Pricing for Profit
Getting pricing right for your customer and for you.
Before you decide on any pricing strategy, you need to understand your competitive environment. Do you have many competitors or few? What is their pricing strategy and where do you feel your customers believe you fit. So for example:
- Skim: set your prices higher than your competitor so you can ‘skim off’ the higher paying customers eg Competition £79.00 / Your Hotel £89.00
- Match: Set your rate to match the competition eg Competition £79.00 / Your Hotel £79.00
- Surround : Set one price cheaper and one price higher eg Competition £79.00 / Your Hotel £69.00 & £89.00 (eg. standard and superior rooms)
- Undercut: Set your price lower eg Competition £79.00 / Your Hotel £69.00
- Penetrate: Set rates substantially lower in the hope of attracting new customers to try your product eg Competition £79.00 / Your Hotel £59.00
The considerations here of course are ‘perception’. If you set your rates too low, then the customer perception of your product will be low and increasing your rates in the future may be difficult. However, if you price too high then you risk pricing yourself out of the market and your customers choosing one of your competitors or worse, your customers may arrive and feel disappointed as your product has not lived up to their expectations.
Once you understand your competitive environment, understanding your operational costs will be critical to your success. In effect, you need to understand not only what you feel you can charge, but how much each room is costing to deliver, so that profitability can be ascertained
There are 3 elements to consider:
- Fixed Costs
- Variable Costs
Fixed Costs: will include loans, rent, insurance, rates etc. It is also recommended that ‘fixed’ staff salaries are also included; so for example, your GM or Reception or any full-time, contracted staff. Basically you should include all charges that need to be paid, no matter if your property has rooms sold or not.
Variable Costs: will include linen, cleaning, electricity, maintenance, stationary, marketing (perhaps attending roadshows or events), sales costs; online marketing fees such as Pay Per Click or Facebook promotions, along with variable wages costs such as house-keeping staff.
Commissions: bringing business to our properties always incurs a cost and the largest impact to our bottom line is usually commission cheques from Online Travel Agents (OTA’s) such as Booking.com or Expedia. However, don’t forget to factor in the cost of running your own brand booking engine.
There is an argument that Fixed Costs should not be included when trying to ascertain your cost of sale as these costs need to be paid no matter what, but that will be a decision for individual properties to make.
The attached template may help: Download Room Cost Breakdown Template.
This template shows the main costs associated with a property which equates their cost of sale to be £37.57.
By understanding this net/net cost, a property understands what the absolute minimum price they can accept to ensure they cover costs.
However, there are two costs not shown on this template. The first (as it can only be shown once a selling rate has been agreed) is VAT. Don’t forget to include 20% VAT and deduct that from your selling rate. The second is a cost that you should assign to your chef to cover the cost of breakfast.
- Nett/Nett = your nett operating cost
- Nett = your operating cost + profit margin ie your minimum selling
- BAR = Best Available Rate
- Rack = Your highest published rate
A Flexible Selling Strategy
Often hotels and guesthouses operate within a very flat rate strategy which in its most basic form can look like selling high rates in the Summer and low rates in the Winter. Whilst this may work perfectly for seasonal properties such as B&B’s or Self-Catering, it can be limiting to hotels or slightly larger properties.
As an example, if you publicise High rates in the Summer but have a quiet day, you risk your customers not booking as they feel the price may be too high. The best solution is to always offer your guests the Best Available Rate (BAR) which may occasionally mean lower rates in the Summer and perhaps a High rate in the Winter, as you the property are controlling the rates, based on Supply & Demand.
In the above example, rates are set within 4 different Rate Bands. This example shows 4 bands but this could easily be just 3 or even up to 10 – depending on the complexity of your business.
Start by assessing your Nett (your operating cost + profit) which then equates to your Low Rate. This rate should only be used when you know that demand is low and that by charging lower rates, you could perhaps stimulate demand.
Then work out your Rack Rate, which is your Highest Rate. This rate should be used when you predict you are going to be busy and that there is a high demand for your product.
Then work out rate levels in between. In the above example, there are two interim rates. There may only be one rate in between or multiple. Make it as simple as possible by having set rate increments of say £10.00. These are the rate levels you should be most comfortable with as these are the rates you will sell most often.
If you work this out for your Standard Room, then you can add supplements for your higher graded rooms such as Executive or Superior.
This rate strategy will then give you the flexibility to price as your business demands and does not limit you to selling on a traditional flat rate policy.
Once you decide on your rate levels then look at the next year ahead. Understand which dates will be busy for you: perhaps Easter, mid-term break or perhaps there an event happening in your area. Increase your rates to reflect this higher demand. Then review dates when you know you are always quieter – January for example or Sundays during the Winter. Make sure your rates are sitting lower to ensure that you aren’t discouraging bookings with high rates.
Even if you don’t feel your business would suit a flexible rate strategy as above and you prefer to work on seasonal rates, then at the very least, identify dates of very high demand or very low demand and flex your rates accordingly.
And so to packages…
Before you even consider putting a package together, ask yourself this… ‘when guests come to your hotel, what do they actually do?’ Are you catering for the younger market that perhaps like to cycle? Hike? Go Clubbing? Or perhaps your market like the theatre? Shopping? Fine dining? Don’t fall into the trap of trying to be all things to all people. Know your market and then tailor-make the packages to suit.
Remember that packages should always be ‘opaque’ pricing, in that customers shouldn’t be able to work out individual costs. You may include dinner, wine, bike hire or theatre tickets but work out what each individual component costs. You may need to reduce the cost you would normally accept for a bedroom to make the package more attractive but work out what you feel the selling rate should be, then deduct ALL costs to make sure you are profitable.
Conditions of sale
Now that you understand how to price depending on a) your market and competitive set b) your customers price points c) supply and demand and d) your customers buying behavior ie packages – always ensure that you have clear ‘conditions of sale’:
- Establish a cancellation policy which is easy to adhere to and isn’t too restrictive for your customers. Tip: Never have more restrictive policies on your own brand website than you do with the Third Parties such as Booking.com – that is asking for trouble!
- Ensure that you supplements are easily understood for both your team and your customers eg: children under 2 are free / supplement for an extra bed is £20.00 etc
- Make sure that any conditions of sale are openly communicated on your website, booking engine or booking confirmations – that will take away any cause for confusion and make your whole sale process clear and fair.