A product must be priced accurately and competitively. This requires a clear understanding of the individual costs of all product components and their impact on the total price.
The setting of prices for tourism and hospitality products among SMEs is often ‘hit or miss’. Many smaller operators continue in business for years not realizing that they are slowly going backwards. Important points to consider when setting your prices are:
- Total costs involved in getting the product or service to the market,
- Your required profit margin,
- Price sensitivity of target markets,
- Commission levels and other distribution costs,
- Allowance for any taxes that are applicable,
- Competitor analysis and competitive advantage,
- Market and image perception of the product, the business and the region,
- The perceived value of the product,
- The quality of the product.
Factors influencing pricing are:
- Seasonality: particularly fluctuations between high and low season,
- Operating costs: overheads, promotion and labor costs can vary depending on business peaks and troughs,
- Competition: this influences the maximum price for which a product can be sold
- Demand: generated by existing and potential customers
To determine prices, many operators simply rely on comparisons with competitors, or use a ‘cost-plus’ pricing system, without ever determining the break-even point. This is a simple calculation to determine how much product they need to sell to stay in business, before even considering making a profit. Read how you can do a simple break-even analysis.
Pricing, and especially how to effectively use dynamic, seasonal and value-added pricing, including discounting, can be a valuable part of your marketing strategy.
There are a number of ways to influence customers to buy more, eg.
- Package or bundle your product
- Discount pricing
- Quantity discounts
- Seasonal discounts
- Segmented pricing (price reductions to one part of your market, eg. students, seniors, etc.)
Discounting on price alone can be a short term action to boost sales, and it works best for low value, high turnover products, but it is usually a doomed strategy on a longer term basis. There will always be a competitor who can undercut your price and it’s easy to find yourself in a downward spiral of competitive price cutting.
Value vs Price
There are some market segments that will always be price sensitive. However, in recent times there has been a steadily growing consumer appreciation of ‘value’ rather than price alone, regardless of whether you are selling a tent site, a backpacker bed or a 14 night Baltic cruise.
The more sustainable approach is to price your offer on the basis of ‘value’ and to use your marketing communications to clearly communicate that value. Pricing based on value-added and bundling is much harder for competitors to compete on.
“Rather than thinking about price, how about revisiting the challenge of demonstrating what value you provide to customers”.
You can read more on pricing strategies on tourismexcellence.com.au