Boosting occupancy rate
You can boost revenue by increasing the number of days your listing is booked versus the number of days that your listing is available for booking. For example, if your listing is available 365 days a year, then increasing the number of days booked from say 182 days booked to 274 days booked would roughly increase your occupancy rate from about 50 to 75 percent. All things the same, boosting your occupancy rate will increase your booking revenue.Raising average nightly rate (ANR)
You can also boost revenue by increasing the average price of each night booked. For example, if your listing currently books 200 days out of the year at an average nightly rate of $100 per night, then the gross booking revenue are 200 days booked times $100 per night equals $20,000. However, if you could increase your average nightly rate to $120 per night, even without increasing the number of days booked, your gross booking revenue would now become 200 days booked times $120 per night for $24,000. Raising your ANR will increase your booking revenue.Expanding listing availability
You can increase revenue by having your listing available for booking for more days out of the year if it’s only available for a fraction of the calendar year. For example, if your listing is only available for booking during the summer months from June to August, then making it available for booking from September through November would double the number of days available for booking. Doing so may not double revenues or profits; more than likely it’ll mean more bookings. Expanding your listing availability will increase your booking revenue.Doing all three: Yes or no?
Couldn’t you just maximize your revenue potential by maximizing all three factors — your occupancy rate, your average nightly rate, and listing availability? Not so fast. Just because you want to increase each of these factors doesn’t mean you can just magically make that happen.You may find that your local city regulations limit the number of days you can make your listing available for rent on a short-term basis and thus choose to only host during the busiest parts of the year to maximize earnings. In addition, you’ll often have to make a tradeoff between increasing your occupancy rate or your average nightly rate the two metrics an inversely correlated — when one goes up, the other goes down.
That’s because Airbnb travelers are price sensitive. All things equal, an increase in price for a listing will reduce the demand for the listing because some potential guests will become priced out and look to cheaper alternatives.
The following figure illustrates the inverse relationship between the occupancy rate and the average nightly rate. As you can see, the point at which profits are maximized is when neither the occupancy rate nor the average nightly rate is at its maximum values. The implication here is that these two metrics are inversely correlated — go higher on one and the other will fall. For either metrics, going to too high may lead to lower profits.
The relationship between occupancy rate and average nightly rateThe optimal point for your Airbnb listing will depend on how it’s positioned relative to its competition and the underlying Airbnb demand in the market. If local Airbnb demand is low and your listing is inferior to its competition, the optimal occupancy and average nightly rates will settle below the average rates in your market. If local Airbnb demand is high and your listing is superior to its competition, the optimal occupancy and average nightly rates will be higher.
To understand your listing’s performance and how it compares to that of its competition, you must obtain the following information:
- The average occupancy rate for similar listings in your market: Preferably over the prior 12-month period, by month.
- The average nightly rate for similar listings in your market: Preferably over the prior 12-month period, by month
- The stabilized occupancy rate and average nightly rate for your listing: This must be at least three months after your ramp-up pricing period. But for best results, having a full 12 months of stabilized data will allow you to know with certainty how your listing is performing in your market versus competition.
We recommend getting that data from a third-party market data provider like AirDNA, rather than attempting to gather the numbers on your own. At best, the data will be incomplete and quickly outdated. At worst, you’ll have inaccurate information from which to base your decisions.
After you have that data, you can compare your listing’s performance on occupancy rate and average nightly rate versus your market averages. If you don’t have monthly data, you can just use the full year figures. Having monthly data lets you to make this comparison on a month-to-month basis, allowing you to spot potential opportunities during different parts of the season.Considering the four scenarios of Airbnb listing performance
What you can discover with the data is that your listing’s performance versus its direct competition falls into one of these four scenarios (as shown) in terms of how your occupancy rate and average nightly rate compares to the market optimal point.
The four scenarios of Airbnb listing performance versus competitionThe following sections look at these four scenarios and how your listing’s occupancy rate and average nightly rate compare to those of its competition in the market. In addition, you find out how to adjust your pricing accordingly if you find that your listing falls into either of the two of the sneaky scenarios.
Clearly underachieving listings
The clearly underachieving listings are in the lower left corner that have both their occupancy rates and their average nightly rates lower than what their market suggests they should be able to achieve. When a listing is underachieving in its market versus competition, it almost always has low hanging fruit.These listings often have poorly executed and incomplete listing profiles, with poor quality photos, inadequate or difficult-to-read descriptions, poor pricing, and subpar amenities. And their hosts aren’t delivering consistently great guest experiences with one too many low star guest reviews on the profile. These Airbnb hosts likely began hosting before they, their property, or their listing profile were ready for guests. These listings are leaving the most money on the table and have the most opportunity to increase profits.
Clearly overachieving listings
The clearly overachieving listings in the opposite quadrant command both above-market occupancy rates and above-market average nightly rates. Not only are these listings booking more nights, their guests are willing to pay a premium to book those listings. These listings will almost always have professionally executed listing profiles with perfect photos, catchy titles, detailed and easy-to-read descriptions, attractive amenities, and great guest reviews.These listings have no opportunities for low hanging fruit. The hosts for these listings were ready from day one and have consistently delivered 5-star guest experiences and received 5-star guest reviews. These listings are leaving little to no money on the table.
To increase profits, hosts for these listings must think creatively outside of direct bookings to increase their revenue and profits.
Price-dominated listings
Inexperienced hosts often fixate on an arbitrary minimum nightly rate for their listing that is well above the market average nightly rates, leading them to overprice their listings. These hosts may say to themselves, “I’d rather have my listing sit empty than to list it for lower than [insert arbitrary daily rate not based in reality].”The result is that they will enjoy an arbitrarily high average nightly rate but suffer a much lower occupancy rate as potential guests opt for more reasonably priced alternatives in the same market. Hosts with these listings could end up leaving thousands in profits on the table by having their listing sit empty when they could easily fill it with guests at lower rates.
The following figure looks at a hypothetical price-dominated one-bedroom listing in downtown Los Angeles and how much money it’s leaving on the table by underachieving on occupancy due to its fixation on a high nightly rate.
The cost of a price-dominated listingBy overpricing the listing and thus achieving a much lower occupancy rate, the host left more than $500 of money on the table each month.
If you find yourself in the price-dominated listings quadrant, order a market report from a company like AirDNA and reset your pricing expectations for your listing. Choose a price for your listing that the market demand will accept, not just what feels good to ask for.
Occupancy-dominated listings
The final quadrant is the other sneaky scenario where the Airbnb listings have much higher occupancy rates than their competitive listings in the market, often in the 90 to 100 percent range. These listings are booked almost every day. However, most can only do so by undercharging guests.This scenario is arguably the most problematic and the most difficult to diagnose because the high occupancy rates of these listings can give the hosts a false sense of performance.
“I’m completely booked up. I must be doing great!”
And if the listings are also profitable, the hosts may never have the impetus to find out how much money they are leaving on the table. Hosts of profitable and fully occupied listings often never realize that they’re leaving money on the table.
The following figure examines a hypothetical occupancy-dominated one-bedroom listing in downtown Los Angeles and how much money it’s leaving on the table by listing at below-market nightly rates to achieve above-market occupancy rates.
The cost of an occupancy-dominated listingNotice that the high occupancy rate comes at the expense of a lower average nightly rate. By undercharging the market to achieve a perfect occupancy rate, this host is leaving $488 on the table every month!
Another incentive, besides increased profits, for raising prices when your occupancy rate is well above-market rates, is that you can achieve the same profits with fewer bookings.
If, for example, you can make the same profits but go down from eight bookings to six bookings per month, those two fewer bookings mean two fewer cleanings, check-ins, and checkouts. Especially if you’re doing the turnovers, achieving the same revenue with fewer bookings can free up hours of your time without lowering your profits. Getting the same profit with less effort is always a good deal.If you find yourself in this scenario, you’ll need to adjust your pricing to increase your profits. Remember that the point at which you maximize your profits won’t be at full occupancy. For high demand markets in or near urban cores, the ideal occupancy rate typically falls in the 70 to 90 percent range. In suburban or rural markets, it will be lower, and the range is wide.
But the only way to know for certain is to obtain a market report from a third-party data provider to compare your listing’s performance to those of its most direct competition.When you’re ready to adjust your pricing, we recommend increasing your price up 5 percent every four weeks until you start to see your profits start to drop again. For example, if you’re at 100 percent occupancy charging $100 per night when the market is at 80 percent charging $150 per night, raise your prices by $5 until your occupancy falls to 80 percent.
Charging a premium over competition
Unless your listing has a rare offering that can justify a market premium over its competition, start at similar rates to those of the most similar listings in your market. You can justify charging a premium with these following reasons:- Your listing is closer to desirable attractions (for instance, a minute walk to the beach).
- Your listing has rare and appealing amenities (such as indoor movie theater or an arcade).
- Your listing is a premium property with premium amenities catering to high-end travelers (such as a luxury condo in an exclusive luxury high rise).
If your listing is charging well above the average market rates and you’re concerned about making a drastic price reduction, you can start slow. Adjust your pricing down 5 percent at a time every four weeks until your occupancy rate rises and you’re happy with the improved profits.
For example, if you were charging $200 per night at a 50 percent occupancy when the market average is $150 per night at an 80 percent occupancy, then start by reducing your price by $10 every four weeks until profits drop again.During these price adjustments, your profit will go up as your occupancy rate moves toward the market rate. Stop the pricing adjustments or reverse the most recent change should you find that profits fell with the most recent price change. For example, if the change from $160 per night down to $150 per night didn’t improve occupancy or profits, revert to $160 per night and then monitor going forward.
Using dynamic pricing to take out the guesswork
The previous pricing adjustment recommendations for the two sneaky scenarios assume you’re setting your pricing manually. However, we highly recommend that all hosts go with a third-party dynamic pricing provider to automatically set the proper pricing for their listing.Only with a dynamic pricing tool that automatically adjusts the pricing of your listing in real time to account changes in the supply and demand of competitive spaces, including hotels, and their changing daily rates, can you truly maximize for your listing. It is impossible to do this manually.