Updated on September 19, 2017
AirBnB Pricing Guide for AirBnB Hosts
Getting the AirBnB pricing right for your AirBnB listing can be the difference between a profitable AirBnB business and a waste of time and effort. Truly understanding the costs associated with hosting, the time it takes to run the business, and earning a respectable return on investment are key elements in pricing your AirBnB listing. Here is my AirBnB pricing guide for AirBnB Hosts.
Before I got into the math of AirBnB pricing with an example AirBnB listing, let’s take a deeper look at the cost structure of your AirBnB business.
AirBnB Hosting Cost Structure
- Capital Expenditures – The capital expenditures for your AirBnB listing are the physical items that are purchased with the intent of long term use. When tabulating your AirBnB capital expenditures (or Capex), add up the items such as bed frames, mattresses, sheets, towels, desks, chairs, lamps, LED light bulbs, and other items you have purchased for your AirBnB listing.
- Operating Expenses – Your AirBnB operating expenses are the costs associated with maintaining and running your AirBnB. I have a detailed write up on AirBnB operating expenses here. In summary, this will include utilities such as electricity, water, gas, cable, and internet. It will also include consumables such as toilet paper, trash bags, and cleaning products. I also put home maintenance expenses into this category. If you offer breakfast, add that here as well.
- Time – While your time is not a direct monetary cost, it does have monetary value. As an AirBnB host, you need to be aware of the time you spend working on your AirBnB business. For the purpose of this exercise, the time it takes to clean will be assumed to be accounted for in your AirBnB cleaning fee. The time we are talking about in this example is the time associated with responding to AirBnB inquiries, greeting your guests, and other non-cleaning hosting activities. We will associate a dollar value to time in the example case.
Now that we understand the AirBnB hosting costs, it’s time to tally them up and set the price for our AirBnB listing.
AirBnB Pricing Guide for AirBnB Hosts
For the purpose of this exercise, I will give example costs for capital expenditures, operating costs, and time associated with listing a spare guest room on AirBnB. Please adjust these to the best of your knowledge to get a more refined number for your specific AirBnB listing.
- Capital Expenditures – Let’s assume that the all included costs of purchasing the items listed above is $1,500. Adding up the costs of these items is fairly simple, but how do I relate that to a daily cost? To do this, I make the assumption that each item has a usable life of 200 days. Some items will potentially have a shorter life, and some will last longer. Others may require a few dollars here and there to maintain. This 200 day assumption is very conservative based on my years of hosting experience, but I prefer to lean on the side of caution when it comes to organizing the financial expectations for my AirBnB business. The 200 day assumption means that 0.5% of your capital expenditure cost is your prorated daily costs. For a capex of $1,500, the prorated daily cost is $7.50.
- Operating expenses – I have a full detailed post on operating expenses (opex) that you should definitely read. In summary, I will use $4/day for utilities, $4/day for consumables, and $5/day for home maintenance. For this example, we will be offering breakfast as well for ~$5/day. Our total operating expenses (opex) are $18/day.
- Time – For an experienced AirBnB host who has perfected his or her hosting process, the time commitment should be pretty easy to pinpoint. Remember, for this example, we are assuming that you as the AirBnB host have set a cleaning fee and the time associated with cleaning is accounted for in that fee. All other time requirements for the job would fall into this category. For the purpose of this, we will assume that you spend 2 hours per stay and each stay is 2 days long. Therefore, we will assume 1 hour per day. Now what is the value of our time? That’s really up to you. I’m going to assume my time is worth $15/hour as an AirBnB host. The cost of our hosting time is $15/day.
AirBnB pricing is not so hard, right?
Now before we start pricing our listing, we need to determine what our Return on Investment (or ROI) should be. Since we have outlayed capital for the operation of our business, there needs to be an appropriate return on that capital invested. Should you simply add up our prorated capex, operating expenses (opex), and cost of time, you’d be using an return on investment of 0%. Essentially, you are saying that your dollars spent are not gaining you any return. You are risking money for no return. This is not a very good business model.
So, let’s pick an ROI.
What is a good ROI?
Your AirBnB pricing would ideally have an ROI above the “risk free rate.” The risk free rate is an assumed rate of return that can be achieved with no risk and is usually correlated to United States bonds. Often times this is reported at +/- 3%. So, why would you risk your capital to return 3% when you can do that for free? You definitely need to plan for an ROI greater than 3%.
As a small business, you are taking substantial risk. Many times greater than 3% in my opinion. There’s no need to spend large amounts of timeo picking an ROI to shoot for, but 30% is a good place to start. We will apply this 30% ROI to your Capex and operating expenses.
Here’s the formula we will use to calculate a listing price.
(Prorated Daily Capex + Daily Opex) x (1 + ROI) + Value of Time Spent = Minimum Listing Price
For our example, the math looks like this.
($7.50 + $18) x (1 + 0.30) + $15 = $48.15
What this means is that to achieve an ROI of 30% and a value of your efforts at $15/hour, you need to price your listing at $48.15/night.
In actuality, AirBnB takes 3% off of your listed price as a fee. So divide $48.15/(1-0.03) and you get $49.64. Since you can’t price your AirBnB listing to the penny, let’s round up to $50/night.
For our example, you should price your AirBnB listing at $50/night.
There’s a bit more than goes into pricing your listing such as looking at the competition around you, seasonal pricing, and event pricing. We will touch on those at a later date. In today’s exercise, we have calculated a minimum listing price to achieve ROI and an hourly rate of your time. Please adjust these numbers to fit your AirBnB listing!
More of the best AirBnB hosting tips to come!