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Have you ever spent hours thinking about your prices without knowing if they are too high or too low? Do you feel stuck for fear of raising prices that will push away customers? Or are you having difficulty knowing whether your current performance could be improved by increasing your selling price?
If yes: then read what follows.
These are the questions that Marie asks herself and we will answer them by looking at the following points:
- What is the performance of the apartment and what objective should we set?
- Analyze the current price structure of the good and that of competitors
- Decide on a price change and the expected gain with this change.
- Implementation in test & learn mode.
Please note: this article is part of my 52 week challenge . This case is real but for confidentiality reasons the first name has been changed and the city is not mentioned.
Can I increase my selling price: this is why I need to be more precise.
To begin the price analysis, let's start by presenting the property. Marie's apartment is located in a medium-sized (between 100 and 150 thousand inhabitants) in the east of France.
The apartment is located in the city center . It is large in size because it can accommodate up to 8 people . The ad has around thirty positive comments with an excellent total rating of 5 stars.
The property is not positioned in a specific segment (leisure or professional). It receives almost as many professionals as leisure customers .
We agree with Marie to work more specifically in the months of September/October as part of this study.
Note each month (or even each week!) could merit a different study. In fact, a price recommendation over a certain period is not valid for another. For what?
Several reasons for this:
-
- sales trends are different
- the time that separates us from the period considered is different (we are further from the date or closer to the date)
- competitors' prices are different
- the volume of competitors may fluctuate (on Airbnb in particular)
- trends in our own apartment are more or less ahead or behind
Define the objective: we choose to increase sales prices, but not just any sales prices!
Performance of the apartment: rather low average occupancy
The apartment has been available for sale since last year so we only have 10 months of history.
Here is the overall performance of this property:
The occupancy rate is calculated per night: 78% of available nights have been sold (regardless of the number of people staying in the apartment)
For comparison with the market: over the last few months and for the entire Airbnb park in the city, the occupancy rate is 70% and the average price €55. (source airdna ).
(Glossary and method of calculating occupancy rate and average price)
As a result, the performance of the apartment is rather better than average . Which is also confirmed by the fact that the apartment is almost always in first position for searches in the city center. It's a virtuous circle: the algorithm favors good performance and good performance is favored by the algorithm which places it at the top of the list.
The average occupancy of 3.9 people is, however, relatively low for a property that can accommodate up to 8 people.
Indeed, of the 60 reservations made in 10 months, the majority concerned groups of 3 people (27%), in second place were groups of 2 people (18%) and in third place groups of 4 people (15%). .
Note that groups of 5 to 8 people (which make it possible to optimize the apartment as much as possible) represent 33% of reservations made.
So here we have an important avenue for optimization for Marie's real estate: the average occupancy of the apartment being 3.9, the objective must be to favor high occupancies (more than 4 occupants).
Note this objective is particularly true due to the pricing method on the Airbnb site (base price + addition of a supplementary price for any additional person). With this pricing model, the more you sell to a large group of people, the more money you make.
On all sites for which the price is the same regardless of the number of people in the apartment this point will not be relevant.
Regarding the length of stay, it could probably be improved but there is no urgent financial issue for Marie to reduce the impact of cleaning costs . Marie margins correctly. This point is therefore deprioritized.
Pricing more in favor of low housing occupancy levels
The pricing of the apartment is structured as follows:
100€ per room for up to 3 people then 15€ more for each additional person which gives a price of 115€ (4 people) to 175€ (8 people).
If we compare it to the other apartments available on page 1 of the search, Marie's apartment is:
- among the 35% most expensive apartments for 2 people
- among the 44% most expensive apartments for 3 people
- among the 29% most expensive apartments for 4 people
While it is among the 5% largest apartments !
There is therefore a potential for a price increase for stays of 1 to 4 people. This will be our goal!
Furthermore, by changing these prices we give ourselves every chance of increasing turnover because this is the majority of apartment sales (67%).
For higher occupancies (5 to 8) the apartment has two main competitors capable of accommodating up to 8 people. The price of the apartment is located in the middle between each of the competing prices.
There is therefore no reason to change the price of occupancies from 5 to 8.
Please note at this time on booking.com that three-star hotels range between €70 and €110 for a room for two people (commission included). Which also confirms the potential for price growth for occupancies from 1 to 4.
We have the objective, we must now give ourselves an ambition: to increase turnover compared to last year.
Identify opportunities for improvement in sales history
There are two errors in the apartment reservation history which may inspire you and which seem (more) obvious once you establish your performance objective.
Error 1 : Reservation from 09/25 to 10/10 for 4 people.
When we know that our average performance for an apartment is 4 people, we have absolutely no interest in “condemning” our apartment for 15 days with an occupancy of 4 .
Our ambition is rather to give ourselves the opportunity to do better than 4 .
By taking this reservation we will not be able to do better than our average performance.
Error 2 : Reservation of 2 people from 10/25 to 10/27 (during the holidays).
Holidays are periods with high potential for sales with many occupants (families, friends for example).
This is why this reservation of two people is not interesting for the performance of our apartment: we know that we are going to sell because the period presents a high level of demand: we must therefore ensure that we sell at least to 4 people to maximize our income.
However, these reservation choices were made when the apartment had just arrived on the market. These decisions were probably the best for a business launch and to create credibility through positive feedback.
If the same decisions were taken today they would miss out on potential turnover.
And at this stage of reading I bet you are dying to tell me: yes great Elise but we can't choose the reservations that are made!
How to choose the request on Airbnb?
In truth, you have a choice .
The first option is not to activate the automatic reservation option.
This solution offers the advantage of being able to completely control the reservations that are made.
The disadvantages, however, are very present:
- first of all you will be disadvantaged in the Airbnb algorithm. He prefers (for obvious reasons of customer satisfaction) goods offered for immediate reservation.
- Furthermore, it is also necessary to note the additional work involved because you will have to analyze and validate everything yourself.
However, there is another solution based on pricing: placing all the lowest occupancy levels at the same price.
We don't refuse, we accept everything but not at any price!
What new price list?
In this context my recommendation is to increase the base price and apply it up to 4 people.
Test and learn: the method to avoid putting your activity at risk.
Why Test & Learn
The advantage of the test & learn method is that it makes it possible to apply a price change to a reduced part of the activity and therefore to reduce risks.
So there are two main risks to reduce as much as possible:
- see its sales volume decrease following an increase in price
- see its sales volume stagnate following a price drop
The whole challenge of a test & learn exercise is to choose the right action, over the right period at the right time and with the right customers.
This is why success lies in the chosen scope. There must be sufficient sales potential to be able to evaluate the outcome of the action. This means a sufficient number of rooms or in the case of an apartment a sufficient duration .
Large tourist groups also use this method a lot. Indeed, it is very often difficult to predict the result of a new action. Even when comparing ourselves to history, we still observe disparities in context.
The ultimate truth is the customer who gives it to us through their act of purchase (or lack of purchase).
Test & learn allows you to test, take stock of the action, then extend it to the entire activity if successful.
Are the lights green?
For our price change, we decide with Marie to implement this modification from September to October.
The lights are green because this period is a period of high demand in your city, which helps reduce the risk.
Quantified ambition of the test
In October, if reservations were strictly identical to last year, this increase would enable +13% growth in turnover.
For September and October we set our ambition at +10%.
See you in a few months to share the results of this action together.
UPDATE FEBRUARY 27, 2019:
Marie sent me her final figures for the year 2018. The month of October ended with +45% turnover compared to 2017 and the month of November (month in which she decided to extend the strategy) at +24% turnover compared to 2017 .
If you would like to contribute to this challenge and give me one of your current issues: do not hesitate to write to me in the comments!
Please note: I sign a confidentiality clause with my interlocutors. Names and cities may be modified to comply with this clause.