What is cost-based pricing?
Cost-based pricing is a pricing method in which the selling price of a product or service is determined by adding a markup to the unit cost or, in the case of hotels, the cost of keeping the room available and maintained for use.
For hoteliers, it is crucial to understand cost-based pricing as a method of pricing a hotel to set room rates that not only cover operating costs but also provide a healthy profit margin.
Why do hotels use a cost-based pricing strategy?
Cost-based pricing provides a simple approach to balancing a pricing strategy and allows hotels to:
Cover operating costs: Ensuring that all costs are covered is critical for continued growth. This includes fixed costs such as rent or mortgage, salaries, and utilities, as well as variable costs such as supplies, maintenance, and marketing.
Achieve a desired profit margin: By adding a markup to the cost, hoteliers can set a room rate that provides the desired profit margin, allowing for reinvestment and financial growth.
Simplify pricing decisions: The cost-based approach provides a simple and straightforward way to price rooms for both direct bookings and through distribution channels, reducing complexity and providing immediate actionable numbers.