As the new year is drawing near and we are entering a new decade, it is time to get prepared for the upcoming challenges in operating a vacation rental business in 2020 and beyond.
Airbnb is an 11-year old mature startup that has revolutionized the hospitality industry, and disrupted the traditional hotel businesses so much so that Marriott International recently added ‘Homes & Villas’ in their longer stays brand category.
In early 2018, Airbnb also added ‘Hotel room’ as a category in their type of place to allow boutique hotels and B&Bs to use the platform to generate bookings. This has certainly increased the competition for homestay hosts and vacation rental owners, especially when guests search for listings without choosing the filter “type of place”.
Moreover, in recent years, so many people have started offering their homes in Airbnb that the competition has significantly increased for Airbnb hosts.
Due to a high supply of Airbnb listings, the room rates have significantly dropped in many cities in the last couple of years.
If you are doing Airbnb Arbitrage for last 7 years or longer – where you rent an apartment for long-term and put it in Airbnb (with owner’s permission) to re-rent it out for short term to earn an income – you have surely seen a decline in your profit margin in all these years.
As a property owner, when you list your entire apartment in Airbnb for short-term rental, you can still earn 3-4 times higher than the normal rental offered to long-term tenants.
However, the three main challenges faced by Airbnb hosts these days are:
- It is getting more and more difficult to keep your listings ranked on the 1st page of Airbnb Search Results Pages;
- Some of your competitors’ listings look better and are priced lower than your listings in the same area or region;
- Your listings’ pricing cannot be increased much due to your competitors who are offering same or better kind of listings at a lower price.
So, how to overcome these challenges and beat your competition in the vacation rental space?
Here’s a brief story about my success with Airbnb:
I got started in Airbnb as a host in Malaysia in 2012.
Just like many other hosts that I know of, my primary reason for joining Airbnb was to earn an extra income.
Back then, I was living solo; and so I rented a fully-furnished 3-bedroom apartment to stay in one room and share the other two rooms with Airbnb guests.
I got a couple of bookings in the first month that just covered 100% of the rental. It was a good start at the time – compared to the fact that many homestay hosts receive fewer bookings nowadays, in the first few months of their hosting journey, that usually don’t fully cover their apartment rentals.
With that said, I was aiming to earn more to pay for my utilities and get the return on my investment that I made in decorating and adding amenities to the apartment.
It took me about 3 months to earn back my investment and I was thrilled to live for free in the heart of Kuala Lumpur city. Thanks to Airbnb and this video (below) which inspired me to try out the home sharing economy.
I was enjoying meeting new people from different parts of the world and hosting them in my apartment.
At first, I was a bit uncomfortable to share my home with strangers, but soon I realized most of the travelers using Airbnb were actually nice and friendly people. Reviews by other hosts posted in their Airbnb profile also gave me confidence to trust them when accepting their booking.
Soon I decided to rent two more 3-bedroom apartments to start earning profits from the 3rd room in each unit.
I hired a cleaning staff to clean the three apartments and a friend of mine was helping me to welcome guests, during check-in, when I was busy at work.
After one year of hosting successfully, I wanted to scale Airbnb further.
I created more listings for a hotel-apartment chain in my Airbnb account, and sent them guests in exchange of receiving commission per booking.
In 2017, I earned the ‘Superhost’ status in Airbnb and also won the ‘Guest Review Awards 2017’ from Booking.com.
With my several years of experience in Airbnb hosting, today, I’m going to share with you the strategy or formula that I’ve developed to successfully run and scale a vacation rental business.
So, without any further ado, here’s my thesis or formula to outpace your competition and scale your Airbnb business:
No. of Bookings = SQ + m.BV – b(Price)
This equation is derived from the demand curve formula in microeconomics:
QD = a – b(P)
Where QD = Quantity demanded,
a = all the factors affecting price,
b = slope of the demand curve = (change in Price) ÷ (change in QD),
P = Price of the product
Figure 1: Demand Curve
So, for my proposed thesis,
QD = Total number of bookings for a listing
a = SQ + m.BV (I’ll expand the acronyms in a moment)
b = slope of the curve (it will vary for every listing)
P = Price of the listing per night or ‘room rate’
On a side note, this is not an academic article. I’m using demand curve equation to derive a valid formula to explain the relation between the ‘number of bookings’, ‘pricing of room’ and ‘factors that affect the price’ for any vacation rental property.
In my formula, the factors that affect the price are:
SQ = Service Quality
BV = Brand Value
m = Mindset
Let me show you how these factors affect the Price (room rate) and hence the number of bookings for your listing.
According to the Law of Demand, the quality of services that you provide in your vacation rental property is going to influence the number of bookings you get, provided that you keep the pricing of the room constant.
Here, the service quality is both qualitative and quantitative.
For qualitative service quality, you need to upgrade the quality of amenities in the apartment such as replacing average mattress and pillows with premium branded ones, normal sofa with designer ones, normal LED TV with SMART TV to let the guests watch Netflix, and so on.
As for quantitative service quality, you need to add more amenities in your vacation rental property to enhance your guests’ experience in staying at your place. For example, you can provide welcome drink for your guests when they check in, hand towels in addition to bath towels, two pairs of pillows instead of one pair in each double bed, increase the frequency of housekeeping, etc.
Increasing qualitative and quantitative service qualities will bring you more bookings for the same nightly rate for your listing.
Now, you can’t provide top-notch service quality if you don’t have enough resources. So there’s a relation between service quality (SQ) and resources (R).
SQ = k.R where k is a positive constant.
SQ is directly proportional to R; meaning:
when R increases, SQ increases and
when R decreases, SQ decreases.
The resources for your vacation rental property include:
- Money to invest in getting high-quality furniture, electrical appliances, decoration pieces, kitchenware, and adding other amenities to boost your Service Quality;
- Hiring professional housekeeping services or training your cleaning staff to provide hotel-like housekeeping;
- Employing two or more persons (depending on the number of properties you have) to welcome your guests in-person during check-in, collect keys/access cards during check-out, and respond to their queries online within an hour before and during their stay;
- Automation tools to improve efficiency in managing your vacation rental property, especially when you have multiple properties.
- Having a contact list of service providers (such as plumbers, electricians, etc), who can provide same-day services when needed urgently.
So, these are the essential resources that you need to boost your service quality when running and scaling a vacation rental business.
Figure 2: Shift in Demand curve when factor SQ increases.
As we can see in the above example (Figure 2), total number of bookings per month doubles (increases from 10 to 20) for $100/night room rate when service quality (SQ) is increased from 150 to 200.
Total bookings doubled due to the slope of the curve, b = -5 in this example. Your value of b, slope of the demand curve, will vary and so will the increase in number of bookings you receive.
The slope of the curve (b) – which is change in price of your listing over change in the number of bookings (demand) – will always be negative as the relation between price and demand follows the demand law.
The Law of Demand states that an increase in price of a product/service will lead to a decrease in the quantity demanded, and vice versa.
Now, before we analyze the other two factors that influence the number of bookings for your listing, let’s analyze the pricing of your vacation property.
You need to set a price for your listing that not only covers all the costs and expenses to set up and run your vacation rental business, but also that gives you a profit margin.
In its early years, Airbnb got popular because hosts offered cheaper short-term rentals, compared to hotels, in expensive cities.
As Airbnb kept expanding worldwide and the number of hosts and listings rose significantly in popular holiday destinations, the competition grew immensely (increase in supply) in some cities and, as a result, the prices of listings dropped further.
With that said, if there is little to no profit margin in running your vacation rental business, there is no point of doing Airbnb hosting (unless you’re offering a spare room in your home just to earn enough money to pay your bills).
So, there is a limit at which you can lower the price of your listing no matter how high the vacation rental competition is in your region.
When to LOWER your listing’s nightly rate
When you’re just getting started with zero reviews, the price that you set for a listing should be equal to or lower than the average price for the same category of listing in your area.
So, in the beginning, you should expect to make losses for first few months to earn back the money that you invested in your property.
Once you get a couple of good reviews and 5-star ratings for your listing, you can slowly increase its nightly rate to reach the breakeven, and eventually start earning profit per month.
If you are offering a budget accommodation to Airbnb guests, you must lower your costs to lower the nightly rate, in order to get more bookings.
Lowering costs would mean lowering your service quality up to an acceptable standard, as you can’t afford to use the same upgraded resources (mentioned above) that are used to run a luxurious vacation rental property.
You may consider installing smart lock for each listing, which is a one-time investment, so that you don’t need to hire staff to help your guests check in and check out.
For communicating with guests before and after check-in, you can either do it yourself or hire just one person to take care of all the communications.
As for housekeeping services, you can hire a cleaner (not necessarily a professional) who can provide basic cleaning services to keep the property in right order. The cleaning frequency needs to be 2-3 days a week to cut costs.
Now, if you are offering a semi-luxurious to high-end vacation rental for a while and even if you have received hundreds of guest reviews for your listing, you will need to lower your listing’s nightly rate from time to time.
One obvious time to lower your listing’s nightly rate is during off-peak season when the number of tourists visiting your country drops significantly due to extremely cold winter or severe weather conditions.
Another occasion to offer your listing at a lower price is when you get repeat customers. Returning guests sometimes expect some discount if they are booking twice in the same month.
If you’re offering budget to semi-luxurious vacation rental, it is a good idea to offer 15% to 20% discount for loyal guests who visit your city frequently and book your place.
With that said, when you are offering discounts, you should be lowering your profit margin but not making a loss or break even. So, offer the discount accordingly.
When to INCREASE your listing’s nightly rate
For a budget vacation rental, you can increase your listing’s nightly rate a bit when you make some improvements to the amenities and get dozens of great reviews from past guests. The reason for increasing the price a bit is due to the limitation of your guests’ purchasing power.
Students and backpackers usually have a low budget while travelling. They can’t afford to pay much higher than the average nightly rate for your room, even if they appreciate your efforts in offering the best budget accommodation in town.
With that said, it’s wise to test your pricing and see the amount of bookings coming in for each nightly rate. Then find the optimum price for which you earn the most for your listing – one optimum nightly rate for the peak season and another for the off-peak season.
For a luxurious vacation rental, you can increase your listing’s nightly rate by 30-50% of the average market value in your region.
In this case, your listing price is directly proportional to your service quality.
The more resources you have that helps to boost your service quality, the higher the nightly rate you can set for your vacation rental property.
The more resources you have that helps to boost your service quality, the higher the nightly rate you can set for your vacation rental property, says @ashique #airbnb #airbnbhost #vacationrental #holidayhomes Click To Tweet
Now, one might argue saying that increasing price might not be a good idea as there are a lot of competition these days. More and more people are joining Airbnb as hosts to offer premium quality properties at lower nightly rates.
Well, this is true to some extent. I, myself, had to lower the room rates when Airbnb got popular in Malaysia from 2015 onward and my competitors (other Airbnb hosts in the city) offered more luxurious properties at a cheaper rate. The price of Airbnb rooms declined so much so that the current nightly rate of a studio apartment (entire place category) in Kuala Lumpur CBD is now priced same as the nightly rate of a private room in a shared apartment that I offered back in 2012-13.
However, it’s important to note: when you set the pricing of your luxurious vacation rental property higher than the average market value, your direct competition are no longer those listings that charge about the average market value or lower. They become your indirect competitors. Your direct competition is now similar luxurious vacation rentals, priced similar to yours, in the region where your listing is located in.
Now, getting back to my thesis, other high-end vacation rentals can offer the same quantitative and qualitative service qualities that you offer in your listing and, thus, they can make it hard for you to get more bookings.
What sets you apart from majority of the competition is your brand value (BV) and mindset (m).
These two factors can help you to get more bookings for the same price as we see a further shift of the demand curve in Figure 3 (below).
Here’s the formula again:
No. of Bookings = SQ + m.BV – Price
The branding of your vacation rental property is simply its reputation.
Your customers’ perspective of your vacation rental brand is heavily influenced by your reputation as a host in serving the guests.
A good indicator of your reputation is obviously the reviews that you have as an Airbnb host.
The more positive reviews you receive, the higher your reputation becomes.
Airbnb makes it easy for guests to determine the reputation of a host by rewarding the latter with the ‘Superhost’ status.
If you are offering luxurious properties, you can even apply for Airbnb Plus to categorize your listings as premium ones, which further increases the value of your vacation rental brand.
Getting listed in Airbnb Plus has some limitations though. You cannot offer the same property in other websites (such as Booking.com, VRBO, etc). There are some other terms and conditions which you need to agree before applying.
If you don’t go for Airbnb Plus, you can list your properties in Booking.com and get awards every year to maintain 8.0/10 or higher ratings. This obviously makes your vacation rental brand compete with hotels in your area, as guests usually perceive Booking.com to be primarily for hotels (which is true).
Apart from getting great reviews and titles of authority from Airbnb, Booking.com, etc, another thing that makes your vacation rental brand stand out from the competition is your unique hospitality that gives your guests a unique experience in staying at your property.
You must be doing something unique to make your vacation rental guests become your raving fans. You need to be creative and thoughtful when deciding on what you are going to offer that really benefits and make your guests’ stay enjoyable.
Here are a couple of things I used to do to build my brand, before other hosts in my city started copying me:
- Offer travel cards for transit trains with loaded credits for two persons per room;
- Offer free breakfast, as a surprise, for guests who booked the listings that did not mention of complimentary breakfast being provided;
- Offer free Lunch/Dinner for solo or couple guests who stay at least for a week. Again, this was not advertised in the listing and was offered to selected guests whom I became friends with;
- Shifting guests to another apartment/room when there were unexpected circumstances beyond my control;
- Providing guests with basic medicine for free when they needed it urgently.
Can you imagine a hotel offering any of the above services, except for item #4?
While offering these extra services incurred me some extra costs and yielded me less profit in the short term, however, my unique hospitality (i.e. really caring for guests) brought me more bookings through return and referred guests, and thus I made more money in the long term.
Some of my guests were so happy with my services that they booked my place multiple times when they returned Kuala Lumpur, and they recommended their friends and family to book my place too. This is what my highly perceived reputation or hospitality brand did for me.
When you do more than what is expected of you, your customers become your raving fans.
In other words, overdelivering can boost your reputation and increase the perceived value of your vacation rental brand.
So, here is a non-exhaustive list of things that can increase your brand value:
- Couple of hundred reviews;
- High frequency of great reviews (i.e. very few negative reviews);
- Number of years you are running a vacation rental business;
- Earning ‘Superhost’ status consistently every quarter, year after year;
- Stunning photos of your listings that look very professional as that of a luxurious hotel chain.
Once your brand value increases, you can expect to see an increase in the number of bookings coming in for your listing, as illustrated in Figure 3 below.
Figure 3: Shift in Demand curve when factor BV increases.
As we can see in the above example (Figure 3), total number of bookings per month increases from 20 to 30 for $100/night room rate when Brand Value (BV) increases, leading to the total increase of factors (SQ+m.BV) from 200 to 250.
Thus your brand value gives you a competitive edge and it is the most important factor in the formula to scale your Airbnb business.
“Your vacation rental guest is always right.” – this is the mindset you need to have if you want to successfully run and scale your Airbnb business.
While most Airbnb hosts complain about some of their troublesome guests, you need to handle things professionally like a hotelier and make necessary changes to your vacation rental property and services.
Here are a few examples:
- If your guest left a stain in the mattress, hire a professional to remove the stain and buy a mattress protector for the bed, so that it doesn’t happen again.
- If you have a house rule that states ‘guests need to empty the trash bin by themselves’, but you usually find them not following this rule properly, then hire a cleaning staff to do this task.
- If you’re upset about Airbnb partially refunding your guest due to his/her complaint about bugs found in the kitchen, hire a professional pest control service provider and get rid of bugs completely from the whole apartment.
- If some of your guests fail to check in to your place at the scheduled time and you’re tired of waiting for them, then either get a smart-lock for your guests to do ‘self check-in’ or hire someone to welcome your guests at any time they check in.
- When a guest posts a negative public review for your listing, respond to it politely and professionally, instead of bashing him/her. If the guest review goes against Airbnb’s content policy, then request Airbnb to remove it.
I can go on and on with giving you more examples, but I hope you get the point I’m trying to make here.
As for a once-in-a-blue-moon guest who makes a significant damage to any furniture or fixture of your property, I advise that you keep photos and a detail video tour of every single item in your vacation rental property before you start hosting guests, so that you can make a claim for compensation to your local insurance company and/or to Airbnb later.
So, you need to change your mindset from being an average Airbnb Host (a non-business entity) to being a vacation rental brand (a for-profit business).
In my opinion, this shift in mindset in believing that ‘your guest is always right’ is an important factor that helps you to build your vacation rental brand that can even compete with neighboring hotels.
Your mindset in Airbnb hosting or any service-oriented business is binary. It’s either you have it or you don’t.
No. of Bookings = SQ + m.BV – Price
So if you lack the correct mindset, i.e. if m = 0 in the formula, it will completely ruin your brand value (BV = 0).
Before you want to beat your competition, you need to identify who your real competitors are. Your vacation rental competition is subjective to the price of your listing.
If your listing’s nightly price is way below the average nightly rate in your region, then you are directly competing with hostels, budget hotels, homestays and B&Bs.
If your listing’s nightly price is close to average nightly rate in your region, then you are directly competing with semi-luxurious listings and 3-star hotels.
If your listing’s nightly price is quite above the average nightly rate in your region, then you are directly competing with luxurious vacation rentals and 4-star hotels.
If you are offering a short-term budget accommodation or a semi-luxurious vacation rental, you can invest to a certain extent on the resources (R) to increase the service quality (SQ) a bit.
As long as your SQ is worth more than the nightly price paid by the guest, you can expect to get more bookings. To compete with and outdo your direct competitors, you need to increase your brand value (BV) by having the right mindset (m).
If you are offering a luxurious vacation rental, the nightly price is certainly higher than the average market price and it makes financial sense to invest more on the resources (R) to boost the service quality (SQ).
Your direct competition or other high-end vacation rentals in your region can offer similar SQ. However, again, your BV is the ultimate factor that helps you to beat your vacation rental competition.
No matter what kind of property you are offering as a vacation rental, your service quality, brand value and mindset help you to outpace your competition and let you scale your vacation rental business.
Another factor, not mentioned in the formula, that lets you get more bookings is ‘Reviews’.
Increase in Service Quality also generates great reviews and compliments from guests, which eventually inspire more future guests to book your listings.
Thus, getting positive reviews consistently leads to generating more bookings, and getting more bookings means more money into your bank account.
I hope this article helps you to take your Airbnb business to the next level in 2020 and beyond.
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