can be a powerful tool in the holiday let industry, helping property owners and managers make informed pricing decisions that align with supply and demand fluctuations while maximising profitability.
A simple explanation of how it work is that it asks you for two figures.
- Average price – This is what your rate should be on average night for your property.
- Minimum price – This is the lowest price that you will take for your property.
The average price is then pushed through all the supply and demand algorithms to give a daily rate sometimes higher than your average, sometimes lower. The minimum price is the line in the sand that you won’t go below. In other words, you would rather be empty than go below the minimum.
It does need checking on regularly to make sure your average price and minimum price are competitive and you can assess this by how your occupancy compares to the local area. However, I have found that it only really needs tweaking of a few pounds either way to stay at the competitive edge of the market.