Setting prices- A combination of Science and Dark Art!

By Simon Tolson on 14th Nov 2018
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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 so 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.

 

Price 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. This can lead to an interesting discussion with an owner who may say they need higher prices as they have a mortgage to pay.  The response, of course, is that if we thought we could get a higher price we would charge it. If we have two identical homes we charge the same for them regardless of whether one is mortgage free and the other has 80% finance.

 

Owner requirements

 

Not everybody wants the same thing from their cottage so there are occasions where similar cottages 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 cottage but will take the money if say it was enough for a skiing holiday at Christmas.

 

Cheap weeks

 

The average holiday cottage 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 £100 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 at Christmas.

 

Small differentials

 

You would think that a few tens of pounds either way wouldn’t make a difference if you like a cottage 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- you would think if you want a Twix you’d buy one (I don’t even know what they cost) but it’s extremely price sensitive 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.

 

Adaptive Discounting

 

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 £900 week empty with 48 hours to go and someone offers £800 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 150 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.  You can trust me…..I’m a salesman!