Setting your selling price: the 6 mistakes to absolutely avoid

As the revenue management and pricing professions are relatively poorly understood, it is quite easy to observe basic errors when setting the selling price for a service. And this even for fairly old and experienced tourism operators (certain hotels or lodges for example).

First of all, why are we talking about an error: how are the points I will address below problematic? 

The two major problems that these errors can bring are:

• of your business at risk That is to say either miss out on potential turnover or outright lose money.
• Lose your customer's trust and/or encourage them to wait before booking . This is totally counterproductive for you. You need your customers to anticipate their reservations as much as possible, to give you visibility.

Once you know them, these mistakes are very easy to avoid . By reading this article, you will have all the cards in hand to: avoid them, and give yourself a competitive advantage over your competitors.

1 – Not forecasting sales

If you do not forecast your sales , if you simply follow your sales versus the past, you will not be able to establish an appropriate price . Indeed, without forecasts (point of salvation!) you will not have in mind the periods of high demand or low demand to come . The pitfall is that they can vary from one year to the next. The history is therefore not sufficient.

Like a car running at full speed without GPS: you don't know where you're going. And since you don't know what awaits you on the road immediately after: you cannot adapt the speed of your vehicle to the obstacles that arrive.

In hospitality/tourism, it's the same thing. Your price must be precisely adapted day by day to the level of demand that will arrive . Not doing so means taking the risk of selling too high or too low. And in any case not to obtain the maximum income from your activity.

2 – Set your selling price according to your costs

Pricing according to costs remains relatively common. But is completely contradictory to revenue management logic: why?

In revenue management, the price level is determined by the expected level of demand. It is therefore possible that in certain periods, we margin less depending on our sales potential. But this allows the whole to be more financially efficient (both in terms of occupancy rate and average price ).

Pricing according to your costs means getting stuck on an amount that is often unsuitable for the demand for your activity.

Note however, the costs can be a level to keep in mind to avoid going too low (so the profitability calculation remains useful).

But it should be borne in mind that in certain situations it is better to: 

• sell the rooms at an unprofitable price to partially cover fixed costs
• rather than wanting to sell absolutely at a price with a high margin and selling very little

3 – Underestimate your selling price

Underestimating your price is an important mental bias when determining your selling price for two reasons.

First of all because we tend to think with our own wallet and ask ourselves how much we would be willing to pay. Which makes no sense if your service is aimed at customers whose income is double or triple yours. And moreover because we fear the financial risk of not selling at all.

In this situation several solutions are possible: 

• ask your customers (after their stay) about the quality/price ratio
• stay very connected to the feedback you receive on social networks (Tripadvisor) or online shopping site (Airbnb or Booking),
• carry out a market study with questions related to the financial value of your service,
• your competitors' prices like the back of your hand
• and above all (this is my favorite) do test and learn !

This is the magic of revenue management: you test your price increase on a limited scope (a single type of room for a single month for example or a few days). Subsequently, customers respond to you with their act of purchase! There is nothing fairer than this type of test.

4 – Thinking that price is everything

Reducing your customer's decision-making to exclusively a subject of price is very reductive (and a bit sad). On the one hand, it means not considering the quality of the work you do on a daily basis, the interest of your establishment or apartment, as well as its location. On the other hand, it completely denies your client's intelligence and emotions. Price is far from being the only decision-making criterion for a place to stay when you are not sleeping at home.

Clients can attach themselves to details that nourish their deep aspirations (Maslow's pyramid when you have us!). For example: “I prefer this establishment because they call me by my last name when I arrive” or “I prefer this establishment because the bedding suits me better”. These are all very valid reasons for a customer to pay the price you display even if you increase it.

On the other hand, the customer may also be little sensitive to the sale price because these are professional expenses . They will therefore attach great importance to location, breakfast time or the proper functioning of wifi.

Your customers are sophisticated human beings who must be known inside and out to best adapt pricing.

5 – Follow the competition to set your prices

I am the first to mention in almost every article that you need to know your competition perfectly. And I do not deny this point! But there is a very big difference between knowing their offer and their prices perfectly and reproducing their prices .

If you copy what your competitors are doing (and worse: they copy you too) you will only end up with one thing: putting everyone out of business! For what?

These situations generate an upward or downward bidding mechanism. So, he lowers his price, so you drop, so he drops again, etc. (you get the point). In the case of a price drop: your margins erode over time. And in the case of a price increase: your customers flee over time. And everyone lost everything!

So what to do? I think we need to keep a watchful eye on what the competition is doing but not necessarily react immediately . On the one hand because by reading this blog you are probably already more informed about revenue management than them! And on the other hand because each situation is specific and depends on your position on the market (leader or challenger).

In any case, two points must be asked:

• Could this change in the competitor have a significant negative financial impact on my business?
• Is there a relevant factual element to change my price? (an event that you had not planned for example)

If the answer to these two questions is negative, you can keep your positions and observe in more detail the period affected by this competitor's price change, to check that your sales are not slowing down .

6 – Lower your public price at the last minute

This one is a real black cat for me. If you do, I beg you: stop it today! You are putting obstacles in your way.

So why is this an error? First of all because if you have unsold items for this evening or for tomorrow: a priori the customers who are going to make a reservation are in an emergency situation. In any case, they have no other choice but to find accommodation for tonight or tomorrow.

They are therefore less sensitive to price : they must find a roof over their heads no matter what! Your price reduction will therefore not have generated any additional sales at all. But it will have made you make sales at a lower price.

Finally, last but not least, you are damaging the trust that your loyal customers have in you.

Have you ever found yourself in the following annoying situation? You purchased a product or service a few weeks earlier and when you returned to the site, the price dropped! Annoyed, you tell yourself that you should have waited to buy and that next time they won't bother you again.

 

 

This is exactly what your customers will be saying. Except that you have absolutely no interest in your customers delaying booking with you. Your objective is rather to encourage them to anticipate their reservations to have maximum visibility very early on your activity.

So what is the solution, doctor? I advise you in the event of major difficulties close to the date: not to change your displayed price but to offer targeted offers to very specific types of customers . For example: send a promotional offer to companies with which you are used to working.

And can you think of any other pricing mistakes you made that you no longer make? Do not hesitate to share them in comments to help other readers as well. I will be happy to read your responses and respond to you.