Cost-based pricing is the easiest and most financially secure way of determining prices. As long as you sell the room, you’re guaranteed to make a profit that makes financial sense to your property. A break-even strategy means earning enough to cover costs, which is ideal during low season.
NB: This is an article from Mews
Subscribe to our weekly newsletter and stay up to date
A cost-plus strategy puts a profit margin on top of your prices, which should be your go-to strategy during times of regular demand.
This strategy also gives you more control over your revenue. If you sell a room at X price, you will earn X profit rather than trying to forecast prices based on market conditions.
How to calculate your hotel cost-based pricing?
The formula is simple: divide the total costs of running your hotel per day (the daily operating costs) by the total number of occupied rooms + profit margin to get the average room rate. Identify all your costs, choose between break-even or the cost-plus strategy, and then find the profit margin you want to apply.
Considering acquisition costs is crucial because you can’t be successful without regularly bringing in guests. And if you’re spending too much on acquiring them, you also eat away at your profitability. Determining all the operating costs can be challenging, but it will inform your decisions.
Benefits of cost-based pricing strategy in the hotel industry
This model is popular because it guarantees a minimum profit and supports long-term planning. It’s simple, transparent and less risky, allowing hoteliers to cover and recover costs. Let’s take a closer look at all the benefits.
Simplicity
We’ve already mentioned how it’s the most straightforward method because it directly links prices to the costs incurred. It’s worth mentioning that this simple way of calculating pricing ensures that costs are covered no matter what.
Profitability
Profitability is the name of the game – it doesn’t make sense for your hotel to operate if it’s not covering costs. With this method, you can calculate a desired profit margin that covers expenses and generates profits. By aligning these two factors, your hotel can stay profitable and reinvest in future growth.
Less risk
Cost-based pricing gives you enough wiggle room to adjust to the market conditions. Once you’ve accounted for all expenses, your hotel can practice risk management and stay financially stable no matter what happens in the industry. While covering costs doesn’t guarantee profitability, at least you can effectively plan other strategies that will help drive ancillary revenue to make up for it.
