Understanding Key Metrics
A successful Airbnb pricing strategy leans heavily on understanding and monitoring key performance indicators (KPIs). We’re going to discuss five pricing KPIs: Occupancy rate, Average Daily Rate (ADR), Revenue per Available Night (RevPAN), Booking Pacing, and Booking Window.
Occupancy Rate
The occupancy rate is the statistical percentage of time your Airbnb property is rented out.
Average Daily Rate (ADR)
Calculating the Average Daily Rate (ADR) is a crucial part of revenue management for both hotels and single-family homes rented on Airbnb. However, the calculation and the factors influencing the ADR differ due to the nature of these two types of properties.
For a hotel, ADR is typically calculated by dividing the total room revenue by the number of rooms sold. It’s important to note that only paid, occupied rooms are considered in this calculation. In a hotel setting, there are typically many rooms available, and the focus is often on optimizing revenue across all these rooms. A hotel might have multiple types of rooms (like standard, deluxe, suite), and the ADR might be calculated for each room type and then averaged, or the total revenue might be divided by total rooms sold regardless of type.
In contrast, when calculating the ADR for a single-family home rented on Airbnb, you would divide the total rental income by the number of nights the property was rented. Given that it’s a single property rather than a multitude of rooms, the ADR reflects the value derived from the entire home per rented night. A single-family home could be rented entirely, or in some cases, individual rooms might be rented out. If rooms are rented separately, one could calculate an ADR for each room. However, this is less common, and typically, the ADR for the whole property is most relevant.
Revenue per Available Night (RevPAN)
RevPAN is a less-known but extremely useful metric in the rental industry. Unlike ADR and occupancy rate, RevPAN measures your total revenue across all available nights, not just those that are booked. So, if your property is available for 30 nights in a month and you make $3000 in that month, your RevPAN is $100, regardless of how many nights were booked.
Booking Pace
Booking pace refers to the rate at which new bookings are made for a specific period. It provides insights into the demand pattern over time.
Booking Window
The booking window, on the other hand, refers to the length of time between when a booking is made and the actual stay. A long booking window means that guests are booking their stay well in advance, while a short booking window indicates that guests are booking closer to their stay date.
How To Leverage These KPI In Your Airbnb Pricing
Now that you understand the key performance indicators (KPIs) of ADR, occupancy, Revenue per Available Night (RevPAN), booking pace, and booking window let’s look at how you can put them to use to know how much to charge for your Airbnb.
Occupancy
A common misconception is that a higher occupancy rate is always better. However, if your occupancy rate is consistently at or near 100%, it could mean your prices are too low. Consider slowly increasing your prices until you find the sweet spot where occupancy and revenue are both optimized. A drop in occupancy rate is not always a bad thing if your total revenue increases due to higher prices. Also, pay close attention to occupancy trends throughout the year. If your occupancy dips significantly during certain months, consider offering discounts or added-value services during these periods to attract more guests.
Revenue per Available Night (RevPAN)
Unlike ADR or occupancy rate, RevPAN provides a holistic view of your revenue performance across all available nights. If your RevPAN remains low despite high occupancy rates, it might be an indicator that your expenses are too high relative to your pricing, suggesting a need for cost reduction, price increases, or both.
Booking Pace
If your property is consistently booked far in advance (fast booking pace), this might indicate high demand and an opportunity to raise prices. On the other hand, a slower booking pace may require more competitive pricing or enhanced marketing efforts. If your booking pace slows and you find yourself with unbooked dates approaching, consider offering last-minute deals to fill vacancies and maximize revenue. Conversely, if last-minute demand is high, you could experiment with charging a premium for these bookings.
Booking Window
Use booking window data to identify when guests are booking their stays. If you notice longer booking windows during certain periods (like holidays or local events), you could increase your rates in anticipation of these high-demand times. Shorter booking windows might suggest that guests are price-sensitive or shopping around.
How KPI Metrics Act Together
These KPIs do not act in isolation, and should be evaluated collectively to tell you how to price your Airbnb.
For example, if you have a long booking window and a fast booking pace, you may be able to charge higher prices due to high demand and guests’ willingness to book well in advance. Conversely, a short booking window and slow booking pace may indicate a need to adjust prices downward or enhance your marketing efforts to attract more bookings.
To see how occupancy, ADR, and RevPAN can work together imagine that you have a two-bedroom apartment that you’re renting out on Airbnb. You’ve been charging $100 per night, and your occupancy rate is 90% (27 nights booked )for the last month (30 days).
ADR = $2700/27nights = ADR of $100
RevPAN = $2700/30 = $90
Now, you’re considering a price increase, but you want to make sure that this won’t negatively impact your total revenue.
Let’s say you decide to experiment and increase the nightly rate to $120. After making this change, you monitor the occupancy rate for the next months (30 days) and find that it has dropped to 75% (23 nights booked).
Your new ADR would be about $2760/23 nights = ADR of $120
RevPAN = $2760/30 = $92
So, even though your occupancy rate went down, your total revenue went up. Plus, because you were only booked 23 nights instead of 27 nights you may have had fewer turnovers and less cleaning expenses, which improves your bottom line as well.
This example also illustrates the importance of testing and monitoring when adjusting your Airbnb pricing strategy. Small, incremental changes to your pricing, followed by careful monitoring of key metrics like ADR and occupancy rate, can help you optimize your earnings while minimizing the risk of significant revenue declines.
Putting It All Together To Price Your Airbnb Correctly
Monitor Regularly
Regularly review these KPIs to keep your finger on the pulse of your property’s performance.
Test and Adjust
The best way to maximize revenue is through continuous testing and adjusting. Change one thing at a time (like price or minimum stay requirement), monitor the impact on your KPIs, learn from the outcome, and adjust accordingly.
Leverage Technology
Consider using property management software or dynamic pricing tools. They can automate much of this analysis, saving you time and potentially providing more sophisticated insights.
Remember, each property is unique, so what works well for one property might not work as well for another. Treat your Airbnb hosting as a business, and invest time in understanding and applying these KPIs to succeed.
Conclusion
Finding the right price for your Airbnb property isn’t a static process. It’s an ongoing journey of learning, adjusting, and optimizing. By understanding the key terms and concepts involved in pricing strategy, you can make informed decisions that optimize your profitability. The use of dynamic pricing tools can greatly aid this process, by turning a complex task into an automated, data-driven strategy. The ultimate goal is to strike a balance that maximizes your returns while offering fair and attractive prices to your guests. By investing time in understanding these crucial KPI metrics and leveraging the available technology, you can ensure your Airbnb hosting venture’s long-term success, and help you answer the all-important question, “How much should I charge for my Airbnb?” more confidently and accurately.