Setting prices is inevitable in business. If you’re opening a new hotel or re-evaluating your pricing structure, the amount you charge matters.
Charge too much and your customers go elsewhere, charge too little and you’re walking away from huge profit potential.
The right pricing is so imperative, it really is the difference between success and failure. Fortunately there are three fundamental pricing strategies you can learn to hone the best approach for your business. These are:
- Cost-based
- Customer-based
- Competitor-based
After reading this ebook you’ll understand what each strategy involves, the advantages and disadvantages and how you can apply them to your business today.
The best part — you’ll go away ready to select the best strategy for your business so you can attract more customers and gain the lead on your competition.
So let’s jump in…
Cost-based pricing
This pricing strategy offers the simplest approach. For your business to be successful you need to not only cover your costs, but make a profit in the process.
To do this, you start by adding up all the costs of running your hotel. For example — admin, cleaning, maintenance, security, wages, advertising, telephone, land/building taxes etc. Then depending on the profits you want to make, you add a markup on each room to take you to that goal.
How to calculate your cost-based pricing
The approach is simple, but the list for calculating your costs can be extensive. You need to take into account your fixed and variable costs, and the direct and indirect costs of running your hotel.
Let’s look at a hypothetical example:
To simplify, let’s explore just a few example costs of running a hotel. You’ll need to calculate every identifiable cost to make this work, but hopefully this will give you the underlying principles of how to apply it.
Your fixed costs are expenses that don’t change. They don’t depend on how many guests stay at your hotel or the number of rooms you rent. These could include:
- Mortgage payments
- Taxes
- Wages
- Insurance
- Utilities
- Telephone bills
- Web hosting bills
Variable costs are expenses that can change depending on the revenue you earn. Generally, the more guests you have the higher your variable costs will be. These could include:
- Food and beverages
- Cleaning
- Entertainment
- Sales and marketing
- Room amenities — soap, shampoo etc
- Flowers and decorations
- Printing supplies
If your fixed costs including mortgage, taxes, insurance etc amount to £5,000 a month, and your variables are £50 per guest, you know you need to make at least £5,050 to cover your costs every month.
The profit you want to add on top will take you to your overall amount for the month. You then divide this figure by the number of guests or rooms you can rent and price accordingly.
Pros and cons of cost-based pricing
Pros:
- A logical approach to pricing
- A simple and understandable way to price your rooms
- Flexible — if your costs increase, it’s easy to adjust your pricing
- You know you’re covering costs and making a profit every time
Cons:
- Less competitive — can be easily undercut by your competition
- Not based on perceived value where guests would be prepared to pay more
- Ignores how competitors price their rooms
- Ignores consumer demand and the impact price may have on demand
Customer-based pricing
The customer-based strategy is about pricing your rooms according to perceived value. As you can see, the beauty of cost-based pricing shows it’s easy to understand and relatively simple to implement.
But what if the demand for your hotel is so high, your customers would in fact be willing to pay more?
When the customer truly desires what you offer, they don’t care about your underlying costs. They care more about the value and benefit you can bring to their lives.
How to calculate your customer-based pricing
So how do you recognise and calculate that perceived value? Let’s look at another example:
Customers perceive value through the connection they feel to your business along with social proof. When potential customers see raving reviews, enticing pictures of your hotel and the desirable experience you offer, they conclude if your price is a good deal.
In this case, the cost to you is irrelevant.
For instance, if you charge £200 a room, but the customer pictures the wonderful memories they’ll make and the chance to unwind in luxury, they see your price as worth the money.
It doesn’t matter if the cost to you is £50 or £150. All that matters is if the demand for your hotel exists and if your customers are happy to pay according to that perceived value.
Pros and cons of customer-based pricing
Pros:
- Allows you to make much higher profits above the costs to your hotel
- You can optimise both profit and customer satisfaction
- Increase your prices according to demand
- With research, you can predict what a customer would be willing to pay
Cons:
- Could put off customers who compare your prices to a competitor offering the same at a lower price
- Could steer away customers who feel your price is too high against what it costs to run your hotel
- If demand is low your profits decrease
- Does not evaluate what is needed to cover your costs, which may mean you lose money if demand is low
Competitor-based pricing
Both cost-based and customer-based pricing are valid strategies to consider. However, you’re not the only hotel in business so it pays to evaluate what other hotels are doing.
Competitor-based pricing means you should conduct a complete assessment of your competitors’ pricing strategy. Consider the rates they apply for every room type, the different amenities, their refundable and non-refundable terms etc.
Only when considering all variables will you have a clear picture of what to charge.
How to calculate your competitor-based pricing
To calculate, you need comprehensive insights and data.
Firstly, directly compare what you and your competitors are offering. Look at their descriptions and images to ensure your comparisons are valid. If you offer luxury, there’s no use trying to compete on price with a hostel. You’re targeting two completely different customers.
Keep your price comparisons relevant.
Find the closely related hotels in your area and consider all their various rate structures.
What do they charge per room — single, double, executive etc?
Do they charge for wifi, telephone, breakfast, spa treatments, parking etc? If so, how much?
How do they adjust their rates for various lengths of stay at their hotel?
What’s their price difference when booking through a third party or direct?
To be successful at competitor-based pricing you need to have a deep understanding of the competition in your area and refine your pricing to deliver above your customers’ expectations.
Pros and cons of competitor-based pricing
Pros:
- Good for highly competitive markets such as the hotel industry
- Allows you to differentiate yourself from the competition
- Can draw customers to you based on how you position yourself
Cons:
- Can be forced into pricing wars that chip away at your profit margin
- Can be forced to lower your standards to compete in the marketplace
- May need to find new ways of attracting customers not purely based on price
Using combined pricing strategies
Setting your prices needn’t be black or white. You may find by using a combination of pricing strategies you’ll get a better result.
You may start with the cost-based method to ensure you’re always covering your costs, but mix a competitor pricing strategy so you can offer customers the best price.
You could then think about doing further research on your customers to understand the demand for hotels in your area. You may realise high demand warrants putting your prices up.
A number of factors will determine the right pricing strategy for you. Including the state of the industry, demand, the size of your business, your business plan, strategy and goals.
Evaluate your business as a whole and then determine the best strategy or combination of methods that work for you.
Conclusion
This blog post explored the three core pricing strategies as well as ways you can implement them today.
Pricing your rooms can be complicated and even disastrous if not done right. So it’s paramount you understand these strategies and your business before choosing the right method for you.
With these insights you should now be ready to assess, plan and execute the best strategy for your business.
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