Pricing methods
This Pricing methods Info Guide will help you to calculate your prices in order to improve your profits.
Whatever pricing method you use to calculate your prices, you should ensure that the price and sales levels you set will allow your accommodation business to make a profit.
Remember!
Your price should never be lower than your total costs.
Your product is worth only what your target customer is 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 fixed and variable costs of your business, 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: Fáilte Hostel Example
- Fáilte Hostel incurs €10 per guest-night in direct or variable costs, such as food and kitchen/room cleaning pay and materials costs.
- It's assumed that most guests avail of breakfast at this hostel.
- It's annual fixed costs are €250,000.
- Annual customer numbers are 20,000.
What is the minimum selling price that Fáilte Hostel should charge if they are to achieve a profit of €50,000?
Fáilte Hostel needs to charge a minimum average price of €28.50, including VAT, if they are to achieve a desired profit of €50,000.
Use our Cost-plus Pricing calculator 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 own 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 competitor prices, depending on the level of quality offered by your competitors.
If you have a holiday apartment in a seaside town, you may decide that in order to attract customers and increase your competitiveness, you need to drop your price from €600 per week to the €450-€500 price range charged by your competitors.
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 your total business costs or the target-profit which you want to achieve, 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 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.
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, for example by providing:
- a superior customer service
- 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.
Value pricing - Advantages and disadvantages
Value pricing:
- matches your customers’ perceived value of your product and gives you the flexibility to pitch your 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.
Remember!
If you are over the VAT threshold of €37,500 sales per annum, you need to add 13.5% to your price.
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