Pricing methods
This Pricing methods Info Guide can help you to set accurate and competitive prices for your activity products.
Deciding what price to charge can be tricky. Whatever method you use to calculate your price, ensure that the price and targeted sales levels which you set allows your Activity business to make a profit.
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 activities, attractions and entertainment.
Remember!
Your price should never be lower than your costs.
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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: Activity Pursuits Centre Example
- An Activity Pursuits Centre incurs €40 per sale in direct or variable costs, such as instructor costs and activity supplies.
- Its annual fixed costs are €85,000.
- Annual customer numbers are 2,800.
What is the minimum selling price that this Activity Pursuits Centre should charge if they are to achieve a profit of €50,000?
This Activity Pursuits Centre needs to charge a minimum of €100, including VAT, if they are to achieve a desired profit of €50,000.
Use our Cost-plus Pricing template to calculate the minimum price to charge in order to achieve a target profit
Pricing special offers
If you are confident that you are going to cover all your fixed costs and achieve your desired profit, you can pursue additional sales by offering discounts. These additional sales don’t need to provide a contribution towards fixed costs as these costs are already adequately covered. The prices of these additional sales should cover their own direct variable costs, and any remainder is pure profit.
In the Activity Pursuits Centre Example, the price of additional sales should be at least €40, excluding VAT. For example, if the price is set at €60, excluding VAT, €20 will be pure profit to the business.
Remember!
If you are over the VAT threshold of €37,500 sales value per annum, you need to add 13.5% to your price.
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Using this method, you base your prices on competitor prices without direct reference to your costs. 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.
Going-rate pricing should not be used as your sole pricing method – you should also use Cost-plus pricing.
Prices above competitor prices
If your prices are held at or above those of your competitors, free extras, eg lockers for storing gear and equipment, may make your product and price more appealing and better value for money.
Prices below competitor prices
If your prices are set below competitor prices, you can reduce the impact on your profits by reducing some of your costs, while not affecting the product quality.
Going-rate pricing Example
- If you have an equestrian centre, you may decide that, in order to attract customers and increase your competitiveness, you need to drop your price from €50 to the €40 - €45 price range charged by your competitors.
- To stay profitable, you may need to cut back on “frills”. Ensure that you do this without reducing the overall quality of your offering.
Price cut pitfalls
Price cuts can help you compete better but beware of the following:
- You will have to reduce your prices further if your competitors do and this may make you unprofitable in the long-term.
- Customers often associate reduced prices with inferior quality.
- New customers secured by undercutting competitors may be unprofitable and have no long-term benefit for your business.
Instead of drastically cutting your prices, try to make your offering more appealing by offering extras or by using value pricing.
You can use value pricing to create the perception of a superior product which merits a higher price. This perceived value may be driven by the following:
You can only use this pricing method if you can differentiate yourself from your competitors, for example by offering something that they don’t offer such as free transport to and from an activity.
Value pricing should not be used as your sole pricing method – you should also use Cost-plus pricing.
Remember!
- Combine your preferred pricing method with cost-plus pricing to ensure that you always cover your total costs.
- 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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