Pricing a product has never been easy. As a homestay reservation system provider, at Softinn, we were often asked by our merchants to help them in naming their rental price. We do not have the answer BUT we believe the article below will at least help to set you in the right direction to find one.
We believe that the price of homestay consists of the following five components (at least):
- Base rate is the expected returns of the house rental to cover the monthly house loan installment
- You may also refer to the minimum monthly rental rates of long-term rental (in your neighborhood) as your base rate
- The base rate should serve as a benchmark to make sure we generate more revenue through homestay rental compare to long-term rental
Service fee (per booking)
- Service fee (per booking) are the additional costs incurred per booking
- For example, cost of guest check-in, cost of cleaning upon guest check-out, and the cost of man-hours you will have to put in to answer booking inquiries, and the rests are the costs that incurred per booking
Service fee (per night)
- The additional costs incurred per night of your guest stay
- For example, the cost of electricity, cost of amenities and the cost of internet, and others are the costs that incurred per day during your guest stay
Target profit per night
- The net profit that you or your shareholders anticipate for running the homestay business
Tax (GST + Tourism Tax)
- Whichever tax applies to your homestay business
In the perspective of Pricing, the Base Rate and the Tax component should be treated as fixed costs while the Service Fee and the Target Profit component should be treated as variables in our pricing strategy.
Having a clear idea of the costs involved and how the costs translate to price gives us confidence in running the business.
NOTE: Even though we suggested five components of price, we believe you to quote your price or rates to your guest with all of them inclusive. These will help guests in making a purchase decision. No one likes the idea of additional fees towards the end of the shopping cart.
How Different Customer Segments change the Weight-age of Pricing Components
- Service Fee (per booking): Medium. Normally family travel involves more guests & normally, you will need to answer more inquires and the time to check-in the guests could be also longer
- Service Fee (per night): High. Kids, the cost and time to clean the house are longer. Normally, family stays are shorter compare to business travel. It means, you will need to clean the house more often
- Target Profit: High
- Service Fee (per booking): Medium. Business travel requires pre-booking documents like Official Quotation, receipts, and so on. The cost is higher in case you offer airport to homestay transfer
- Service Fee (per night): Low. Business travelers are normally less demanding during their stays. Depends on the type of business, you might get a booking ticket with longer stays compare to leisure travelers
- Target Profit: Medium
Don’t stop here, you may further sentimentalize your customers. For example, family with a young couple, family with elders, corporate business travel, factory workers, student convocation attendees, event attendees, and many more. We are not choosing the best customer segment here but instead, we are suggesting you find a good mix of customer segments that will increase your market size and low season (business travel demands are normally the opposite of leisure travel demands).
Best Price = Fixed Price? NO!
Many thought that they could set their price once and forget. It’s a big “No, No” if you wanted to optimize your returns.
For example, the price of airline seats, the price change due to seat availability and demand.
In search of the best price, we believe that it’s not about setting the price right once and forget BUT rather it’s about the design, test, assess, and re-adjustment of your pricing strategy that guides your price setting.
Unless your business model mimics Daiso Malaysia or the Two Ringgit Shops, fixing a flat price for the whole year might not be a good strategy to optimize your returns because the homestay business is a seasonal business. Most homestay owners set their price higher for weekends and public holiday, BUT this is not we meant by non-fixed price (because everyone does it).
In our opinion, having a fixed price is not a good idea for homestay businesses.
Read also: Help us to improve this research by participating in this survey [ 3 minutes].
Why Finding the Best Pricing Strategy Matters?
Having a good pricing strategy gives clarity to our business model and governs our business decisions. These decisions matter because of the following reasons:
Setting the wrong price can be devastating for business. Overpricing or under-pricing could kill a business.
Having a good pricing strategy makes the profitability of a business sustainable.
- Status Quo
Having a pricing strategy keeps us focus. Instead of modifying prices based on your competitors, it helps guide us in updating the price to maintain our status quo (the market share defined in your business plan).
There are many ways to price a product, below are the strategies that we compiled.
- Bundle Pricing
Bundle pricing is a strategy that gives special offers to your customers at a lower price with special conditions.
For example, as a homestay owner, I can create a promotion price for those who choose to stay above 2 nights. The price for my homestay usually is RM250 per night. But, for those who choose to stay 3 nights, the total price will be RM600. This strategy may help me to attract more customers and also reduces the idle rate of my homestay. Take note that it’s reasonable to offer discounts to guests who stay longer because the Service Fee (per night) component is lower.
From the perspective of a customer, when he is considering choosing your homestay or another homestay which is no difference in price with you. This strategy helps you to get more attention from customers and the possibility for customers to choose your homestay is higher as for customers, it is more cost-effective. The customer could save more money.
In the dynamic pricing strategy, the prices will be updated regularly according to the market conditions. You can just adjust your price according to the demand of the market.
For example, as we know, during the school holidays, parents will take their children out to travel. Thus, the demand for finding a homestay in the market will increase. Demand increase while the supply remains, Homestay owners should take this opportunity to raise the price to a reasonable level to earn more profits.
When there is no holiday, the crowd was reduced. Thus, the demand in the market decrease. The homestay owners should reduce or remain their prices at the normal rate to compete with other homestay owners. Homestay owners can compete for the services that they provide to customers instead of the prices. The homestay owners should make sure that they don't have people only when holidays.
On top of price reduction, you may look into your customer segment that generates demand that complements leisure travel, for example, event travelers.
The first and important before the homestay owners set the prices, they should make sure that they provide valuable prices. Valuable price means that the money customers pay is reasonable. The homestay owners can provide more facilities to increase the satisfaction of the customers.
In another more effective way is to let the customers feel that the level of satisfaction is higher than the money they need to pay.
For example, a customer is in a very high level of satisfaction with your homestay, but the money he or she needs to pay didn’t have lots of differences compared with other homestays. Thus, the customer will more willing to come to your homestay the next time.
Why are we pricing our homestay with no big difference compared to our competitors? Price matching with competitors allows us to have the opportunity to attract customers from competitors. As the owner of the homestay, you can turn those potential customers into your customers. From it, you can gain new customers.
Strategy to provide a specific package that is similar to the competitors but with a lower price. Homestay owners should notice that the lower price is only provided to a specific room, not all. Undercut strategy can helps homestay owners to catch the customers’ attraction to the room with the specific package. Although the profit at this stage might be lower, at least it brings new customers. These customers might bring huge revenues for the homestay owners in the future.
Price penetration is a strategy that the homestay can become the low-price leader by providing the lowest price in the whole market. Price penetration strategy helps homestay owners to gain attraction and also establish more market share. Market share represents the percentage of a company's total sales that is earned in a period of time.
For example, the average price in the market is RM 250. As a homestay owner, if my homestay just started, I will use this strategy to help me to gains more customers with the price of RM200. Although the profit margin is lower, I gain customers’ attention to visit my homestay. Later, I can increase little by little the price of my homestay when my homestay business is already stable.
Price Searching Steps
The following steps are what we suggest to search for your best pricing strategy.
Step 1: Looking at a local competition
Try to list out those homestays around you which can be considered as competitors. Try your best to list them out and understand more about them. One of the easiest ways to perform price research is on Google Maps.
Step 2: Understand your own value
Understand which “level” you are among the competitors is a must step. The homestay owners should understand the value of their homestays in the market. You can also look back to those which seem to be similar to you and try to estimate the value of your own homestay.
This helps you to know how to improve yourself to a higher level, either providing better facilities, services or in other ways.
Step 3: Find out your strategic position
You should learn to find out your strategic position. What do you want to bring to your customer? This is a very serious but effective question that can help you to find out your strategic position easier and clearer.
Setting a strategic position for your homestay is very important. For example, if your homestay was in the center of the city, it is more convenient for customers for going anywhere. This is the strategic position of yours in the market and having this you can set the level of convenience higher.
Step 4: Market Segmentation and Selection
You can’t serve the whole market. So, you can segment the market according to many criteria such as income level, age group, and more. Then, choose one or more segments that you think you can capable of. Consider using a booking engine that supports your pricing strategy, for example, a promotion code system.
Read Also: 6 Reasons To Choose Softinn Booking Engine
Step 5: Decide the strategy
- Bundle Pricing
- Dynamic Pricing
- Price Matching
- Undercut Strategy
- Price Penetration
You should always modify your pricing strategy according to the current situation and the effect that you want to achieve.
What you should do after setting a pricing strategy
Review the responses
It’s not the end after setting a pricing strategy and just applies it to your homestay business. You should always be aware of the responses neither good nor bad from your business.
The first way is to review the given responses from the customers. The customers’ feedback is a very direct way for you to think whether there is a problem with your pricing strategy. Customers may give you either positive or negative responses, and you should always focus more on those negative responses. You should find out WHY, whether the price? Location? Or other factors.
The second way is to review the responses from your sales volume. You might have the least responses from customers that enough you to investigate. You can also see through your sales volume. The customers that each homestay can serves are limited. So, there is no reason for you to say that why you are having bad business with least customers unless the environment and facilities of your homestay are bad enough to satisfy any customers.
Try to figure out whether there is a problem with your pricing strategy. Everything happens for a reason, so try your best to modify it.
Observed the situation
A business can’t survive for a long time with only one strategy.
You should learn to observe the situation of the market and identify the best strategy for your homestay business. Before you identify what strategy you may use in your homestay business, you must always remember yourself what is the goal or objective for you to carry on this strategy in your homestay business. Then, apply the strategy.
Observed carefully whether this strategy is suitable for your business with the situation continues for a period of time. The reason you should observe for a long time is to make sure that there is no problem for you to apply the strategy.
Observed your competitors
Diplomats avoid wars. We should understand that there is no winner in a pricing war. The key to prevent pricing war is to observed your competitors. The homestay owners should understand the competition around the situation.
Always be alert of what your competitor is doing. You should always observe the strategy that your competitors are using and think WHY. Why they use this strategy? Benefits that bring to them through the strategy.
Always keep on identifying what your competitors are doing will make you go ahead. At first, you can imitate your competitors’ strategy, learn from it. From day to day, you will find yourself are improving and you will know how to make yourself different.
For example, you noticed that the responses from customers to your competitor are good. You can try to find out the reason and start to think. Is it suitable for my homestay to have this strategy? What can I benefit from this strategy?
Delivery more values consistently
Yes, deliver more value for your customers consistently is very important. You should help your customers to find out reasons that they should visit you the next time.
Please note that deliver values that you think your customers need. Avoiding yourself delivering those “values” that your customers unlike and not willing to pay for.
You may find out what your customer needs through social media, a conversation between you, photos, or many other ways. Try to figure out what they need and provide it to them. For example, if your customer is a family of three (Parents and infant), you can provide a crib for them. Provide service specialization to your customers will let them impress more with your homestay.
Knowing your best value or competitor advantage for your own homestay. Always do the research for the market, observe, and looks at how your competitor wins the game. Learn it from there and implement it on your own version. Set different price rates for weekends, public holidays, weekdays. Create some promotions such as a promo code to offer to your guests or offer a unique promo codes for your loyalty or VIP guests. By using Softinn Extranet, you may create your own version of promo code or unique promo code easily by just a few steps. Try out now before it's too late!