How to Calculate the Best Rental Rates for Your Holiday Let
Setting the rental rates for your holiday cottage can be a challenge. Price your property too high and bookings could be slow, or you’ll attract guests with high expectations who feel overcharged. Set your price too low and you may not be able to earn a profit, or potential customers could question the standard of your property. Low rates are also more likely to attract bargain hunters looking for a cheap deal who might wreck the place.
Whether you are just starting out or have been letting for years, this guide will help you create the best pricing strategy for your holiday rental.
Different approaches to pricing your holiday let
- Price per night: This is the most common pricing model used. It’s straightforward and easy to apply and manage.
- Derived pricing: This can also be known as ‘price per guest’ or ‘occupancy pricing’. If you prefer for the price to change depending on the number of people staying, this strategy allows you to create a basic rate and then a surcharge can be added on top (depending on the number of guests).
- Length of stay (LOS pricing): This pricing strategy allows you to give guests a discounted rate for longer stays whilst keeping your revenue target on track.
- Discounts/special offers: There are multiple ways you can offer a deal for someone’s stay; from ‘early bird’ discounts and ‘last-minute’ deals to promotions like ‘book three nights, get a fourth free.’
Essential advice for setting your rental rates
Firstly, avoid using an online ‘holiday let income calculator’. The problem with these tools is that they are often too generic to give you the accurate estimate you’re after.
Instead, to get to the pricing right, you will have to do your research.
Firstly, look at your overheads/running costs (this post might help). These are likely to include:
- Holiday letting insurance
- Energy and utility bills (you may need to apportion a higher rate for winter to take heating into account)
- Property maintenance
- Advertising on holiday rental portals (also known as OTAs)
- Any general property management/agent fees
- Marketing expenses (e.g. website hosting, digital advertising, use of online software/tools)
- You should also factor in a contingency budget for any damage or repairs needed over time.
Try to work out what your break-even point is after these expenses have been accounted for (note: you should never accept a booking that falls below this amount).
Factor in your property’s location. If your property is 100 metres to the beach, near popular tourist attractions, in a popular town or within easy walking distance from shops and pubs then you can confidently charge a higher rate.
Take into account any unique features and benefits of your holiday let property. Will guests pay a little more for the use of a hot tub, a pool, an enclosed garden or private parking?
Look into the local competition. What are other (same/similar quality) holiday lets in your area charging? How is their availability calendar looking? Extend your research and spend some time comparing rates of similar properties in other tourist hot spots.
Think about your target guest. Who do you want to attract? What is the profile of a typical tourist in your area? Is there anything you can research around their typical income, family make-up, lifestyle habits and so on? Does your holiday rental live up to this demographic’s expectations? If so, then you know your rate setting can now be done with more confidence.
Your pricing structure should take seasonality into account too (low, mid, high, peak): that includes any annual bank holidays, school holidays, and any popular seasonal events which happen locally and draw crowds where accommodation is always in demand.
In general, prices are set higher for the peak season (this includes Christmas and school half-terms), but you should also think about how pricing works out depending on the day/s of the week someone wants to stay. So, for example, if you have a holiday cottage think about how pricing should work for a Monday to Friday, Friday to Friday, or Friday to Monday stays.
For weekend or midweek bookings, it would be reasonable for you to charge 70-80% of the weekly rate.
Lastly, you should consider what type of offers you can run without forfeiting profits. For example, longer stays of two weeks or more might attract a bigger discount for guests – but in return, you have the comfort of knowing that more of your calendar is booked out. Using special offers is particularly useful to get bookings outside of your high/peak season dates.
- Consider offering an ‘early bird’ discount rate for stays booked far in advance.
- Even if you usually offer a minimum three-night stay, you could also set up a price for a two-night stay. This can fill random ‘booking gaps’ in an otherwise busy calendar.
- Weigh up whether a lower occupancy rate would be worth offering. An occupied rental (that sleeps 4) with fewer guests is better than an unoccupied property with no guests!
Pricing mistakes to avoid
Setting the same rates as your competitors
It’s an easy trap to fall into. If you’re aware of what local competitors are charging, you may adjust your rates a little bit to align your property with theirs. This is something you can do without thinking about it too much, but the mistake here is that you’re assuming that they have a ‘product’ that’s comparable with yours.
The reality is that every holiday let is unique. Even if there are similar-looking offerings on the market, the key difference is that you as the owner offer your guests your own special brand of hospitality and service. This includes things like the way your property has been styled, how you communicate with and care for your guests, added extras that you provide as standard and all those priceless nuggets of information on local ‘hidden gems’ and recommendations that only you can share with guests. There are also all of those genuine, glowing reviews to consider from past guests too.
Whilst this may sound rather intangible as a concept, all of these factors add value to your overall holiday let offering and need to be factored in when you’re considering your pricing.
Drastically undercutting your competitors
When formulating your pricing structure for the year, try to avoid the tactic of ‘undercutting’ your competition. Getting into a price war to beat the competition is always a bad idea – because:
- Low price can equal ‘low quality’. Quite simply, if you price something too cheaply then there will always be a sense of there being something wrong with it or that it’s super basic. It also sends out a message that the owner is resorting to desperate measures to get bookings because nobody wants to stay at the property otherwise. It could also imply to potential guests that the place is not what it may first seem.
- Low prices can often attract low-quality guests. The long-term success of your holiday rental business is about doing the right thing for your property, as much as it is about doing the right thing for your income. In the long run, it can be a better bet to have fewer bookings from higher-quality guests than more bookings from low-quality guests who increase wear and tear.
Accidentally undercharging because your sums are wrong
Looking back to the overheads/running costs we listed above, these must be accurately calculated and factored into your pricing. Just covering your costs isn’t enough and doesn’t make for a strong long-term business. You need to make sure that you make a profit for all your hard work to be worth it.
Your figures need to be kept front of mind for your future year-round pricing.
When is it reasonable to set higher rates?
A high-quality, high-price approach can be the best strategy. Try not to think of setting higher prices as ‘being greedy’ – it’s all about charging guests what your property is worth in the short-term rental marketplace.
It might also be that you have a ‘hunch’ that your rates are too low – in which case, don’t be afraid to change your pricing (after some research, as we suggest above, of course), as your unique property deserves the right rates.
In general, it’s reasonable to set higher pricing when you’re confident that your holiday let offers a better product, higher quality service and market demand exceeds supply. More than ever, and particularly because of the recent pandemic, many guests are looking for memorable, enjoyable, high quality stays – not the cheapest rental in the area. If your property largely fulfils their ‘wish list’, guests will be happy to pay a higher price, and they will also value what you’re offering, more.
Some benefits of setting your rates higher:
- It’s far easier to reduce rates and activate special offers if you’re starting from a high price point.
- Starting like you mean to go on (with higher rates) means that you’re setting a precedent; repeat bookers will be more loyal as they know what to expect, and you can also attract the segment of higher-paying guests who are less price-sensitive.
- A higher price point also gives you more room to work with property management and/or letting agencies. They will always take a portion of your earnings as a commission of course, but using them can be an efficient, quicker route to attract bookings when you’re renting out your property.
- By charging the right amount for your holiday let, you’ll attract a more discerning level of clientele who will show your property the respect it deserves. They will also appreciate what you provide more. Happy guests = great reviews = more attractive to newcomers + repeat bookings!
- We all know that a notable proportion of holidaymakers will be researching the holiday lets that have made their shortlist before they decide on which to book. They’re looking for further information so they can be confident that their initial emotions are correct. If it seems too cheap to them, this may throw doubt on their stay – “is it really going to be as good as it seems?” “This is too good to be true…” Therefore, a higher price (but set at the right level for your property) will only serve to reassure them that yours is a quality property.
- A premium pricing strategy has the advantage of producing higher profit margins.
Remember that you can always lower your prices later if the bookings don’t come in.
How to communicate the value of your holiday let
So, if by now you’re thinking that a higher price strategy might be a good approach for your holiday property, you might be wondering what you can do to make sure your property matches up to guest expectations – so that you can be confident that you’re charging the right rates.
Some quick tips for adding value to the guest experience
- Know your market. Make a list of all the similar properties in your area, then split your competition into three distinct groups:Group A) The highest priced properties: note down what makes them special, what facilities they have, how are they described and what their marketing and photography is like
Group B) The ‘middle of the road’, average-priced properties (note them, but then ignore these properties)
Group C) Those holiday lets charging rock-bottom rates. Note down your instinctive reactions to these properties and identify what makes them so cheap.
This exercise is all about learning by example. You want to do more of what Group A properties are doing and do less of what Group C properties are doing. And, if your holiday home is far better than any of your Group A competitors, then don’t be afraid to consider changing your pricing to reflect this.
- In your marketing, take time and care to effectively highlight your USP (unique selling proposition) of your property.
- Pricing should always be inclusive. In today’s holiday rental market, your guests demand the quality of a 4-star hotel with self-catering facilities and do not expect to have to bring along their own towels/linen or spend the last day of their hard-earned break cleaning.
- Include a welcome hamper for each booking. Thoughtful touches like this go a long way, and they are often mentioned in online reviews (which in turn can attract more bookings).
- Offer additional services, even if you have to charge for them. Things like grocery delivery, tickets for excursions, local spa/gym access, or a child-minding service can all make life easier for your clients to have a memorable stay. If nothing else, it’s nice for them to know that these options are there, if they want them.
- Explain in any advertising what you don’t charge for, especially if your competitors do. You probably provide a few little extra things for your guests at no charge, so don’t be afraid to include some content around all of the little things you do for free. It implies that you’re happy to go the extra mile for your guests.
- Use a professional home stylist and photographer when you’re creating imagery for your marketing. This is particularly important if you are going for a higher-price approach – there is simply no excuse for sub-par photos. Investing in professional photography might cost you one or two weeks of bookings in theory, but the return over the long run will be well worth the upfront investment.
- Give exceptional service at all touchpoints with your guests, both during the booking, pre-arrival, through to the arrival/welcome, and during their stay of course. Try to capture the guest’s testimonial as soon as possible on their return to reinforce the fact that – yes, they would definitely come back again!
- Highlight the equipment and gadgets you offer and drop brand names into your descriptions and images. Consider what today’s high-end travellers have come to expect – whether that’s high-quality speakers by Sonos, kitchenware by Le Creuset, luxurious towels from The White Company, a hot tub – perhaps even champagne and chocolates on arrival…Highlight all of these extra items, as it all adds value to your offering and helps to warrant that your property is worth what you are charging for it.
These are just a handful of ideas to help you justify charging a premium price. The additional cost of these can be factored into your rental rate of course. The cost of providing such added extras will be outweighed by the value you can add (and prices you can charge) by doing so.
What if your holiday cottage letting agency suggests lower rates?
Some managers or letting agency business models are based on filling the maximum number of weeks at a low rate. However, letting fewer weeks at a higher rate can give the same return as more weeks at low rates, but without the extra cost of changeovers, commission and the extra ‘wear and tear’.
So, it’s not the number of weeks you let that matters; it’s your profit.
Optimise and automate your rates with dynamic pricing tools
Dynamic pricing tools essentially aim to remove the hassle of manually monitoring and updating your pricing. Your holiday let prices automatically change and adjust based on multiple factors such as the time of year/seasonality, but there can also be hourly or daily fluctuations due to market demand and your competition’s performance.
By using an online tool for dynamic pricing, you’re able to charge the most commercially logical rates in real-time – but without doing any manual work yourself. Tools like these also take into account historical trends and other factors such as how quickly similar properties in your region are being booked up, as well as booking lead-times.
Leading dynamic pricing providers claim that their data-driven solution can increase your revenue by as much as 40%.
Below are some popular dynamic pricing tools that are currently available.
When choosing a dynamic pricing tool check if it integrates seamlessly with your existing systems (PMS/channel manager/listing sites). The best way to test a tool is to sign up for a free trial.
- Owners who put more strategic thought and effort into their pricing than the competition can maximise revenue and bookings.
- Differentiate your holiday let from your competitors so that customers understand your property and offerings are unique.
- Guests are willing to pay a higher rental rate for perceived value and quality, but your property and level of service have to justify these rates too.
- It pays to do your research. Research your competition and your target customers, but also spend time identifying your overheads and running costs too.
- Think about how you can add value to your property through new features, styling, added extras, as well as the information you include on your website and in your listings, advertising and images.
- Never try to radically undercut your competitors.
- Offer deals and discounts, but only if they can maximise your bookings without affecting your bottom line too much.
- Incentivising repeat guests costs less and has much higher profit margins than attracting new customers.
- Consider using a dynamic pricing tool if you think this tactic might suit your business and management style.
- As a rule of thumb, pricing low when you’re starting out is helpful to build up reviews and reputation.
- Remember that you can always lower rates if you need to.
Ultimately, it’s only through time and lots of experience that you’ll be able to master set your holiday rental rates correctly.