When you first setup your Airbnb listing, Airbnb offered you the option of setting your price to dynamically adjust to demand.
Airbnb introduced the Smart Pricing tool to help hosts overcome their pricing “blind spots”. Smart Pricing lets you set your prices to automatically go up or down to match demand in your market, but only within the price range you choose.
The Airbnb Smart Pricing tool uses a trove of data like local demand, your amenities, previous bookings, the number of people who view your listing, and how often you’d like to host, to recommend optimal nightly prices you’re able to charge for your place.
The easiest way to think about how the Smart Pricing tool (and Price Tips) works is to think about how hotels charge different prices for different nights…
- A hotel in Tokyo knows it can charge a lot more for a room during the Olympic Games being hosted in Japan than it can when the Olympic Games are finished
- A hotel knows it has a longer timeframe to gradually reduce the price of un-booked nights six months out from today’s date than it does one week out from today
- A hotel knows how booked out they and other hotels in the local area are, and the availability of alternative accommodation options that exist for guests looking for somewhere to stay
Smart Pricing and Price Tips work in the same way. Airbnb have far greater visibility than individual hosts over all the factors that indicate current levels of supply and demand, as well as the relationship of these variables to listings such as yours.
Airbnb do not release the specific algorithm they use to calculate their price tip recommendations. They have however released general information on some of the factors they will consider:
It takes all of these factors (and others) into consideration to then determine a nightly price that strikes the optimal balance between maximizing your number of bookings with charging an appropriate amount for each of those bookings.
In some instances, the pricing tool may recommend charging less than you may think you’re able to charge. It will do so based on how often you’ve told Airbnb you want to host (“as often as possible” vs. “part-time”) and then reducing your rates in a way that best achieves those goals.
In other instances, it may recommend charging higher prices for your Hawaiian beach-side villa during summer where demand is naturally going to be higher.
Either way, the Smart Pricing tool is not without its critics. Is it your best option for maximizing your Airbnb earning potential? Here’s the case both for and against…
The Case For…
Let’s assume that Airbnb, like all other businesses, is motivated by maximizing their profitability. Airbnb’s business model is premised on being brokers that facilitate short-term rentals and take a small cut from every reservation they facilitate.
The logic would be that the more reservations they facilitate, the more reservations they take a commission from. And similarly, the more you charge for each of those reservations, the greater the service fee they’re able to take from each of those reservations too.
Therefore, whether through maximizing bookings or your nightly rate – every time you make money as a host, so too will Airbnb.
Airbnb further claim that when a host selects a price that’s within 5% of their price tip recommendations, those hosts are nearly 4x more likely to get booked, in comparison to hosts whose prices are more than 5% off from Airbnb’s recommendations. They also claim that hosts that have followed their pricing recommendations have lifted their earnings by an average of 13%.
The Case Against…
Guest Discounts vs. Host Profitability
Some critics point out that this simple overview fails to recognize a small, but important distinction: The difference in service fees that Airbnb take from hosts versus guests.
Airbnb aim to keep two distinct user groups happy:
These two objectives are in direct competition with one another.
Airbnb charge a flat service fee of 3% from hosts for all reservations, irrespective of size or duration. In contrast, service fees for guests range between 6-12%.
From a purely financial perspective (3% host service fees vs. 6-12% guest service fees), there is more for Airbnb to gain by recommending lower prices that keep guests happy (and booking more frequently on Airbnb).
Keeping guests “happy” (with lower prices) inevitably comes at the expense of hosts’ abilities to charge more for their places, since it requires more reservations at lower prices (rather than less reservations at higher prices).
This dynamic is supported by anecdotal evidence from seasoned Airbnb hosts who’ve observed that the prices they’re able to command from their listings are above the prices that Airbnb recommend they charge when using the Smart Pricing tool.
Tips Lack Specificity to your Listing
Lacking in Seasonal Variability
Activating Smart Pricing
If you wish to activate Smart Pricing and didn’t already do so when creating your Airbnb listing, you’re still able to do so at any time after your listing has gone live:
- Login to Airbnb
- In Hosting mode, select Listings from the top navigation bar
- Select Manage listing for your listing
- Click on Pricing from the menu at the top
- Click the Edit button for the Nightly price section
- Turn Smart Pricingto “On”
- Enter your Minimum price and Maximum price into the input boxes
- Specify how often you wish to host by choosing either As often as possible or Part-time under the How often do you want to host? section
- Click the Save button
You’re similarly able to deactivate Smart Pricing any time after creating your listing too, by turning Smart Pricing to “Off” (replacing Step 6).
Airbnb use a color code for their price tips. This is helpful when looking at your calendar to get a high-level “feel” for how accurately you’re pricing compared to what Airbnb suggest you should be pricing at:
In the example below, you can see that for the month of September, Airbnb’s price tips indicate that for the available dates, the prices that have been manually set are, according to Airbnb, less or least likely to get booked…
When you select a date range (i.e. more than just a single night) on your calendar, Airbnb also provide a View price tips option that enables you to see what prices it would recommend instead:
Once the price tips have been displayed, Airbnb also provide a button to save Airbnb’s proposed recommendations should you wish.