Pricing methods
This Pricing methods Info Guide will help you to calculate your prices in order to achieve targeted financial results.
Whatever method you use to calculate your price, you should ensure that the price and income levels you set will allow your Visitor Attraction business to achieve a desired financial return.
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.
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Break-even pricing takes account of all the fixed and seasonal costs of your business, and calculates the minimum price you should set in order to break even or to achieve a surplus, where a target surplus is required.
When should I use break-even pricing?
Unlike other pricing methods, such as going-rate pricing and value pricing, which don't recognise your business’s specific cost-structure, break-even pricing will cover all of your costs and help you to achieve your financial objectives.
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Background
- This Attraction is open all year round. Its busy season is June to September, during which its costs increase substantially.
- It receives about 50,000 visitors over the year.
- A small shop/restaurant generates €160,000 per annum. With average mark-ups on products of 100%, a gross margin of €80,000 provides a contribution to total costs.
- The local authority has agreed to contribute €20,000 towards operational costs this year.
| Visitor Attraction Example |
| |
€ |
| Annual fixed costs (eg core staff pay costs, overheads, marketing) |
|
260,000
|
| Seasonal costs (eg seasonal staff and other costs) |
|
240,000 |
| Total Costs - Gross |
|
500,000
|
| Less - Contribution towards costs: |
| Shop / restaurant income |
|
|
| Sales |
160,000 |
|
| Cost of sales |
80,000 |
|
| Gross margin |
|
-80,000 |
| Operational subvention - local authority |
|
-20,000
|
| Total costs - net |
|
400,000 |
| |
What is the minimum average admission fee that should be charged in order for the Visitor Attraction to break even?
- With expected numbers of 50,000 for the year, this Attraction can afford to set its average admission fee at €8.00 per visitor.
- With the help of its visitor analysis statistics, the Attraction can set a range of admission fees (for adults, children, OAPS etc) above and below €8.00 so that an overall average price of €8.00 is achieved and the Attraction breaks even.
What average price should be set if this Visitor Attraction wants to achieve a target surplus of €35,000?
- Admission fee income will need to cover not only total costs (net) of €400,000 but also the target surplus of €35,000.
- This income must therefore be a mimumum of €435,000.
- With expected numbers of 50,000 for the year, this Attraction should set its average admission fee at €8.70 per visitor.
Use our Quick Break-even Calculator to calculate the minimum average price to charge in order to achieve break-even or a target surplus
If your admission fee income is registered for VAT, you should add the appropriate VAT amount to your average admission fee rates in order to get the price which the visitor will pay you.
VAT may be recoverable on some or all of your costs - if so, the costs taken into account in the Break-even Pricing calculation will be the VAT-exclusive costs.
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Using this method, you base your prices on competitor's prices without direct reference to your 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 quality-level offered by your competitors.
You may, for example, decide that in order to attract additional customers and increase your competitiveness, you need to drop your price from €8.50 to the €6 - €8 price range charged by your competitors.
Going-rate pricing: Advantages and disadvantages
Going-rate pricing is flexible in responding to changing market conditions but it:
- 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 financial result you want to achieve, and as a result, your business may quickly fall into serious deficit and find it difficult to recover.
- may devalue your business's current brand and undermine your current custmer 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 break-even pricing to ensure that you are still covering all of your costs and contributing to your financial targets.
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.
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Value pricing
You can use value pricing if you can differentiate yourself from your competitors by providing:
- a superior visitor experience.
- excellent quality.
- value for money.
- something that competitors don't offer.
Perceived value may be driven by the following:
Remember!
If you are obliged to VAT-register for your admission fee income, you need to add VAT to your prices. VAT incurred on suppliers' invoices related to this activity may however be recovered.
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.
- should not be used as your sole pricing method - you should also use break-even pricing to ensure that you are still covering all of your costs and contributing to your financial targets.
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