Pricing methods
This Pricing methods Info Guide shows you how to calculate competitive prices while remaining profitable.
There’s no magic recipe for pricing your products. Your pricing policy is influenced by your business’s internal cost-structure, eg, your rent level, and external market conditions.
Remember!
A recession affects how much disposable income people have and how much they are willing to pay for a meal or a hotel room.
There are many ways to price a product. One or both of the following pricing methods is often used in the hotel sector:
Cost-plus pricing
Margin pricing
top
Cost-plus pricing (or mark-up pricing) focuses on the direct material cost of providing your product, eg, cost of food and beverage purchases.
When should I use cost-plus pricing?
Use this approach in your hotel restaurant and bar for pricing individual products or groups of products, eg, menu items and beverages.
Remember!
The combined mark-ups from all products may not be enough to cover the business’s overall costs and profits.
Standard mark-up
Add a standard mark-up to the direct costs of your product or service to arrive at the selling price. Chefs often use this method in pricing menu items, with typical mark-ups of 200% for food and 150% for beverage, based on the cost of the food and beverage.
Remember!
You can’t apply the same mark-up across the board to all your products because this would lead to some food dishes being over-priced and others being under-priced.
Maximise high mark-up
Limit the number of low-margin products and maximise the number of high-margin products on offer. To offset the low-margins earned on some of your dishes, sell low cost-base food items, eg, pasta, at a high mark-up price. This will ensure that you make a maximum profit.
| Cost-plus pricing Example |
| What is the minimum selling price that a Hotel Grill Bar Restaurant should charge, when the cost of ingredients is €3.50 and the desired mark-up is 150%? |
| Cost of ingredients for a meal |
€3.50 |
|
| Add 150% mark-up |
€5.25 |
€3.50 x 150/100
|
| Selling price (excl. VAT) |
€8.75 |
€3.50 + €5.25
|
| Add VAT @ 13.5% |
€1.18 |
€8.75 x 13.5/100)
|
| Selling price (incl. VAT) |
€9.93 |
€8.75 + €1.18
|
| |
This Hotel Grill Bar needs to charge a minimum of €9.93 if it is to achieve a desired mark-up of 150%.
Cost-plus pricing calculator
Cost-plus pricing: Advantages and disadvantages
- is easy-to-use and useful for making comparisons with your competitors, but it doesn’t take account of the overall cost-base of your business. Benchmarking may be distorted if your competitor’s cost-base is significantly different.
- should not be used as your sole pricing method – you should also consider using break-even pricing and target-profit pricing.
top
Using this pricing method, you start with the desired selling price of a meal, and then deduct the intended gross margin to be earned on that meal to arrive at a maximum cost of ingredients.
When should I use margin pricing?
Selling prices of individual products (eg menu items or beverages) may be determined by competitor prices. To remain profitable, you need to make a satisfactory margin by controlling the costs of these products.
Remember!
The combined profit margins from all products may not be enough to cover a business’s overall costs and profits.
| Margin Pricing Example |
| What is the maximum amount that a Head Chef should pay for ingredients in order to sell a meal for €9.00 with a gross margin of 60%? |
| Selling price of a meal (incl. VAT) |
€9.00 |
|
| Less VAT @ 13.5% |
€1.07 |
€9 x 13.5/113.5
|
| Selling price (excl. VAT) |
€7.93 |
€9.00 - €1.07
|
| Less gross margin 60% |
€4.76 |
€7.93 x 60%
|
| Cost of sale |
€3.17 |
€7.93 - €4.76
|
| |
The Head Chef needs to ensure that the cost of ingredients for this meal does not exceed €3.17 in order to sell the meal for €9 with a gross margin of 60%.
Margin pricing calculator
Maximise the number of high-margin products offered
Limit the number of low-margin products you offer and maximise the number of high-margin products on offer.
Remember!
You cannot apply the same profit margin across the board to all your products because this would lead to some dishes being over-priced and others being under-priced.
Margin pricing: Advantages and disadvantages
Margin pricing:
- is easy-to-use and useful for making comparisons with your competitors but it doesn’t take account of the overall cost-base of your business. Benchmarking may be distorted if your competitor’s cost-base is significantly different.
- is applied at individual product level, eg, a meal or a beverage, and therefore it only takes account of that product’s direct costs, ignoring the profitability of the business as a whole.
- should not be used as your sole pricing method – you should also consider using break-even pricing and target-profit pricing.
top
Other pricing methods include:
Value pricing
Going-rate pricing
Value pricing focuses on the perceived value to the customer of a product such as a room or a meal, rather than the costs incurred in producing the product. Perceived value may be driven by the following:
When should I use value pricing?
You can only use value pricing if you can differentiate yourself from your competitors, for example by offering something that they don’t offer, such as Wi-Fi enabled bedrooms or spa treatments.
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 break-even pricing and target-profit pricing.
Using going-rate pricing, you set prices based on competitor prices without direct reference to costs.
When should I use going-rate pricing?
You can use going-rate pricing to pitch your prices above, below or at the same level as those of your competitors, depending on the quality-level offered by competitor restaurants.
Going-rate pricing Example
- You may decide to drop your breakfast price from €15 to the €12 - €12.50 price range charged by your competitors to attract customers and increase your competiveness. However, you need to ensure that you still make a profit on breakfast sales.
- If your prices are held at or above those of competitors, free extras may make your product and price more appealing and better value for money.
- If your prices are set below competitor prices, you can reduce the impact on your profits by, for example, cutting food preparation costs while ensuring that your service quality is not reduced.
Going-rate pricing: Advantages and disadvantages
- 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 break-even pricing and target-profit pricing.
top
-
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.
top