The Dutch Auction Pricing Strategy

In these times of COVID-19 you need a different pricing strategy to maximize revenue. The key point is that you want a pricing strategy that strongly encourages last-minute bookings.

If the guest isn’t arriving in the next three days, you don’t want that booking. Why? Because too many things can change between now and the check-in date. And you can bet that Airbnb will give the guest a full refund. If you accept that four-night booking over the weekend with a check-in date six days from now, you have a good chance of sitting with that six-day period empty on your calendar. And then, the morning of check-in, the guest will call Airbnb and say, “Yesterday I was walking down the street and someone on the other side sneezed, and I think I have to self-quarantine for two weeks.” I’ll bet you a dollar against a nickel that Airbnb will give that guest a full refund.

If you’re used to filling up your calendar a month or two in advance, or even just two weeks in advance, you need a new strategy.

Part 1: The Dutch Auction

Do you know what a Dutch Auction is? The auctioneer starts with a high price and slowly lowers it. Everyone sits there looking at the each other to see who is going to make a move. As soon as someone jumps up and says, “I’ll take it”, the auction ends. The first person who jumps up gets it.

Let’s say you have a 1BR unit and your target price is around $60/night. Here’s how you set the prices:

Tonight:  $50
Tomorrow night:  $55
Tomorrow +1:  $60
Tomorrow +2:  $65
Tomorrow +3:  $70
Tomorrow +4:  $75
Tomorrow +5:  $80
Tomorrow +6:  $85
Tomorrow +7:  $90
Tomorrow +8:  $95
Tomorrow +9:  $100
All following nights:  $100

So a booking five-night booking checking in tonight would cost:

$50 + $55 + $60 + $65 + $70 = $300, or $60/night

But a three-night booking would be $165, or $55/night. That’s below the target, but it gets some revenue in the bank, and it’s a short booking. In just three days you’ll be able to take another booking, and hopefully it will be longer.

However, a five-night booking checking in tomorrow would be:

$55 + $60 + $65 + $70 + 75 = $325, or $65/night

You need to be compensated for leaving tonight vacant, and a bit of risk is creeping in. Tomorrow morning that guest might cancel and get a full refund.

For each night that you shift the booking into the future, the price goes up by $25 total, or $5/night. It’s not hard to imagine that guests aren’t going to book too far into the future.

Part 2: Drop Your Prices Daily

When tomorrow arrives, it’s no longer tomorrow. It’s today. So tomorrow’s price of $65 needs to become $60. $70 needs to become $65, etc. Every morning you have to drop the prices for the coming ten days.

There are three ways you can do this:

  • Manually
  • Using Airbnb’s last-minute discounts (available only on the multi-calendar, which is available only if you have 5+ listings)
  • Using pricing software like PriceLabs.

Part 3: Don’t Chicken Out

If you’re used to having your calendar full for the next few weeks or months, it’s going to be gut-wrenching to sit see that there are no future bookings. Sit tight. If the unit sits vacant for 2-3 nights in a row, then your prices are probably too high. Reduce them overall.

But if you have someone in the unit and you haven’t gotten a booking yet, sight tight. Just wait. For a given booking, every day the price will go down by $5/night. Maybe nobody took it for arrival in four days, but tomorrow the price will drop. Maybe someone will take it then.

Part 4: An Actual Example

The above is a bit of an extreme example. I don’t recommend dropping the price by $5/night on a $60 target price. Something closer to $2/night would be more appropriate. You do want to get bookings for arrival tomorrow or the day after. It’s okay to have a 1-2 night gap between bookings, especially if the bookings are longer.

Here’s an actual screenshot from my calendar, taken on August 3rd.

There are a couple of things to note:

  • The first unit (2014 #1) is a small 1BR with a private patio. It’s booked until the end of the month. I’m not worrying about it. The prices set for Aug 29th and following are high enough that nobody will book it. And I don’t want those bookings.
  • The next unit (2014 #3) is a large 1BR. If you compare the prices on the 10th and 11th, you’ll see that it’s priced a little higher. But it’s still too early to be taking bookings for the 10th and 11th. As we get closer to those dates, the prices drop, and eventually someone will take it.
  • The bottom unit (2014 #4) goes vacant tomorrow on Tuesday the 4th. It’s in the zone. The price is right for someone who wants to book it for arrival in the next 1-3 days. I’m hoping to get a booking for someone arriving Tuesday or Wednesday. Right now I would accept a booking request for arrival Thursday, but only for a longer booking. Today, if it were just 2-3 nights, I would hold out for something better for Thursday arrival.

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