Ask Andy – Rate Pricing and Revenue Management

Rehoboth Beach vacation rentals

The following video is a recording of the text below. You can choose to watch the video, or read the text – whichever is your favorite way of consuming content! There is a little extra in the text to reward those whom are up to reading it!

In this month’s, “Ask Andy” section I respond to two questions both centered around rate pricing and revenue management. You do not make this easy on me do you LOL! Be still my beating heart. Revenue Management is my favorite thing to do next to property interiors. Rate pricing feeds revenue managed and delivered so without further ado, here is not one but two, “Ask Andy” questions:

  1. Why do I have a 1-night rate when we do not rent by the night?
  2. What is the lowest nightly rate I should accept?

Revenue Management Key Concepts

Before I cover your questions, it is important that we understand some key concepts in revenue management to ensure we are all on the same page talking about the same things!

Four Important Revenue Management Rules

When it comes to rate pricing and revenue management there are four important rules:

  1. Average Nightly Rate.
  2. Revenue Per Available Property.
  3. Revenue Per Available Night.
  4. Occupancy.

One or more of the four is always compromised in the goal of maximizing the other. The real objective in rate pricing and revenue management is in doing the groundwork up front and understanding the following:

  1. What kind of Property Owner are you?
  2. What are your financial goals for your property?

1. What Kind of Property Owner Are You?

Indiana Jones sword fight scene

There’s that famous scene in the in the blockbuster movie Raiders of the Lost Ark that came to mind when I thought about revenue management – really! Indiana Jones, has arrived in Cairo when his partner is kidnapped by the Nazis. Indy starts running through a crowded Egyptian bazaar, desperately searching for her.

Suddenly, the masses of locals part and Indy sees a huge swordsman in a black robe smiling at him. He’s brandishing a menacingly large sword, displaying his skill with the weapon to intimidate the American archaeologist.

Indiana Jones is highly skilled with the bullwhip — so naturally, we expect to see a very interesting sword vs. whip fight. But Indy pulls out a pistol, and shoots the swordsman from 20 paces. It’s the best laugh in the movie. The Cairo onlookers cheer and run off with the bad guy’s sword.

My take-away? That old movie standard, “Don’t take a knife to a gun fight!” In other words, use the right tool for the right result!

Consider the following. Which Buyer/Owner Persona are you:

Lady grabbing money

“Investor Inez” – an Investor Buyer/Owner.

You never visit or use the property. You bought it purely to maximize income returns on your purchase.

“Second Home Sam” – a Second Home Buyer/Owner.

You wanted a resort holiday home but need to rent it out for the income to cover expenses. You might not want to rent, but you must for the income.

“Laid Back Lisa” – a high net worth Buyer/Owner.

You wanted a resort holiday home which you can afford without renting but you rent anyway for some extra cash.

2. What Are Your Financial Goals for Your Property?

Different Buyer/Owner Personas will really have their own financial goals which drive rate pricing and how those rates are managed to drive revenue.

  1. “Investor Inez” – we know wants to maximize her income.
  2. “Second Home Sam” – again wants and in fact needs to maximize his income.
  3. “Laid Back Lisa” unconcerned with maximizing income as a priority is somewhat disconnected from market rate pricing. They can afford to have a premium, let the property sit empty approach to rate pricing incentives for Guest booking.

How Do You Think Then That Our Three Buyer/Owner Personas Will Approach the Four Important Rules of Rate Pricing and Revenue Management?

Let us dissect the rules to better understand how they would drive our Buyer/Owner rate pricing logic.

1. Revenue Per Available Night

Over the course of a specific period of renting, what is the average rate at which you price? This is not committed income – it is projected income. If your 1-night rate is set at $200, $400, and $600 for low, medium, and high season, your Average Nightly Rate across the full season is: $400.

2. Revenue Per Available Property

Over the course of a specific period of renting, what is the Gross Rental Income delivered for the number of nights available to the paying Guests? If, for example, Owner books 21 nights out of 119 as Owner Blocks, this reduces the available number of nights from 119 to 98. Clearly the impact of number of nights available to book for paying Guests affects Rule Number 3 below.

3. Average Nightly Rate

Over the course of a specific period of renting, what is the average nightly rate you booked at? This is actual Income, not projected. It is Rule Number 2 divided by the number of nights you rented. If you brought in a Gross Rental Income of $50,000 across 119 nights, then your Average Nightly Rate is $420.

4. Occupancy

Quite simply – how many nights were booked by paying Guests reported as a percentage of the available nights to fill by paying Guests.

A Simple Rule of Rate Pricing and How It Affects the 4 Rules of Rate Pricing and Revenue Management

The higher your nightly rate price, the higher your potential income, but what of the effect on revenue and occupancy?

Occupancy, Revenue Per Available Property, and Revenue Per Available Night are all likely to suffer at the hands of higher rate pricing. Average Nightly Rate, however, is likely to be higher the higher your revenue numbers.

You can either maximize revenue, maximize occupancy, or maximize Average Nightly Rate. One compromises to the other. A good Revenue Manager is always looking to maximize all three, but one will always favor the others depending on the type of Buyer/Owner Persona and their associated financial goals for the property.

If you are Investor Inez or Second Home Sam, then by definition you are driven by your goal to maximize Revenue Per Available Property. Investor Inez is also driven by Occupancy.

Investor Inez then will sometimes take a hit on Average Nightly Rate to maximize Revenue Per Available Night and Occupancy.

Second Home Sam is not driven by Occupancy since they will often remove high season popular weeks for personal use. Second Home Sam then may also accept a hit on Average Nightly Rate, Revenue Per Available Property, and Revenue Per Available Night since Second Home Sam sometimes thinks, “Well, if it doesn’t rent, we’ll always use it ourselves.” Remember, however that Second Home Sam still needs to rent for the income. Second Home Sam cannot carry the costs of the property without rental income. Second Home Sam then has a more complicated relationship with rate pricing and revenue management. Second Home Sam should always be working with a professional management company with an in-house Revenue Manager. The Revenue Manager needs to drill deep with Second Home Sam and really understand their revenue goals and how that drives their operating expense dependency. It would seem then that Second Home Sam’s primary goal is to maximize Revenue Per Available Property by minimizing personal use especially at periods of high Guest demand. High demand = higher pricing. Second Home Sam’s primary goal is also driven by Revenue Per Available Night since that also factors into Revenue Per Available Property. With economic laws of supply and demand in a free market, logic goes that one raises pricing to respond to higher demand and lowers pricing for lower demand. If your property has a popular amenity such as a swimming pool, or accepts pets, you are in higher demand than those that do not. Your Revenue Per Available Property and Average Nightly Rate should be higher.

But wait a minute, what about Laid-Back Lisa? Lisa is not concerned with any of these Rules 2 through 4. Laid Back Lisa’s primary goal is Rule Number 1: Average Nightly Rate. Laid Back Lisa can afford to price her property at a market premium and risk it sits empty at rates higher than Guest demand will automatically fill.

Are There Any Similarities Between Buyer/Owner Personas?

I have talked about the differences, but here is one behavioral trait common to all three. It is the Rule of Envy. Be wary of comparing yourselves to others! Appearances can be deceptive. This rule applies when any of the three Buyer/Owner Personas calls their Property Manager/Revenue Manager and says, “Why is my property priced at $x per night when my neighbor’s property/a property I saw on VRBO or Airbnb, or even a local hotel/motel room is priced higher?

Just because a marquee advertises a price, unless we see real time and historical booking data, we have no way of knowing the actual price a property or room booked at. When it comes to hotels and motels, there is also the added complication of booking consolidators pre-purchasing date blocks and discount pricing to fill. Ever used Priceline? What about hotel loyalty/reward programs and that effect on rack rate pricing? If a hotel operator is taking a hit on reward points redemption, then the non-rewards program members are probably contributing to that discount by paying higher rates. Make sure it is an apples to apples comparison against real data.

So when I get that call from any of my three Buyer/Owner Personas, “My neighbor’s house is priced higher per night than mine and it’s not as nice, raise my rates” what do I say? I remind my client what type of Buyer/Owner Persona they are, what their stated financial goals are, and we discuss the effect on their goal by changing rate pricing.

So, you can have high income, high pricing (projected income), high average nightly rates or high average revenue per property (delivered income), or high occupancy. What you cannot have is all the above. What then do you want? You want to be the highest price house on the block, the highest delivered income, or the highest average nightly rate? Do you want to be 100% booked? Are you sure your neighbor has the same goals and delivered results?

I believe that the way Seachange Vacation Rentals sets rate pricing then manages revenue is a good system. It works for all our Buyer/Owner Personas. It works so well in fact that we are outperforming our market by as much as 35%.

This Month’s, “Ask Andy” Questions

Man in straw hat thinking

The following video is a recording of the text below. You can choose to watch the video, or read the text – whichever is your favorite way of consuming content!

1. Why Do I Have A 1-Night Rate When We Do Not Rent by The Night?

How Does Seachange Determine Rate Pricing Currently?

As you know in your annual rate sheet we ask you to approve a 1-night rate, a 7-night rate, and, unique to Seachange Vacation Rentals, a window of variability allowing us to change pricing up and down 20% off of the approved rates in response to Guest demand.

In that middle ground of that 20% window we use our real time reservations data to vary rate pricing based on real time Guest demand. In other words, we are setting prices based on demand in our specific market but only within a range pre-approved by our Owners.

Remember that Seachange never rents just one night. Let us leave that to the hotels and motels. So, when a Guest rents for stays of 2 nights or more, what they really pay is an average nightly equivalent rate, not a 1-night rate or a 7-night rate. Huh?

Huh Sticker

The 7-night rate is an easy concept. We generally have a low, mid, and high-season 7-night rate. It is the rate a Guest pays for the standard Saturday-Saturday 7-night minimum stay. It is easy to see the relation between the 7-night rates and your projected Gross/Net Rental income in your annual rental income proforma summary we deliver along with the rate sheets. However, when it comes to reporting occupancy for the summer season, do you realize that we report occupancy based on number of nights filled, not weeks filled? It is more accurate.

Back to rates. If you divide the 7-night rate by 7 (nights), you will not see any relation to the 1-night rate. Why? Sales logic. The longer you stay, the less you pay (per nightly rate equivalent). It is simple. It is fair. It works even when a Guest calls to extend a 7-night stay by adding an extra night. In this case we price this extension by taking their 7-night rate, divide it by 7 to come up with a nightly rate equivalent.

Assume a Property Owner decides to rent longer term for one year at $1200/month, or $14,400/year. That equates to a nightly rate of $39.45.  Again, longer term nightly rate equivalent has no relation to the 1-night rate. Who would ever accept $39.45/night for a short stay?

Confused man

So Why Then Have A 1-Night Rate at All?

The 1-night rate is used to price stays less than 7 nights (stays of 2 to 6 nights). Our experience has shown that Guests will pay more for flexible stay requirements than the traditional 7-night Saturday-Saturday restriction. When we lower a 7-night minimum in response to Guest demand, we usually fill the more popular long weekend 3-night minimum at a high nightly rate equivalent. Guests will pay a higher nightly rate equivalent for that 3-night stay than they will for the original week nightly rate equivalent. When we have filled that 3-night stay at a higher nightly rate equivalent, we lower the 1-night rate to fill the remaining gap left in the calendar. The result is much more income versus the original 7-night rate, or as other companies do, risk the week going empty at a decent rate and instead deliver $0 income.

2. What Is the Lowest Nightly Rate I Should Accept?

Now here is where it gets confusing and challenging! I am occasionally contacted by Owners after they see their statements. They question the, ‘nightly rate’ of a booking. They often speak with their neighbors, look on VRBO/Airbnb and see similar properties, also hotel/motel nightly rates priced higher than their rates, and ask me to raise their rates accordingly. Be careful with this research. Just because someone reports or you see published rates, we have no way of knowing what the dates booked for. Published rates do not necessarily equate to the actual booked rates unless we see real time live booking data.

Owners will often tell me, “Never rent my property for less than $x/night.” While it is very helpful to know a (private) baseline rate below which we should not rent, it is important that we’re all on the same page and agree which rate we set as a baseline.

When we talk about a, ‘nightly rate’ – what specific rate are we talking about? Is it the 1-night rate, is it the 7-night rate divided by 7, or is it the amount the Guest paid divided by the number of nights in their stay? As we discuss above, with Seachange using a 1-night rate to price stays less than 7-nights, the nightly rate equivalent of the 7-night rate will not equal the 1-night rate.

Brody from Jaws

Working Through the Math with A Booking Example

  • Assume a property has a 7-night rate of $1000 and a 1-night rate of $200.
  • $1000/7 nights = $142.87. This nightly rate equivalent is not the same as the 1-night rate of $200.
  • Recognize that you pre-approve Seachange to work within a 20% window of variability. We can book Guests 20% higher or lower than the published approved rate. depending on Guest demand.
  • So, with the 20% window we can really book Guests between $160 – $240 per night for stays 2 to 6 nights and $800 – $1200 for stays of 7 nights.
  • So with Dynamic Rate Pricing (adjusting rates and minimum stay rules up and down based on patterns of Guest booking (demand), this means I can book a 3-night stay at $720 (20% higher than the 1-night rate of $200). Based on original rates, the Guest effectively pays for 4 nights when they only booked 3. Guest is happy. They got their shorter flexible stay. Owner is happy they got more revenue.
  • I then lower the 1-night rate back to the original published rate of $200 and successively lower to the 20% bottom line all the way to $160 if necessary, to fill the gap.
  • Assume worst case scenario, I reduced the 1-night rate to $160 (the maximum 20% baseline you pre-approve).  This means I book the 4-night gap at $640. Add that to the $720 I already booked the 3-night stay, and you see a gross rental income of $1360 against an original 7-night rate of $1000. This delivers an additional 26.47% more gross rental income! This is called Dynamic Rate Pricing and our reservations data history shows on average that doing this delivers our Owners 35% additional income. Guests are aware of this. Guest know that they pay more for shorter stays, but they love the flexibility and will pay for it.

Is There an Option to Remove Owners from Rate Setting?

The simplest thing to do with rate setting would be to have our Owners not be involved in rate approval at all. We do not do that, why:

  • We never want to be accused of setting and controlling market pricing, of anti-competitive price setting, or of setting prices that make it easier for us to book the properties.

What Are Owners Really Asking When They Question Reservation Prices on Their Statements?

It’s become clear to me that when an Owner calls me to question the pricing on a reservation appearing on their statement what they’re really questioning is the nightly rate equivalent, not the 1-night rate on the rate table.

The 7-night rate pricing model is a holdover from old time resort rentals when no one ever rented for less than 7-nights and everyone arrived and left on a Saturday. Those days are long gone. Contemporary Guests demand flexibility in stay requirements and as our data shows, these Guests are prepared to pay more for that flexibility. Owners earn more per night on a shorter stay than the published 7-night rate. Period. The challenge for Seachange is to fill the gaps in calendars left by shorter stays so that not only is Seachange delivering a higher average nightly rate, but also delivering maximum occupancy so that we can by default maximize delivered income versus risking nights left unfilled.

So if, dear Owners you want us to set a baseline nightly rate equivalent for stays less than 7-nights, below which we would not dip, recognize that it could have a big impact on your actual Gross and Net Rental Income. You cannot have it both ways. What do you want us to do? There is a very real chance that we could not fill the 4-night gap left by not being able to lower the 1-night rate below that which you said you would never rent.

This my dear Owners is why I am recommending that we keep the rate approval process the way it currently is. You must trust Seachange that we can filter out potential problem Guests as much as practically possible so that we will safeguard your property. Please help us help you and keep the rate sheet approval process as simple as possible: keep it ‘as is.’ Let us just use the 20% lower limit as currently approved to set a baseline nightly rate equivalent below which we will ever rent without your specific approval.

So, What Is Andy Recommending for Rate Approval?

Drum being played

Your Homework – Determine Your Buyer/Owner Persona and Your Financial Goals

Are you:

  • Investor Inez? It is not a second home. You never use it yourself. You want to maximize revenue over occupancy and average nightly rate. In other words, you will let Seachange determine your baseline nightly rate based on the market.
  • Second Home Sam? You use the home as a holiday house yourself. Decide how often and when you will visit (low, mid, or high season, or off-season only) since this will impact all revenue management. Take a high season week, your Average Nightly Rate, Revenue Per Available Property, Revenue Per Available Night, and Occupancy all will see a hit. Set too high a baseline nightly rate then again, your Average Nightly Rate, Revenue Per Available Property, Revenue Per Available Night, and Occupancy all will see a hit. Want to maximize Average Nightly Rate, Revenue Per Available Property, Revenue Per Available Night, and Occupancy, then either let Seachange set your baseline nightly rate based on the market, or set a realistic baseline nightly rate in line with your property not your neighbor’s or the hotel down the road.
  • Laid Back Lisa? Rents but does not necessarily need the income to cover expenses. High net worth individuals get that way because they plan their financial life and make smart decisions over where and when to leave money on the table. There is a balance if you will between lifestyle and lenience: how much do you want to enjoy your assets versus how much do you sacrifice for future financial gain? Just because Laid Back Lisa can afford not to rent, if Lisa owns a property in high Guest demand, why not use the property as an income generating asset that is part of a sound financial plan? Lisa then can afford to set a premium baseline nightly rate to have a high Average Nightly Rate with its associated hit on Revenue Per Available Property, Revenue Per Available Night, and Occupancy.

I recommend that we do not change our current method of rate pricing and Dynamic Rate Pricing. Leave it alone. Let it ride, ‘as is.’ I ask our Owners to trust us. We screen and manage Guests carefully. Price alone does not guarantee a Guest will look after the property and we manage the Guest accordingly. We have experienced appalling Guest behavior in a property that is $10,000/week. That Guest is red flagged and not welcomed back.

I believe that Seachange has developed a sensible, compromised approach to property rate pricing. We present our Owners with a proforma for summer rate setting. We get Owner approval for a projected Gross and Net Summer rental income based on the published 7-night rates. We then ask you to approve a window of adjustment based on real time Guest booking patterns and not only deliver record setting Gross/Net incomes, but also record setting occupancy levels.

If, depending on your Buyer/Owner Persona and associated financial goals you feel that the projected baseline nightly rates in your rate sheet are too low, then suggest a higher one and we will accommodate with the associated hit one or all of the four Revenue Management Rules: Average Nightly Rate with its associated hit on Revenue Per Available Property, Revenue Per Available Night, and Occupancy.

Thank you for, “Ask(ing) Andy**.”

** Disclosure – Seachange Vacation Rentals is not a licensed Financial Planner or CPA. This article is not to be considered investment or tax advice. Please consult your Financial Planner and/or CPA when making investment and/or tax decisions.