Target-profit pricing
Target-profit pricing takes account of the cost-base of a business and aims to ensure that prices are set to achieve a target-profit for the whole business. It can be used:
- when setting and varying room prices.
- for an individual department
- for the hotel operation as a whole.
Sales price
The sales price is calculated to cover fixed and variable costs, and to provide a target-profit.
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Target-profit pricing takes account of all your business costs so that your target-profit can be achieved.
Remember!
You need to check your calculations on a regular basis to ensure that you identify any significant cost changes, and update your prices to reflect any changes.
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| Target-profit pricing: Rooms Example |
| A 75-room hotel has an expected occupancy rate of 50% for February. What average room-rate needs to be achieved in order to earn a target-profit of €20,000 in February? |
| Rooms department fixed costs |
€80,000 |
|
| Target-profit required |
€20,000 |
|
| Contribution required from Rooms is therefore: |
€100,000 |
|
Expected room sales
|
1,050 |
75 rooms x 28 nights x 50% occupancy
|
| Contribution required per room |
€95.24 |
€100,000/1,050
|
| Variable cost of an occupied room (eg cleaning room) |
€15.00 per room |
|
| Average room-rate needed (excl. VAT) |
€110.24 |
€95.24 + €15.00
|
| Average room-rate including VAT @ 13.5% |
€125.00 |
€110.24 x 113.5/100
|
| |
- €125, including VAT, is the average room-rate that need s to be achieved in order to earn the target-profit of €20,000 in February, based on an expected occupancy level of 50%.
- In order to improve occupancy above 50%, the hotel could discount room-rates when sales exceed 1,050 rooms in February.
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Quick Target-profit Pricing Calculator
Break-even Workbook
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