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Bookings vs. Revenue: What Airbnb Hosts and Investors Need to Know
Any company, regardless of industry, should prioritize its financial health. How do you measure financial performance? We use various financial metrics, such as bookings and revenue. Best practices suggest analyzing these metrics together and in relation to one another.
Specifically, we'll explore how this applies to the vacation rental business and how real estate investors can interpret these metrics. Understanding the importance of an approach to bookings and revenue will give you a clearer picture of the future revenue growth of your business.
Bookings vs. Revenue in Measuring Business Performance
A company's financial health starts with the sales process. You want as many customers to commit to using your services or products.
What’s the Difference Between Revenue and Bookings?
Bookings represent the total contract value of signed contracts within a given period. They reflect customer commitments to use your products or services, typically after interacting with your sales team or seeing your marketing message. Customer contracts vary depending on the business.
Companies can categorize bookings by type, such as new bookings, renewal bookings (from existing customers), non-recurring bookings, or annual contract value.
Revenue is earned by delivering products or services—it's the actual money received from customers.
Annual recurring revenue is a key metric for subscription-based businesses such as SaaS companies, ARR represents predictable, recurring revenue from long-term contracts over a year. There's also a term called deferred revenue, also known as unearned revenue. This refers to payments received before a company has delivered its product or service.
How Does This Apply to the Short-term Rental Business?
In the vacation rental business, characterized by frequent guest turnover, we primarily focus on new bookings over a specific time frame. These are essentially reservations. Bookings are further defined by the booking window, which indicates how far in advance a reservation is made.
Some bookings are made months in advance, especially for longer trips, as customers tend to plan ahead. Conversely, your rental business might be dominated by last-minute bookings.
However, it's crucial to distinguish bookings from revenue—the actual payments received from guests who have completed their stay successfully and were not refunded.
When analyzing revenue, it’s important to consider two key time frames:
- Monthly Revenue
- Yearly revenue
Both figures are important because they reveal that revenue is often unevenly distributed throughout the year. Seasonality and other market factors influence booking patterns and revenue. Financial analysis must account for both booking and revenue figures year-round.
How Do Bookings Convert to Revenue?
In order for bookings to convert to revenue, the provider has to fulfill the service or deliver a product. If everything goes according to plan, bookings get to the end of the revenue cycle and are converted to revenue.
In short-term rentals, a booking represents a confirmed reservation, but the revenue isn’t recognized until the guest checks in and completes their stay.
Bookings and revenue are not necessarily the exact match. If a guest cancels before check-in or receives a refund, that booking won’t contribute to recognized revenue.
What Is the Booking to Revenue Ratio?
The booking-to-revenue ratio measures how much of a company's booked value actually converts into recognized revenue over a given period.
For subscription-based businesses, churn plays a significant role in determining how bookings convert into revenue. A customer may sign a contract (a new booking), but if they cancel before the service period starts or downgrade their plan, the expected revenue decreases.
In the hospitality business, cancellations are one of the most significant factors affecting revenue. A high booking value doesn’t necessarily translate to higher revenue if cancellations are frequent or if bookings are made far in advance.
Excessive cancellations reduce revenue figures, which is why platforms like Airbnb implement strict cancellation policies to minimize refunds and ensure more predictable earnings.
What is Recognized Revenue?
Revenue recognition is an accounting term referring to the final stage of the revenue recognition cycle, which involves recognizing revenue in financial statements.
The revenue recognition principle states that revenue is recorded in the income statement only when it is earned—meaning services have been provided or products delivered—not necessarily when cash is received. This principle is essential for regulatory compliance with accounting standards like GAAP or IFRS.
For a higher level of financial transparency, we can also examine cash flow—the actual movement of money into and out of the business account. Cash flow tracks real cash transactions, including customer payments and business expenses.
While bookings are a forward-looking metric that helps predict future revenue, revenue itself reflects past performance—showing what has already been earned.
Why Bookings and Revenue Matter for Airbnb Hosts and Investors
Bookings, billings, and revenue metrics matter for any company's financial performance, but let's explain why they matter for the Airbnb and short-term rental business.
Determining Best Pricing Strategies
Determining the best pricing strategy usually takes time and research. It depends on external factors, market demand, seasonality, and competitor rates. Additionally, amenities, property type, and level of exclusivity influence nightly rates.
The bookings-to-revenue ratio can indicate whether you're underpricing or overpricing your property. If bookings are high but revenue remains low compared to competitors, you might be underpricing and leaving money on the table. On the other hand, if bookings are sparse despite strong market demand, your pricing may be too high, discouraging potential guests.
A dynamic pricing strategy is based on the bookings-to-revenue ratio. It involves adjusting pricing at different times to balance these two metrics for the best possible results.
Revenue Forecasting
Financial reporting helps Airbnb hosts analyze booking patterns and plan ahead. Once you determine the best pricing strategy based on historical trends, you can more accurately predict future revenue.
The goal of a business is to create a predictable revenue system, so write down these metrics to see how far you are from your target. If the numbers don’t look promising, you can assess whether investing in upgrades or adding amenities makes sense to increase income.
Understanding Factors That Affect Revenue
Consider the number of bookings, but factor in the percentage of cancellations. Having a portion of cancellations is normal unless you insist on applying a strict cancellation policy to prevent guests from asking for a refund. But be careful: this could also deter many guests who want flexibility.
Airbnb's ranking algorithm affects your property's visibility. Factors like response time to guest inquiries, guest reviews, listing engagement, and dynamic pricing can push your property higher in search results, and lead to more reservations.
Occupancy Rates vs. Actual Revenue
For vacation rentals, the value of bookings must be considered in relation to occupancy rates. You can make the same revenue with a 50% or 90% occupancy rate, depending on your prices.
Naturally, a higher occupancy rate is better—unless you're filling vacancies by undercharging. There's actually a metric that shows exactly this: RevPAN (Revenue Per Available Night). Its total revenue is divided by the number of available nights. This accounts for both booked and unbooked nights.
Long-term Investment Decisions
Investing in a new property requires conducting a break-even analysis to determine how long it will take to recover the initial investment and achieve profitability. In this scenario, revenue projections are based on historical data from the area and a comparison of key metrics from similar properties.
Every investor needs to know if location and market demand can support the profitability of their venture, after all costs are subtracted.
Common Mistakes in Tracking Bookings and Revenue
Now, let's understand the typical mistakes made when tracking and analyzing these financial metrics.
Not Analyzing the Data
You can't make better business decisions if you don't read the financial data you have. The purpose of tracking these metrics is ultimately to locate the bottleneck if there is any. Data analysis provides valuable insights that can transform your business strategy and increase profitability. Have regular reviews of your financial metrics.
For example, if you don't have enough bookings, that means that either the demand is low or your messaging doesn't inspire prospects to take the next step. If there are substantial bookings but not enough revenue, it is time to understand where customers fall off or if the pricing is set right. Identifying these specific pain points allows you to address the core issues affecting your bottom line.
Using Only Bookings as a Success Metric
Getting booked is an indicator of a strong market demand, but is it an indicator of a successful business?
The company should also analyze how these bookings convert to revenue. In the short-term rental business, the metric that interests us the most is revenue per available night (RevPAR). It combines revenue and occupancy rate to show whether you're making the most of your property's potential.
Then, you can check related metrics such as average daily rate. ADR is a key performance indicator calculated by dividing the total revenue earned from bookings by the number of units sold during a specific period. This metric is crucial for property owners and managers as it directly reflects pricing efficiency and revenue generation capabilities.
And let's not forget the average occupancy rate. This metric represents the percentage of available rental units or rooms occupied during a specific time period. If it dips below 50%, it may be a signal to reevaluate your business strategy.
Confusing Gross vs. Net Revenue
Gross revenue represents total income before deductions, while net income reflects the actual profit after all deductions. If you're not accounting for platform fees, taxes, or refunds, you lack a clear financial picture.
Common deductions for Airbnb hosts include:
- Platform fees
- Taxes and licenses
- Cleaning and maintenance costs
- Utilities and operational expenses
- Refunds and chargebacks
- Marketing and advertising costs
- Debt repayments and interest
Platform fees are charged for being listed on a booking platform. All booking websites, from Airbnb to Vrbo, have some kind of fee structure. For example, Airbnb charges hosts 3% of their income if hosts split the fee with guests or 14–16% under the host-only fee model.
In addition to taxable income, some regions require business licenses or permits, which come with annual fees. For instance, in Denver, U.S., hosts must obtain a short-term rental license for all primary residences listed on platforms like Airbnb. The application fee is $50, and renewals cost $100 annually.
Many property owners hire cleaning teams to handle guest turnover. Although Airbnb allows hosts to charge a cleaning fee, this expense will still appear in your books. The same applies to costs related to regular maintenance and repairs.
A portion of revenue often goes to utilities such as water, gas, electricity, and other operational expenses. On the bright side, many of these expenses are deductible under IRS rules, allowing you to recoup part of your revenue.
Other expenses may arise, such as guest refunds, which is why the booking value doesn’t correspond directly to revenue. Additionally, marketing costs to attract guests and mortgage payments can take up a significant portion of your revenue.
Not Factoring in Seasonal Pricing Changes and Discounts
During the slow season, not only do you see a dip in bookings, but it becomes challenging to charge premium prices. Airbnb hosts should consider offering length-of-stay discounts as a strategy to promote their listings and recuperate some of the lost revenue.
Additionally, adjusting nightly rates to reflect seasonal trends can help maintain competitiveness and attract more bookings. Proactively monitoring your competition's pricing will also provide insights into setting optimal rates during slower months.
Analyzing monthly revenue figures and booking trends is as important as tracking overall revenue and overall bookings. This approach allows hosts to identify booking patterns and prepare for future seasons.
Takeaway
If there’s one important takeaway from this article, it’s this: analyze the financial performance of your business on a regular basis. Evaluate bookings and revenue as two distinct metrics. Bookings are excellent for predicting future revenue and market demand, while revenue focuses exclusively on your past performance.
iGMS is a property management software for Airbnb hosts and investors. This software helps Airbnb hosts track their finances by organizing income, expenses, and fees in one place.
It creates easy-to-read reports, and shows useful insights like earnings per booking and occupancy trends. With everything in one dashboard, you will confidently track where your money is going.
