Pricing methods
This Pricing methods Info Guide will help you to calculate your prices in order to improve your profits.
Whatever method you use to calculate your price, you should ensure that the price and sales levels you set will allow your Guesthouse or B&B business to make a profit.
Remember!
Your price should never be lower than your costs.
Your product is worth only what your target customers are willing to pay for it. This is especially true during an economic downturn when people have less disposable income to spend on accommodation.
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Cost-plus pricing takes account of all the costs of your business, both fixed and variable, and calculates the minimum price you should set in order to break-even and achieve your target profit.
When should I use cost-plus pricing?
Unlike other pricing methods, such as going-rate pricing and value pricing, which do not recognise your business’s specific cost-structure, cost-plus pricing lets you know whether your pricing is profitable.
Cost-plus pricing: Guesthouse Example
- A Guesthouse incurs €18 per guest-night in direct or variable costs, such as food and kitchen/room cleaning assistance.
- Its annual fixed costs are €70,000.
- Annual customer numbers are 2,500.
What is the minimum selling price that this Guesthouse should charge if they are to achieve a profit of €45,000?
What is the minimum selling price that this Guesthouse should charge if they are to achieve a profit of €45,000?
This Guesthouse needs to charge a minimum average price of €73, including VAT, if they are to cover all their fixed and variable costs, and also achieve a desired profit of €45,000.
Use our Cost-plus Pricing template to calculate the minimum price to charge in order to achieve a target profit
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Using this method, you base your prices on competitor prices without direct reference to your costs.
When should I use going rate pricing?
You can pitch your prices above, below or at the same level as competitor prices, depending on the level of quality offered by your competitors.
If you have a B&B in a seaside town, you may decide that in order to attract customers and increase your competiveness, you need to drop your price from €60 to the €40-€50 price range charged by your competitors.
Remember!
If you are over the VAT threshold of €37,500, you need to add 13.5% to your price.
Going-rate pricing: Advantages and disadvantages
Going-rate pricing:
- is flexible in responding to changing market conditions.
- can damage your business in the long-term, particularly if you have a unique, high-quality product offering, and the competitor whose prices you are tracking does not.
- takes no account of the cost-structure of your business or your target-profit, and as a result, your business may quickly become unprofitable and find it difficult to recover.
- may devalue your business’s current brand and undermine your current customer base.
- may result in price-wars if your prices are set below competitor prices and your competitors are able to afford further price-cuts.
- should not be used as your sole pricing method – you should also consider using cost-plus pricing.
Avoid price-wars
- Competitors may have a lower cost-base than you and have greater scope for price-cutting while remaining profitable and competitive.
- Cutting your prices can help you to compete better but customers often associate reduced prices with inferior quality. New customers secured by under-cutting competitors may be unprofitable in the long-term.
- Instead of engaging in a price-war, you could make your offering more appealing by offering extras or using value pricing.
You can only use value pricing if you can differentiate yourself from your competitors by providing:
- a superior customer experience.
- excellent quality.
- value for money.
- something that competitors don’t offer.
Perceived value may be driven by the following:
Value pricing should not be used as your sole pricing method – you should also use cost-plus pricing to ensure that you are still covering all of your costs and contributing to your target profit.
Remember!
If you are over the VAT threshold of €37,500 you need to add 13.5% to your price.
Value pricing: Advantages and disadvantages
Value pricing:
- matches your customers’ perceived value of your product and gives you the flexibility to pitch prices at premium levels when opportunities arise.
- may not take into account the cost-structure of your business unless you also use cost-plus pricing.
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