My competitors all charge to same rate, to be competitive should I charge less?

I’m losing money but my occupancy is high, what can I do?

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In our last podcast we looked at the best ways to stay in touch with your customers and I had originally planned to continue with this theme but today we are going to get a little side-tracked because of a question that I have seen asked many times lately.

 

What should I charge?

 

Today we are going to talk about what price you should put on your properties services.

 

It never ceases to amaze me how many hospitality property owners there are that when asked, have no idea what it costs to provide rooms, meals or other add on services to their guests.

 

By this I mean what are the actual costs required to have a room ready for a guest to walk into for a night’s stay; the cost of a breakfast or any given meal; or the daily cost to operate a sauna, pool, meeting or sitting area.

 

I have been to many properties where the owners base their prices on their competition or their own insecurities and in many cases under value their property.

 

So what should you take into consideration when deciding on pricing structure?

 

Look at your costs. Now I know accounting is not everyone’s cup of tea but it is very important that owners know and understand the numbers when running a property.

 

Take a look at your fixed costs:

  • building and maintenance costs
  • market area (where is the hotel)
  • the competition
  • number of rooms
  • the amenities
  • how your property is being managed
  • what type of hotel it is (city, resort, large scale, B & B, etc.)
  • cost of labour (daily housekeeping divided by average # of rooms cleaned per person)
  • cost of energy
  • cost of any included meals (if not included with the room rate, then go through the same exercise to determine if you’re making a profit on your meals but we’ll talk a little more about that later)

 

Now you need to establish when your high, low and shoulder seasons are and the room rates you have been charging; determine our fixed costs; and your average occupancy for periods. You always want to include a few extra dollars to have as a buffer. This is known as variables costs.

 

The following is a very simple spreadsheet model you can use to compute a rooms profit and profit margin given the following data:

 

So again, what you need is to determine the following:

[su_list icon=”icon: check-square-o” icon_color=”#1b23af”]

  • Current room rate  ??
  • Allocated fixed cost  ??
  • Variable cost
  • Occupancy

[/su_list]

 

Now place those numbers in the following calculation:

room rate X occupancy = Room revenue

allocated fixed cost + variable cost X occupancy = Total room cost

room revenue − total room cost = Room profit

room profit / room revenue = profit margin

 

If you are happy with the profit you are making then “Good for you!”

If not it is time to re-evaluate.

 

Okay, let’s look at a possible pricing structure.

For example:

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  • Rack Rate
  • Discount 1 (walk-in Corporate)
  • Discount 2 (Government)
  • Deep Discount 3 (Segment Discounts)
  • Deep Discount 4 (Promotional rate)

[/su_list]

Now when you have these set, decide on the desired occupancy levels needed to close each discount level.

[su_list icon=”icon: arrow-right” icon_color=”#ae122a”]

  • Half the rooms sold…all rates are available
  • up to 70% of the  rooms sold…close Deep Discount rates
  • over 71% of the rooms sold…close all rates except Walk-in Corporate and Rack Rates

[/su_list]

 

You see the price is not going up but as the number of sold rooms increase, the numbers of lower rate rooms are closed for sale. This will increase your profit.

And it is a very simple exercise to start with.

Now with meals you can also use a simple formula to determine a sale or value price.

Raw food cost / desired food cost percentage = price

Now if you’re thinking, I have no clue what you are talking about, don’t worry. In the show notes there is a link to wikihow.com calculate food cost page that will explain how this works in a step by step manner. I’m also going to include a link to a great blog post about controlling food cost and improving profit.

 

The show notes can be found as always at

 

keystonehospitalitydevelopment.com

 

If you are losing money or your occupancy rates are low, I would suggest not dropping your prices or leave it as a last option, but instead look at ways to improve your guests experience and show case that. Make them see the value of their stay.

 

Bottom line:

If you start using these types of formulas you will quickly determine numbers don’t lie and the purpose of today’s post is to get you thinking about your profit. If this podcast was a blur to you and you would like to learn more about this process leave us a comment below.

 

Okay this was a look at “What to charge”.

 

“Success is making those who believed in you look brilliant.” – Dharmesh Shah

 

If you have been wondering about the music we use for the podcasts, we get our tunes from a great site called danosong.com.

 

If you have any interesting stories about pricing your properties services and would like to share or have any questions or feedback you can leave them in the comments section of the show notes.

 

A pdf of each episode can also be found in the show notes and this week look for the links to the blog about controlling food cost and improving profit as well as the formula to calculate food costs.

They can be found at our website at:

 

keystonehospitalitydevelopment.com

 

Let’s continue to work together to put heads in your beds.

Until next time, have a fun day.

 

Show Notes:

Written Script of “What Should I Charge?” Video in PDF

How to calculate food costs

Controlling food costs makes profits

 

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