Note: Lessons from The Overlook is a monthly update on lessons learned from owning a vacation rental property in the Southern California mountain town of Idyllwild. It's a hands-on opportunity to apply some of the techniques I advise my clients to use. You can find past updates here.

Pricing strategy can be tricky.

One thought is customers naturally want to pay as little as possible. So you can bring in more customers if you cut your prices. That's what Amazon is betting on by dramatically cutting prices at newly acquired Whole Foods. The challenge is lower prices equal lower profit margins, so you'll need to sell a lot more to make more money.

Another approach is to charge a premium. This way you can sell to fewer customers and still make money. Of course, you want to avoid raising prices so high that nobody will pay them.

My wife, Sally, and I decided on a third pricing strategy. We wanted The Overlook to be an excellent value for the customer we wanted while appearing too pricey for customers we didn't want.

Here's what we did and how you can do it, too.

Define Your Target Customer

One thing you'll notice about The Overlook is each room has just one bed.

There are no side-by-side twin beds. No bunk beds. The sofa isn't a pullout sleeper. We have four bedrooms and four beds (two king, two queen). Our advertised guest limit is eight.

This is very intentional.

We want a certain customer who will enjoy the peacefulness of our cabin. It's often extended families (mom and dad, the kids, plus grandparents), a couples weekend, or two families meeting in the mountains. Our guests enjoy the cabin's amenities plus a little elbowroom.

There's also a customer we don't want—the bargain hunter who is looking to cram as many people as possible into a cabin to maximize the cost per person. 

Those guests create extra wear and tear without any extra revenue. More things go missing and more damage occurs. We've had a couple of renters sneak in more than eight guests and the cleaning alone was always a challenge after these guests had gone.

Other cabins in Idyllwild pack 'em in. Guests sleep on bunk beds, in lofts, or air mattresses in the living room. These cabins typically offer fewer amenities. We think the bargain hunters are willing to make that trade-off and will stay in those places instead of ours.

A good pricing strategy starts with your target customer. What are the characteristics of the customer you want and can you serve them profitably?

Competitive Analysis

Serving customers profitably brings us to the next step: conducting a competitive analysis of your pricing.

This means comparing your prices to what your competitors are charging. We started with the other cabins managed by our property manager that slept six or more guests with three or more bedrooms.

The Overlook was the least expensive of the four-bedroom cabins. While our cabin also sleeps fewer people than the other four-bedroom options, it also has more amenities.

For example, our cabin is the only one with a view. And only one other four bedroom cabin has a spa. Our research shows that our guests want a spa, good views, a nice fireplace, and it should be pet-friendly. The Overlook checks all four boxes.

Here's how our pricing looks compared to just those cabins with the same amenities:

Not as many options! And the lower-priced cabin is much smaller and is really only comfortable for two couples. 

We also compared The Overlook to cabins in the area that weren't managed by our property manager. There were plenty of lower-priced options, but The Overlook was on the low-end of the scale when you just compared cabins with similar amenities.

And our price includes the cleaning fee, which can be $100 or more at other vacation rentals.

Our Pricing Decision

We ultimately decided to raise our nightly rate to $325 for the first two nights, $275 for each additional night.

Here was our new positioning when compared to our property manager's other cabins:

We wanted to price on the higher end of the market to deter bargain-hunters who were not our ideal customer, while remaining an exceptional value for the customers we were trying to attract.

The results have been good so far. Our guests have been very pleased with the cabin and the amenities. They've consistently commented on enjoying a peaceful and relaxing stay.

Best of all, revenue is up 5 percent over last year and none of our guests have trashed the place.