7. Pricing for Profitability

There are a number of factors which will affect the final selling price of your tourism product and also the rate that you sell it to who:

• How much are people willing to pay for your product?
• How much do your competitors charge?
• How much does your product or service cost you to deliver (operating costs)?
• How much do you need to pay others who are selling on your behalf (commissions)?
• How much profit do you want to make?
• How will seasonality affect your pricing structure?
• How could you add value to your product without affecting your profit?

The golden rule to pricing is to make sure that people want to buy your product and that distributors want to sell it. It is essential that you strike the right pricing balance.

You need to understand all of the different elements that make up your final price. You also need to be consistent with what price you are offering and to who when bookings are made.

Your customers should be able to buy your product at the same price regardless of where they book.

Net Price = Operating Costs + Your Profit Margin

The net price is the absolute minimum that you can sell your product for and still make a profit.

Rack Rate = Net Price + Distribution (Commission Costs)

The Rack Rate is the rate that your customers pay, and this must be consistent across all the distribution networks.

Operating Costs

Understanding your operational costs will be critical to your success. Having a firm handle on your operational costs, and how they may change over time will allow you to develop an effective pricing policy and most importantly ensure your future profitability.

There are 2 elements to consider:

Fixed Costs: will include rent, rates, machinery, equipment, insurance, business loans etc. It is also recommended that ‘fixed’ full time staff salaries are also included. Basically, you should include all charges that need to be paid, no matter if you have made a sale or not.

Variable Costs: will include cleaning, electricity, maintenance, stationary, marketing (perhaps attending roadshows or events), sales costs; website costs and online marketing fees such as Pay Per Click or Facebook promotions, along with variable part-time wages costs.

Distribution Costs – these costs are the commission costs that you pay to a third party such as Online Travel Agents (OTA’s) such as Booking.com or Expedia which you sign up to drive sales to sell your product. There are industry standards on the commissions charged and you need to research each level of the distribution network to make sure you know what these are.

By understanding the net cost ( excluding VAT at the prevailing rate), a business can ascertain the absolute minimum price they can accept to ensure they cover costs.

Pricing

Pricing needs to be right for you (profitability) and your customer (how much they are willing to pay). 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?

You have a number of options such as price matching, undercut the competition by setting your price lower or attempt to penetrate the market by setting the price substantially lower in the hope of attracting new customers to try your product. 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.

Pricing to Keep Competitive

• Discounted Prices – You might want to discount to attract immediate business. This could be in the off season or last minute. Don’t imagine that this will give you a competitive edge because your competitors can easily do the same and will probably be keeping an eye on your prices as you should also do with theirs. Discounting can often de-value your product if not used sparingly and carefully.
  
  
• Adding Value – The concept of this is to increase the value of your product to make it more attractive and give a competitive edge. This may be offering an extra such as a complimentary upgrade, a bottle of champagne, free parking, early check in etc. It also could be bundling your product with others to offer an enhanced experience that is the right fit for your shared target market.
  
  
• Bundling Your Target Market – To effectively offer you customers a bundled experience you need to have an in-depth knowledge of what experiences your target market want that is complimentary to your own offer and then find other tourism products in your region that would strengthen your offer. Be careful to choose carefully so that your bundle partners have the same high standards as you and are people you want to work with. Once you have identified the potential partner for your bundle you will need to consider the terms of your agreement, the price, how you will jointly promote the experience and the details of the operation.

A useful webinar ‘How to develop pricing for profit’ examined different pricing strategies which could be used by small and medium sized businesses to set prices, with a view to maximising profit. Key takeaways included:

• How to incorporate recovery of direct and indirect costs into prices to achieve a consistent mark-up.
• How to develop practical pricing strategies to reflect different scenarios and calculate the breakeven point for your new products and services.
• Understand the importance of a good bookkeeping system to record, measure and report on pricing and how to use this to review gross and net profit margins.
• How to use a controlled approach to effective pricing to support business growth
• Top Tips to develop a structured approach to pricing and how to embed good pricing practices within business planning.