3 methods to help you find the right price for the rooms in your lodging establishment
In this article, we show you which strategies to use to establish the best price for your hotel or non-hotel business.
Selling your rooms or apartments to travelers entails pricing them.
If you have ever had to start your accommodation business from scratch or, more simply, redo your initial price list, you know how complex it is to find the "right price“.
Pricing, that is, the discipline through which prices are set for any product or service, is a science in itself.
There are lots of models and theories for determining the right price, and if we want to summarize them, they revolve around three key concepts:
- cost-based price attribution
- competition-based price attribution
- price attribution based on perceived value
Let's look at these models together so that you can choose the one that you feel best fits your needs.
Setting the price of rooms based on costs
This model involves defining the price by starting with the sum of the variable costs of each room and adding an arbitrary value corresponding to the margin you want.
This value is called the “unitary contribution margin” or "mark-up": it represents the economic contribution that each room brings to your facility.
Mark-up, mind you, does not correspond to a true business profit because it does not take into account your fixed costs, let alone aspects of taxes and financial interest.
Rather, it is through your mark-up that you go to cover your fixed costs and constitute your company's profit.
In this article, we show you how to calculate your accommodation business's fixed and variable costs.
Once you add your mark-up to the value of your variable costs, you get your base rate or bottom rate.
You might consider including fixed costs in the bottom rate calculation, but you would be unlikely to sell at that price during off-season.
This method of calculating costs also has the shortcoming of completely ignoring competition and other market conditions.
Setting the price of rooms based on competition
The accommodation market, like any market, consists of two elements:
- demand, i.e., customers and potential customers;
- and supply, i.e., the accommodations that sell rooms, including yours.
This method of pricing considers the competition, i.e., that part of the supply that has very similar characteristics to yours and is targeted to the same customer base as yours.
You start by identifying accommodation facilities in the market that share location, services, category, size, etc. with you.
Of these facilities, you then observe the pricing strategies in order to approximately calculate the average selling price.
If you don't know how to do this, read our article that explains how to perform a competitor analysis.
Once you have the average price, you can apply it to your rooms according to your needs.
For example, as a starting price, benchmark price (BAR), bottom rate, ADR target, or other benchmark.
Compared to cost-based pricing, this method of pricing is more effective because it puts you in relation to the market and other players in the industry.
However, if your competitors have lower costs than yours for some reason, you may find yourself incurring a price that is not profitable for you.
Setting the price of rooms based on perceived value
So far, we have analyzed two pricing models that take into account supply, that is, what your facility offers and what your competitors offer.
The real and undisputed player in the market, however, is demand, i.e., your potential customers.
It does not matter how valuable you consider your facility and what price you consider fair for your rooms.
The market only cares if customers are willing to book them for that amount.
To price rooms based on perceived value, you need to:
- precisely define the characteristics and needs of your typical customer
- identify who in the market already meets those needs
- find the differences between your offerings and those of others, highlighting them in the eyes of customers
Basically, you have to follow the same process you did previously regarding your competition to define your price, but with one small and fundamental difference.
You must not consider your own point of view, but that of your customers.
In fact, you may find that a difference with competitors that is irrelevant to you, is instead of enormous importance to your customers (and it makes sense to keep it in mind when calculating prices).
What is the best method for finding the right price for your rooms?
Each of the proposed models for setting price has its pros and cons depending on the specific case.
However, the following are concepts are always valid when pricing a lodging facility.
- Cost analysis is essential to accurately define the bottom rate; without it, there is no pricing strategy.
- Your facility's contribution margin (mark-up) is an excellent tool for measuring its potential.
- In hotel chains, it is often used as an element of comparison between different properties.
- Competitor analysis is a necessary activity for calculating prices, but by itself it serves only as a partial indication. Indeed, there are many factors that influence demand, such as seasonality, weather, and events.
- Knowing the needs and characteristics of your customers is the only way to enhance the value of your accommodation within the market.
Proper, complete and reliable pricing therefore requires the use of all three methodologies.
To choose only one or two is to rely on incomplete and therefore, most likely, incorrect information.
Did you know there is software that can make choosing the best price for your rooms much easier still?
Smartpricing is the revenue management software that finds the right price at the right time, increases your revenue, and reduces stress.
Talk to one of our consultants and find out if Smartpricing is right for you!