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.

The Basics

We believe that the price of homestay consists of the following five components (at least):

• Base rate

  • 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

• Family Group

   

  • 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
    
    

• Business Group 

   

  • 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.

Fixed Price

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:

• Survival

Setting the wrong price can be devastating for business. Overpricing or under-pricing could kill a business.

• Profit

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).

Pricing Strategies

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.

• Dynamic Pricing

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.

• Valuable prices

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.

• Price Matching

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.

• Undercut Strategy

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

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.