Buying a high-potential property is the first step to a successful vacation rental; the next one is setting up the right Airbnb pricing strategy.
How much to charge for rent on a short term rental is different from how to charge for a long term rental. Consider various factors when working out the numbers. You need to find a price that will strike the right balance between the daily and occupancy rates to maximize revenue.
Table of Contents
- The Simple Airbnb Pricing Formula
- 10 Factors to Consider When Pricing Your Airbnb
- What About Airbnb Smart Pricing?
- Automating Dynamic Airbnb Pricing With the Best Tool
The straightforward formula to calculate Airbnb prices makes sense to an investor. However, it doesn’t always make sense to guests. Thus, Airbnb hosts consider variables to attract guests and keep their properties occupied.
In this article, we’ll take a detailed look at these factors. We’ll also see what dynamic pricing is, its benefits to investors, and how to automate it.
Let’s get started!
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The Simple Airbnb Pricing Formula
A simple formula can help you determine the minimum nightly rate for your Airbnb property. To use it, add your monthly operating costs, such as mortgage payments, maintenance costs, and utilities, which include:
- Streaming services
- Cleaning fees
Then you divide the total expenses by 30 days of the month. This is your average daily cost.
Say you got $80, so the very least you should charge per night to break even is $80.
However, this simplistic formula has a few flaws. First of all, no property can generate a 100% Airbnb occupancy rate. If you set this amount for all nights with bookings, you will not break even, let alone make money.
Second, the fact that you set $80 per night does not mean guests are willing to pay this amount every time. Sometimes they’re willing to pay more depending on local events and rental availability. Other times, during low seasons, they will want to spend less.
In other words, you should have a flexible – or dynamic – Airbnb pricing strategy. At any point in time, your nightly pricing should reflect the balance between supply and demand in the local short term rental market.
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10 Factors to Consider When Pricing Your Airbnb
While the simple formula above can give you a rough estimate of the price option that will cover your rental expenses, several other factors need to go into your pricing strategy. Taking these factors into consideration will help you be competitive in the local market, boost occupancy, and optimize Airbnb rental income and Airbnb cash flow.
Check them out below:
1. Similar or Comparable Properties
What are other short term rental properties in your neighborhood going for? Or said differently, what daily rates is your competition asking for?
Looking at the pricing of similar properties in your area will aid you in determining a reasonable range for an affordable Airbnb price. Searching your city or neighborhood on the Airbnb platform will give you a good range of properties and prices to consider.
An easier way to locate Airbnb rental comps is to use the Mashvisor Airbnb calculator. You can enter your address and the number of bedrooms and bathrooms to get an average daily rate for similar properties as well as other metrics. Moreover, through the Mashvisor platform, you can access active comps on Airbnb to see what different prices they charge.
For example, if you see that comparable properties are listed at $60-$90 in your area, that’s the range you want to price your own Airbnb listing.
Especially when your listing is still new, it’s crucial not to overprice your property because this will make the Airbnb algorithm rank you lower in guest searches. It will also push guests away from your rental because they tend to favor properties with competitive rates and positive reviews (which new listings don’t have yet).
Going back to the $60-$90 range mentioned before, you can consider $60 as your minimum rate and $90 as your maximum rate. As part of your Airbnb pricing strategy, you need to set minimum and maximum daily rates.
2. Airbnb Occupancy Rate
When you work on the pricing strategy for your Airbnb investment property, you should consider another equally important metric – the occupancy rate. In a short term rental business, the revenue is the product of the average daily rate and the occupancy rate (expressed in days). Importantly, these two metrics are kind of inversely related. Higher prices lead to lower occupancies and vice versa.
So, the trick to maximize your Airbnb income is to hit the right spot where the product of the daily rate and the occupancy rate is the highest. Thus, you should use the prevailing occupancy rate in your market for adjusting your prices.
Going back to the Mashvisor Airbnb calculator, this tool shows you not only the average daily rate but also the average occupancy rate for rental comps in the area. If you see that demand is strong (i.e., occupancy is above 60%-70%), you can push your average rate a bit. If, on the other hand, demand is weak (i.e., occupancy is below 30%-40%), you may need to lower your price to attract guests.
While your Airbnb rental property analysis needs to focus on comps, no two real estate properties are the same. Consequently, when you set up pricing, you should consider the amenities and extras your rental offers and how they compare to the rest of the listings in the neighborhood.
Things like swimming pools, spacious gardens, verandas, and fireplaces can allow you to charge a higher rate than your competitors. If, alternatively, your vacation rental is quite basic, you need to minimize the daily rate to attract guests on a budget who are ready to sacrifice access to amenities for a lower rate.
4. Airbnb Reviews
Generally speaking, if you’ve just started an Airbnb business, you should begin with a lower price for your listing. It’s important to be very competitive in order to attract the first few renters who can write you positive reviews after their stay. Guest reviews are a significant part of the Airbnb algorithm. They also play a big role in guests’ decisions about staying in a particular property.
So, to encourage your first few bookings, your Airbnb pricing should be lower. Once you have established yourself and your property through good reviews, you can increase the price of your listing. The more and the better your guests’ reviews are, the better prices you can set.
5. Cleaning Fees
When you set a price for your Airbnb rental, you need to consider a number of extra fees. One of them is the cleaning fee. It is a standard fee that Airbnb hosts charge in order to provide professional-grade cleaning between guests. Even if you do the cleaning yourself, you should still add a cleaning fee to your listing because your time is worth a certain amount of money, right?
Keep in mind that cleaning fees are usually determined per stay, not per night, on the Airbnb website. The typical value is around $50-$70, but you should check out the rates in your local market to ensure you are not asking for too little or too much.
6. Extra Guests Fees
This is another price option that’s quite common among Airbnb hosts. If you can fit an extra person or two in your short term rental property–above the standard occupancy–you can charge additional Airbnb fees. If you have a futon or an extra bed, you can add the extra cost to the night’s base rate for the number of guests.
However, before you go for this option, make sure you are not violating any local Airbnb laws. In some markets, the maximum occupancy per vacation rental is limited to a certain number of adults, and if that’s the case in your city, you want to stay within the cap. You can check out the Mashvisor short term rental regulations page as a starting point for your research on the topic.
7. Pet Fees
In your Airbnb pricing strategy, you can also account for a pet fee. This applies only if you’re willing to host pets on your property. Remember that this does not apply to service animals, which are not legally restricted from Airbnb rentals.
If you’re willing to host guests with pets, you can charge an additional pet fee based on the type, size, and number of pets. Similar to the cleaning fee, this is regularly charged per booking rather than per night because it covers additional cleaning expenses required with pets.
8. Security Deposit
As a host, you can decide whether to ask for a security deposit or not. It is an amount that can be returned to guests during checkout if they did not cause damage to your property or belongings. Property owners use the security deposit to make the necessary repairs in such cases.
Typically, the Airbnb platform provides quite good damage protection coverage, so investors don’t have much to worry about.
9. Seasonal Pricing
Airbnb listings should apply dynamic pricing, depending on peak or off seasons. To develop a comprehensive dynamic Airbnb pricing strategy, you need to look at different seasons as well as local events that bring in a large number of visitors. These include huge concerts, large-scale festivals, international conferences, and major sporting events.
During the high season, you can afford to increase your nightly price to take advantage of the strong demand without causing harm to your occupancy rates. Meanwhile, during the low season, you should decrease the Airbnb price to motivate guests to book your rental property.
10. Longer Stays
The last major factor to take into consideration is the length of stay. The switch to remote work brought about a new concept – Airbnb long term rentals. These are weekly or monthly rentals of otherwise short term rental properties that guests usually use to work away from home. They are a particularly popular choice among digital nomads.
If you’d like to cater to the needs of this specific segment of guests, you should consider adjustments to your Airbnb pricing policy. In this case, the nightly rate should be significantly lower. The lower daily price is more than compensated for by the 100% occupancy rate of the longer stay.
What About Airbnb Smart Pricing?
Airbnb Smart Pricing is an in-built tool on the Airbnb platform which collects and analyzes data about Airbnb demand and supply, tourist activity, availability of similar listings, and other factors. Then, it provides a suggested price for hosts for each night for which their property is available for booking.
However, the issue with the Airbnb Smart Pricing tool is that many hosts report that it offers prices below the market averages, so they lose money instead of gaining. The reason for this is that the Airbnb logic gives preference to occupancy rather than revenue. As some reviews have it, the tool lowers the rate until a property gets booked, even if that’s below the break-even point.
So, while Airbnb Smart Pricing seems to automate your dynamic pricing strategy, it doesn’t necessarily bring the best possible results. You don’t always maximize your income, cash flow, cap rate, and cash on cash return.
It’s important to realize that this is not something that you have to use as an Airbnb host. When you create a listing on the Airbnb website, you can decide whether to keep Smart Pricing off or switch it on.
Related: 3 Housing Markets Where Investors Can Earn Positive Cash Flow With Airbnb in 2023
Automating Dynamic Airbnb Pricing With the Best Tool
The fact that Smart Pricing is not an ideal option should not discourage you. There is another dynamic pricing tool that allows you to simultaneously optimize and automate your Airbnb pricing strategy: Mashvisor.
The Mashvisor Dynamic Pricing Tool uses the power of AI and machine learning algorithms to suggest daily rates that can maximize the revenue you generate from your Airbnb property. It is possible because the Mashvisor algorithm prioritizes rental income rather than Airbnb occupancy rates. This way, you can optimize your Airbnb cap rate and cash on cash return.
What makes the prices suggested by the Mashvisor tool so reliable is the fact that they reflect the real-time and historical performance of comps obtained through comprehensive Airbnb market research. All short term rental analytics and data come straight from the Airbnb website and reflect active listings in the area.
The best part about the Mashvisor Dynamic Pricing Tool is that it allows you to fully automate the process of setting up your daily rates. All you have to do is to connect your Airbnb account to your Mashvisor account, import your listings, and allow the tool to manage pricing for you. In this way, your nightly rates will always be optimized for revenue without any active work on your behalf.
To put your Airbnb pricing on autopilot for the best results possible, sign up for a 7-day free trial of Mashvisor followed by a 15% discount.
Final Words on Airbnb Pricing
There isn’t a single, straightforward answer when wondering how much rent to ask for your Airbnb property. Your daily rate should depend on a number of factors and should change all the time to reflect adjustments in the supply and demand in the local short term rental market.
To boost the performance of your vacation rental investment property, it’s a must to adopt dynamic pricing. It is the only way to stay ahead of the competition, get a good occupancy rate, and generate the most revenue and profit possible.
While this can be a tedious process, you can use the Mashvisor Dynamic Pricing Tool to both automate and optimize the process simultaneously. Through thorough analysis and AI, the Mashvisor tool can find the best nightly prices for each day when you want your property listed for rent. Moreover, the tool has the capability to set up these rates automatically, as long as you allow it.
To learn more about how the Mashvisor Dynamic Pricing Tool can help boost your Airbnb pricing strategy, schedule a demo with our team of experts.