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Creating my new Prices

I cannot hope to Double My Rental Income unless my prices are perfect. But how can I create perfect pricing? How do I start?

Perfect Rental Pricing begins with research. I need to start with an new pricing ‘model’ and test to see if its realistic, if its competitive, if it will work. But I need to set model prices that I know will bring me the rewards I seek. It’s no good testing a model that won’t generate the revenue I want. So first of all I needed to do some simple maths.

I looked again at the spreadsheet of our previous years of rental income. I added up the total revenue we had generated in each month and from this I was able to see what percentage of the total revenue had been created in each month. It showed that 39% of all income came in August and a correspondingly smaller amount from each of the other months, and nothing in February.

I realised that I could use this percentage spread of revenue across the months to make another simple calculation. For if 39% of our income comes from August, and I know that I want to Double my Rental Income to 36,000 – then it follows that my target for August is 36,000 x 39% = 14,040. And using the same calculation I could generate a target revenue for each of the other months too. And these monthly targets will all add up to my 36,000 goal.

14,040 in August … wow that’s a lot. That’s more than we earned in the whole year of 2013! Immediately it looked too much, but I carried on with the calculations to see where it would lead me.

Next I looked at the ‘utilisation’ of our two houses; how many weeks in each month they were rented out. Of course our target is to have them rented out continually. That would be a utilisation figure of 8 (4 weeks x 2 houses)  but we’ve only ever achieved that in August. Across the rest of the year our utilisation is very variable. But if I am to Double my Income I figured that the minimum utilisation figure I should accept, and plan for, in any month is at the maximum utilisation we have ever achieved in that  month. For example: in 2008 we rented out 4 weeks in May – we have never done it since – but 4 is now our minimum utilisation target for May. Using this method I created minimum utilisation targets for each month – these tell me how many weeks rental I need to sell in each month.

So now I have a target rental income from each month, and how many weeks rental I should sell in that month. So by dividing one by the other I could create a rental rate. For example: My target income for August is 14,040, and my target utilisation for this peak month is a maximum 8. So my rental rate for those weeks would need to be 14,040/8= 1,755 per house, per week.

Ouch! 1,755 per week. Now I am sure we are underpriced at todays price of 1,100 but that’s a massive price rise… and really looks to be too high.

Unperturbed and still wanting to find my new pricing model, I carried on this same calculation for all of the other months. I discover that my simple mathematical model was probably too simple. Not only was it showing massive price rises in peak season but also huge price cuts in the off season. I feel that this is wrong. I know that the off season is vital to my success, but I don’t think success is reliant on huge rate cuts. In fact I decided to set the off season minimum weekly rental rate slightly above where it is today.

By increasing rates in the off season (slightly), and meeting the utilisation targets I found that I could re-balance the revenue plan across the year. This reduce my reliance on August, and therefore reduced that 1,755 price so below 1,500 per house per week. Now that’s still a big increase, but not so big.

And so now I have a model and monthly revenue targets, weekly rates and utilisation targets to test. Do these make sense, can I make them work? Are we competitive? Can we deliver great value to our guests at these rates?

Its time for more research ….

 

 


Video Transcript for those with text readers.

Welcome to my challenge to Double the  Rental Income from my holiday homes  Hi, I’m Martin Finn and welcome again to Double my  Rental Income. In the last episode I  was talking about research and I am carrying this research but  this time I’m going to be looking at my  pricing model, because unless I get  pricing right I no chance of Doubling  my Rental Income.  So I’m still in research mode  it’s important to make sure that the  research is just right so that the  next stages are also right.  Our rental pricing model where we  started from? Here’s our rental rates  for 2015. What I I know about these is that I cannot  achieve my goal of Doubling my rental  Income unless I change my rental rates.  I know that that’s true because  I’m already getting full  occupancy in my peak month, and that month is really important in  terms of the total amount of revenue I  get. And therefore I cannot possibly  double my unless I raise prices.  But does it  mean I just double my prices across the  board? I hope not, because I don’t think that’s sustainable. So what do we need to do?  I decided to start by creating a pricing model;  a  mathematical model which would generate  the double income I want –  something I  could test to see is it real. Is it  really practical?  I started with our cumulative rental income by month. You’ll see that August is ginormous it’s the biggest  We’ve been renting out for  number of years, I can do this  calculation and see that 39 percent  of all of our income comes in one month  can say I take my total target, what I’m  trying to do (double income)  and multiply by that percentage I’ll get the target for August.  So this year 2015, where’re  gonna do rather better than I expected.  I thought we generate 15,000 euros, but infact it will be 18,000  So to Double my Income my target becomes 36,000  euros multiplied by 39 percent – for August. And then gives  me an August revenue target 14,040  Wow! I know that’s more  than we generated in the entire year of 2013  Proving whether we can do this is gonna  be quite hard. But anyway carry  on the maths and see where it takes us. The  next thing to look at utilisation.  We have two houses. So how many weeks rental can we get from two houses in any moth.  Well clearly that’s a maximum of eight  weeks. And I’d expect to get 8  weeks in August. We really want to get  8 weeks in the shoulder months of  July June and maybe September. That would be  fantastic, but what it decided to do in  this model was just to pick the best  we’ve ever done in terms of utilisation  in any (month). So I chose  utilisation from the best  May, the best June etc.. So we have the number of  weeks sold, the best in any month. But  the best, needs to become the minimum  That has to be the absolute base  level I am targetting. When I put those two charts  together you’ll see that pretty similar  August peak. Thats when  I’m absolutely maxxed out and it’s my  premium rental rate. The reason its my  premium rate is because I know I’m  gonna to be maxxed out.  But I’m also draw to these areas. What this tells me is  that there’s a divergence between best  utilisation and rental revenue in these  periods; because actually  utilization  has bounced up and down in these months  The shoulder months are gonna be a tough  area to make sure that we always hit  that minimum level. They’re a key battleground I need to  win. I need to get rental revenue throughout the year. If I carry on the mobile and do the calculation  Monthly target divided by the minimum  utilization for that month I get, for  example, in August 14,040 (my revenue target) divided  by the eight weeks gives a weekly  rental right of 1,755.   Wow! now currently we’re at  1,100 euros and I think we we need to  increase our prices. But is 1,755  sustainable? It looks a bit high.   Anyway this is a simple model and I need to test.  So lets carry on the model. Here’s what  that simple model generates.  here the (weekly) rates created purely by maths.  You’ll see that spike in August  but you’ll also see that because we  never had any revenue in February this simple  model is saying that we should charge nothing  If I putting up current rental rates you’ll be draw to two areas. Here in our  peak season, where we’ve got this spike  suggesting  very substantial rate rises and also down here where in fact our  simple calculation shows that we should  be charging next to nothing … and that  doesn’t make sense. So I decided to  modify this  I put some modifications and set a minimum rental rate of  750 a week. That’s above on current  minimum rental rate but that’s what I need to sustain.  Because 750 is above the suggested rate it means I can re-balance the rates  and  it actually means  that I can bring down that top rate we  need to be charging in peak season maybe  to more manageable levels. That’s what I need  to test. So this becomes a new model.  And yet I saw that there was another  modification I needed to make.  You see the week of  Christmas is also a peak week for us and so this  becomes the new modified rental rate model. When I set this  against what we’re currently charging it  looks much more reasonable. OK we’ve still  got substantial hikes to make in peak season rates.   But I think I knew  that was going to be the case. So the pricing  model I’m gonna be testing further has  Min. utilisation at the best we’ve ever achieved. Can we do that? Minimum rental rate 750 in every  month. I need to test whether that’s possible. And most crucially can we increase our  peak season rate by  10% to 40%. This is a great deal of   research and I’m gonna be  testing this local this model.  This is what I test and tune to get to our Perfect Pricing  Something i should say before ending,  is that one thing I know about this yellow  line is that if I achieve those rates, and the utilisation too then I will Double my Rental Income.  Thank You  I hope you enjoyed this edition of Double my Rental Income and I really hope you’ll join me again.  Dont forget you can find out much more about  my challenge in how it’s progressing by  visiting the website www doublemyrental  income.com and you can sign up on  the website to to get the very latest  news and some extra special content  which I can’t make available elsewhere.  So please join me again and remember it  is has been valuable to you I’m giving  it to you for free but I do make a  request  share it with others let them know too. I  want as many people as possible to start  using some of the things that I have  spent so long to create.  Thank you.

 

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