Travel & Tourism October 11, 2021
Pricing Strategies for Tourism and Hospitality Businesses
Setting pricing for tourism businesses is a strong mix of marketing strategy and financial analysis. Is there a formula for developing pricing for tourism businesses?
Not really – tourism products are very rarely identical, often because of location, but also because of the people and the components that make up the experience you provide a traveller. It can be incredibly diverse and pricing strategies can evolve as a tourism business develops its brand and market share. Even star ratings for accommodation only give a general guide for travellers on what the pricing will be – there are no set criteria.
In this write up I will try to outline the things you should consider, components of your pricing strategy, different pricing types and ways to stimulate demand.
Things to consider when setting your pricing strategy
- How unique is your business? The more unique your tourism product the more flexibility you will have to decide your pricing.
- What value added services do you provide inclusive of the experience?
- What market do you want to attract and what positioning in the market do you want to establish?
- What are your operating costs (fixed and variable)? Using your costs, get your accountant to help you calculate your break-even point and therefore what your minimum pricing should be for profit goals (estimates of revenue, occupancy rates etc will be needed).
- For most tourism businesses setting prices will be more market based – that is, what do competitors with similar products and services charge within your market? Be careful however, you must be aware of your own financial position (debt levels, cash flow etc) before you can decide whether you should compete in this way. Ideally being competitive is not price driven, it’s product driven.
Knowledge of your break-even point is an important place to start, but on the launch of a new tourism business, it may be that pricing is set lower than your longer-term pricing expectations in order to attract volume, credibility and establish your brand.
Then as you become more established with a regular booking base you can consider increasing prices.
Of course, this is wholly dependent on your overall marketing strategy. For tourism businesses that cater to the exclusive/luxury traveller pricing may not fluctuate much at all. While those targeting the budget travel market may not have too much room to move on pricing and they will rely on volumes of bookings.
Your pricing strategy may be made up of the following components:
All tourism businesses should have a rack rate – this is your “full rate” before any discounts are applied and typically is what is provided to wholesalers and printed on brochures for the season ahead. For activity and attraction operators, their full rate is more likely to be charged all the time without any day to day discounting, however, accommodation operators – particularly those in the middle of the market will be changing pricing almost daily for the month or 2 months ahead to fill gaps.
Using a mix of pricing throughout the year to cover low, high, and shoulder seasons is a standard way for tourism businesses to cater for differing levels of demand due to the time of year. Typically these will be the same date periods each year but may also apply for school holiday dates and for local events where the dates vary each year.
A common method for accommodation suppliers to fill those last-minute gaps in inventory availability, last-minute pricing is basically discounting daily prices according to forward bookings and promoted on last-minute booking websites.
- Per Person pricing: A set price per person e.g Adult and Children prices. Commonly used by activity/attraction and transport operators or backpacker accommodation and campsites. Options may include an adult, child and senior citizen price.
- Per Unit pricing: – A set price for 1 unit of the product e.g. Price per night, this is the standard way to price accommodation, usually the advertised price is for 2 people so if the accommodation fits more than 2 guests it can have a mix of the per person pricing with extra adult and extra child rates.
- Single or double occupancy – common for B&B’s there is a single rate and a double rate (which is not double that of the single rate).
While discounting has its place, and often unavoidable in a competitive market such as tourism, be very wary about continually discounting your prices to stimulate demand – it can become a rocky road to reducing profitability or even missing that vital break-even point. Be selective with last-minute pricing deals – don’t make every day reduced, just select those where you really do need extra bookings. Consider adding conditions to a discounted price like a minimum stay or number of travellers in the booking. While a booking is better than no booking at all, customers do become used to a certain price level and you, therefore, run the risk of not only making it hard for you to charge your normal rack rates, but it will also devalue your product – remember perception is everything in tourism!
Developing packages with complimentary tourism partners in your area or with value-added components is a good way to stimulate demand without having to discount. Strike up deals with local businesses to provide a full package and share business with each other – you should be able to get their products or services at a “net” rate so the package pricing is better than if they had purchased each component separately. Packaging can also be used to target niche markets effectively e.g golf weekends, food and wine tours, pampering packages etc.
Many bookings will come via some sort of third party who will charge you a commission such as a retail travel agent, wholesaler, inbound tour operator or online travel agent (OTA). Many tourism operators are tempted to add the value of the commission to the pricing for these providers but this should actually be considered in the setting of your rack rates anyway – if you have different pricing across different distribution channels it just confuses both travellers and can jeopardise industry relationships, so keep it simple.