Pricing for profit
- How much are people willing to pay for your product
- How much do your competitors charge
- How much does your product of service cost you to deliver (operating costs)?
- How much do you need to pay others who are selling on your behalf (commissions)?
- How much profit do you want to make?
- How will seasonality affect your price structure?
- How could you add value to your product without affecting you profit?
The golden rule to pricing
To make sure that people want to buy your product and that distributors want to sell it, it is essential you strike the right pricing balance. You need to understand all of the different elements that make up your final price. You also need to be consistent with what price you are offering and to who when bookings are made. Your customers should be able to buy your product at the same price regardless where they book.
The main pricing elements:
- Operating costs
These can be both fixed costs like rent, buildings, machinery, insurances etc. And variable costs like wages, utilities, repairs, cleaning, maintenance, materials, stationary, IT/website, marketing collateral, linen, food, petrol, bank fees, marketing, travel, exhibitions etc.
- Distribution costs
These costs are the commissions that you pay to a third party to sell your product. They are the cost of doing business and you should not consider this to be a discounted rate. There are industry standards on the commissions charged and you need to research each level of the distribution network to make sure you know what these are.
Typical commission level
Inbound tour operator (ITO)
ITOs are the link between NI’s tourism products and the overseas travel distributors that buy them, including wholesalers direct sellers, travel
agents, meeting planners and event planners. Typically a net rate providing a 30% margin is agreed with an ITO and is paid to you once a sale is made.
Online travel agent (OTA)
OTAs specialise in online distribution and have no intermediaries – they deal directly with the consumer and the tourism product. Typically a net rate providing a 20% margin is agreed with an OTA and is paid to you once a sale is made.
Retail travel agent
Retailers are travel agents who provide customers with an accessible place to book or enquire about travel products. These agents usually provide a shopfront office for customers in shopping centres and local town centres. A travel agent retains the commission once the booking is confirmed and pays you the balance.
Direct to customer
The customer pays you your retail rate - however the retail rate
What is the difference between a rack rate and a net rate?
NET RATE = OPERATING COSTS + YOUR PROFIT MARGIN
The net rate is the absolute minimum that you can sell your product for and still make a profit
RACK RATE = NET RATE + DISTRIBUTION (COMMISSION) COSTS
The retail or rack rate is the rate that your customers pay, and this must be consistent across all the distribution network.
Pricing to keep competitive
You might want to discount to attract immediate business. This could be in the off season or last minute. Don’t imagine that this will give you a competitive edge because you competitors can easily do the same and will probably be keeping an eye on your prices as you should also do with theirs.
Discounting can often de-value your product if not used sparingly and carefully.
The concept of this is to increase the value of your product to make it more attractive and give a competitive edge.
This may be offering an extra such as a complimentary upgrade, a bottle of champagne, free parking, early check in etc.
It also could be bundling your product with others to offer an enhanced experience that is the right fit for your shared target market.
Bundling your product
To effectively offer your customers a bundled experience you need to have an in-depth knowledge of what experiences your target market want that is complementary to your own offer and then find other tourism products in your region that would strengthen your offer. Be careful to choose carefully so that your bundle partners have the same high standards as you and are people you want to work with.
Once you have identified the potential partner for your bundle you will need to consider the terms of your agreement, the price, how you will jointly promote the experience and the details of the operation.
Some questions to consider:
- What agreements will you put in place with your product bundle partner?
- Will you confirm the agreements legally?
- What is limitation and exclusions of the bundle?
- What is the price of the bundle taking into account commission rates from third parties?
- How will you jointly brand the bundle?
- Who will develop the promotional strategy and promotional activity?
- Will there be a joint budget for sales and marketing activity?
- How will people book the experience?
- How will you promote the experience?
- Who will make sure that all legal, insurance and other packaging compliances are met?
- Ensure you show any seasonal variations in product and clearly identify the rates and dates for each season.
- Don’t have too many rate periods as it is confusing and makes your product more difficult to sell for distributors.
- Don’t just add the commission on top of your advertised market rate. Customers must be able to buy your product at the same price regardless of how they book.
- Keep a record of to whom you have distributed rates, so you can update them.
- Make sure validity dates and booking conditions are stated on rate schedules. Conditions might include child rates and ages, cancellation charges, amendment charges, free of charge (FOC) policy, minimum night stays, days of operation etc.
- Guarantee your rates for the period 1 April to 31 March and have rates available up to 18 months in advance.
- Ensure commissions for all distributors are factored into the retail (rack) rate. Be sure of different pricing levels for different distributors and quote accordingly.
- Promoting your pricing details limits the shelf-life of your offline material; Rack rates for accommodation are becoming increasingly rare as prices will change on a day/week/season.