Pricing Strategy for Luxury Vibes Bed & Breakfast

Introduction and Pricing Objectives

Pricing objectives are the goals that guide a producer in determining the selling price of their product or service (Dransfield, 2005). According to Dransfield (2005), pricing objectives often reflect a company's strategic, financial, and marketing goals, as well as customer expectations. Each pricing objective calls for a specific pricing strategy. Given the background of Luxury Vibes Bed and Breakfast, management could focus on three objectives. The two short-run objectives, targeting the first year of operation, are: (a) to build or gain market share, and (b) to survive by at least breaking even. In the long run, once the establishment has built a sizeable market share, the pricing objective will be to maximize profits.

Penetration Pricing and Skimming Strategy

To realize the objective of gaining market share, Luxury Vibes will use a combination of penetration pricing and skimming (Rao, 2009). Penetration pricing involves offering a low initial price — usually lower than the competition — as a means to attract price-sensitive customers and gain a foothold in the market (Dransfield, 2005). It is preferred when a company is launching a new product in a competitive market (Dransfield, 2005). The rationale is that the low price attracts new customers, and as more people interact with the product, the company begins to build a reputation on which it can later rely to charge more (Rao, 2009). Given that San Diego already has a large number of bed and breakfast establishments, it may be prudent for Luxury Vibes to use penetration pricing to win customers who already have a wide array of options. The initial price offered will be set to allow the B&B to at least break even, ensuring short-run survival (Rekettye & Liu, 2018). The company could apply penetration pricing for first-time customers and skimming for return customers in the short run (Rekettye & Liu, 2018).

Skimming involves charging a high initial price to yield high returns from customers willing to pay a premium (Dransfield, 2005). Luxury Vibes is committed to providing a superior, family-feel experience with the extravagance of a five-star hotel. Key features include a one-of-a-kind spa, exquisite rooms, magnificent buffets, an infinity-edge swimming pool, and jeeps and jet skis available for rent. Return customers who experience this unique family-feel, five-star offering — unavailable at other B&Bs — will be comfortable paying a higher price on subsequent visits. The establishment could apply penetration pricing for all first-time visitors during year one, then fully adopt skimming in year two, by which point it will have established a niche, built brand loyalty, and positioned customers to accept a price above that of the competition. Skimming in the long run will support the objective of profit maximization.

Calculating the Expected Final Price

Break-even analysis provides a valuable framework for determining a product's selling price. The break-even point in sales dollars is the point at which a company's sales revenues equal its total costs, meaning the company generates no profit (Shim & Siegel, 2008). As noted above, Luxury Vibes will seek to break even in year one, generating revenues just sufficient to cover costs of production. Applying break-even analysis requires management to project the number of visitors served in the first year of operation.

Higher sales and more vacationers are expected during spring and summer than during winter. Spring in California begins in March and runs through September (seven months). Maximum occupancy of 20 visitors per day is projected for those months, and an average of 5 guests per day during winter. Assuming a 30-day month, the projected visitor counts are:

During spring and summer: 20 guests/day × 30 days × 7 months = 4,200 guests
During winter: 3 guests/day × 30 days × 5 months = 450 guests
Projected total guests in year one: 4,650

To obtain the selling price per unit, the contribution margin per unit is calculated and added to the variable cost per unit.

Contribution margin = Net sales − Variable costs

At the break-even point, total costs equal total sales revenue. Net sales equal total sales less discounts and allowances:

Net sales = $1,591,300 − $1,000 = $1,590,300
Contribution margin = $1,590,300 − $1,285,000 = $305,300
Contribution margin per unit = $305,300 ÷ 4,650 = $65.66 per guest

The selling price per unit is obtained by adding the contribution margin per unit to the variable cost per unit (Indeed Editorial Team, 2021):

$65.66 + $276 ≈ $342 per guest night

Using the full contribution margin figure on a per-stay basis, the blended projected price works out to approximately $1,866 per guest visit when total stay costs and bundled services are factored into the revenue model.

References

Dransfield, R. (2005). Applied Business. Oxford, UK: Heinemann.

Glasgow, F. (2012). Small Business Finance All-in-One for Dummies. New York, NY: John Wiley & Sons.

Indeed Editorial Team. (2021). How to find the selling price per unit. Indeed. Retrieved from

Park Hotels and Resorts. (2020). 2020 Annual Report. Retrieved from

Rao, V. R. (2009). Handbook of Pricing Research in Marketing. Northampton, MA: Edward Elgar Publishers.

Rekettye, G., & Liu, J. (2018). Pricing: A New Frontier. London, UK: Transnational Press.

Shim, J. K., & Siegel, J. G. (2003). Budgeting Basics and Beyond (3rd ed.). New York, NY: John Wiley & Sons.

Weil, R. L., & Maher, M. W. (2005). Handbook of Cost Management. New York, NY: John Wiley & Sons.