Setting the right prices for your holiday home is a combination of art and science.
Knowing when and how much to discount is more like voodoo!
Getting the pricing right on every property is one of the hardest things that an agent has to do and whilst we try to use data to help it’s still a decision that has as much to do with gut feeling and emotion as science.
The journey to finding the right range of prices for any property starts with the initial meeting with a new owner and therein lies the first problem. Like an estate agent we know that the higher prices we quote the more likely we are to get the instruction yet we are the ones who have to deliver on our promises. In the end honesty is the best policy here- the truth is that we never really know how well a place will do and all first pricing is a work in progress, so we agree on a starting point with the owner and wait to see the results
Retailer v Salesman
I once heard an interview with Sir Charles Dunstone the founder of Carphone Warehouse where he said something that really resonated with me: The difference between a salesman and a retailer is that when evaluating a product a salesman will think ‘How much could I sell this for?’ and a retailer will think ‘How little could I sell this for?’ To unpack that, the point is that if you can reduce the price of an umbrella to say £4.99 you could sell so many that the quantity discount on your order would allow you to get them at a price that would allow you to make a profit.
Of course the fundamental difference is that we do not have an unlimited supply- I can’t reduce August weeks to £199 and order another 10,000 to sell so my job is certainly to be a salesman and in fact more like a fish salesman as my product will go off on a certain date and I can’t keep it in a warehouse for next year. This is handy as my first business was selling fish and I spent a lot of my working life selling business equipment and software.
Van Westendorp Price Model
Peter Van Westendorp was a Dutch economist who developed a price model known as the price Sensitivity Meter first published in 1976. This is so old that even I was at school! It predates the internet, mobile phones, personal computers and even the Post-it note yet the basic principles still apply today.
The model works by asking four survey questions:
At what price would you think this product is a good value?
At what price would you think the product is getting expensive?
At what price is the product so inexpensive you doubt its quality?
What price would you think is too expensive for you to consider buying the product?
Each of these answers can be plotted on a graph to identify some key price values:
Point of marginal cheapness where you actually lose sales because the price is so low people question the quality.
Point of marginal expensiveness above which sales fall away
Range of acceptable pricing covers the value between these two points
Optimum price point where the same number of customers feel the price is either too expensive or too cheap.
For a retailer who can order almost unlimited stock, the optimum price point or even a price just above the point of marginal cheapness which gives them maximum volume and lowest price is the right choice. In our case we need to push towards the point of marginal expensiveness although in some cases, especially for a new property we may prefer to set a lower price and fill the place up in the first year.
Price is not related to costs
Many businesses operate on a fairly simple margin basis, buying washing machines at a price and selling them for 10% more and you compete by buying cheaper or squeezing your margin. The right price for a holiday let is not related to the costs; it is simply what someone will pay for it. The price can however be related to owner requirements:
Not everybody wants the same thing from their second home so there are occasions where similar properties could have very different price strategies. An investor with 10 properties is running a business and the brief is to get as much income as possible. This is actually unusual for us as most of our properties are individual loved holiday homes so we have to work with the owners to determine what they want from their property. All will want to make sure they cross the threshold to qualify for holiday let tax benefits but beyond that they may be happy to charge a higher rate and have more empty weeks to use themselves. One strategy to consider is premium pricing at a time when you might use your property but will take the money if say it was enough for a skiing holiday at Christmas.
The average holiday property is going to be empty for 20+ weeks so everyone has a base price that they don’t go below but do be careful with this. Before you say ‘I’ll only make £300 so it isn’t worth it for the wear and tear’ consider that there can be more value than just money to having a guest stay. Every person through the house is someone who will go home and tell their friends and family about it and may return. The house gets an airing, a blast of heat and a clean and crucially you give the work to your caretaker. Remember that not bothering for the winter is a bit of a slap in the face to someone who cares for your property and almost certainly could really use the money especially in the lead up to Christmas.
Non Holiday Guests
We are fortunate in Poole that there is a strong market for interim accommodation needed for anything from 1-5 months and we take great advantage of this. Guests may be in between houses, building at home, moving to the area or on a temporary contract and a 6 month unfurnished let doesn’t fit the bill. Although prices are lower than weekly holiday rates it’s an excellent way to top up annual income and maximise returns.
You would think that a few percent either way wouldn’t make a difference if you like a property but it really can. It’s not that the guest can’t afford it, the key is that they may be looking at a number of choices that they can’t make up their mind about. There’s no better illustration of this effect than the chocolate bar market- I’d imagine that if you want a Twix you’d buy one (I don’t even know what they cost) but apparently it’s an extremely price sensitive market with a few pence on the shelf lifting sales for one bar over another.
Be prepared to change
If bookings are slow early in the season it will be much cheaper to reduce a little early on than wait and discount last minute. The worst that will happen is that you sell lots of weeks and think you could have got a bit more whereas the risk of not selling the week at all is much more painful.
We always try to persuade our owners to give us discretion on discounting as it is impossible to make a rule for every situation. It’s all very well saying call me first but when you have a guest on the phone with their credit card out you need to make a decision on the spot. I often have a conversation when told I don’t have discretion, only 10% so I ask ‘If I have a £1,500 week empty with 48 hours to go and someone offers £1,300 do you want me to refuse it?’ ‘No obviously in that case you would take the booking’. ‘So you want me to use my discretion then?’ Sometimes we go round in circles a few times but I usually get my way.
The main thing to remember is that your agent’s interests and yours are aligned and they are looking at a bigger picture when making a decision- would I give a 15% discount 4 weeks in advance? When deciding I’m looking at 90 properties and if there’s only 2 left then I won’t but if the week is 70% unsold then I probably will. If it’s off a £250 weekend I probably won’t, if it’s a £2,000 week and we can bank £1,700 then I probably will.
Balance of Risk
Above all it’s important to remember that the balance of risk between underpricing and overpricing is not equal- If you hold out for £2,000 a week and fail the loss is the whole amount, if you sell for £1,800 when you could have got £2,000 the loss is £200 so if you are not 90% sure of getting the higher price, statistically you will lose money by standing firm.