Silicon Valley's second-highest-valued start-up — Airbnb — is rolling out dynamic pricing tips known as smart pricing for all hosts on its platform this week. Hosts that enable the system boost revenue by 13 percent on average, according to Joe Zadeh, vice president of product at Airbnb.
"That is one of the great things about our marketplace and our business model," said Zadeh. "Our business scales with them."
Airbnb takes a percentage of all transactions, so the company expects revenue to rise with wider adoption of the program. Airbnb collects 3 percent from hosts and 6 to 12 percent from guests.
Smart pricing offers recommendations to hosts based on supply and demand, the amenities on offer and comparative listings and reviews. The company makes the suggestions based on data it gathers from more than 2 million listings on the platform. Hosts set a minimum and maximum rate, and Airbnb makes suggestions within that range.
"Everything on our platform is incredibly unique," said Zadeh. "That provides an interesting challenge to our hosts — there's no standard way to price."
For example, Airbnb may suggest a different rate if there is an event taking place in a certain area, but it might not be as much as hosts expect. Big events, like the Super Bowl in San Francisco or the papal visit to Philadelphia, often drive sign-ups, but hosts sometimes over-price their listing.
"What people sometimes do not realize is that just because there is a big event happening does not mean you should do the equivalent of surge pricing," said Zadeh.
Other data fed into the smart pricing algorithm are specific amenities on offer. For example, a hair dryer adds around $10 per night, a hot tub is worth around $26 extra per night, Wi-Fi brings in an additional $8 and cable can earn an extra $16 per night.
Hosts with 10 or more reviews are 10 times more likely to get booked, said Zadeh.
"Reviews radically change how attractive your listing is," said Zadeh.
Leslie Brunker rents out a suite in her home, which is 10 minutes from downtown Portland, Oregon. Brunker enabled smart pricing and discovered she had not been adjusting her rates enough to account for seasonal fluctuations in demand.
"There is certainly more travel to Portland in the late spring and summertime than in the winter," she said. "They are suggesting slightly lower than I had it in the winter time, but they also have it higher than I have it in the summer."
It is too early to know if these changes will boost her bookings, said Brunker. The new tool has saved her time researching appropriate pricing and provides a fairer price for hosts and guests, she said.
"They know they are getting the fair price or the going rate. Maybe it gives them more confidence," she said.
In the past, smart pricing has only been available to new hosts at sign-up and to limited pilot test groups. The company has found that 80 percent of hosts who have enabled smart pricing kept it switched on. Also, though hosts can manually override suggested prices, they accepted the suggested price for 92 percent of their available nights when it came to listings with smart pricing enabled.
The next step is offering hosts coaching to improve how they present their listing, said Zadeh.
Airbnb was valued at $25.5 billion in June. As of March 31, Fidelity valued Contrafund's stake in Airbnb at $69.2 million, up 9 percent from February, according to a report from Reuters.
Uber, valued at $62.5 billion in January, is the only Silicon Valley start-up that is more highly valued than Airbnb.