By applying a few fundamental rules, choosing the right prices for your beds and rooms is easier than most hostel owners think.
However, what prevents many from going deeper into the topic is the perceived complexity of the issue. Fancy buzzwords like ‘revenue management’ and other ‘key performance indicators’ like RevPar, ADR, LOS,… etc. turn people off.
Don’t worry, we’ll keep it easy and practical.
‘Hostel revenue management’ is just another word for ‘making more money’. And choosing the right price can help you achieve this goal.
‘Pricing strategy’ is the procedure you use to set your rates – no matter how sophisticated your approach actually is. It’s a bit like playing financial Tetris: there are many options available but the fundamentals remain the same.
To create your own pricing strategy, I recommend using proven tactics rather than reinventing the wheel.
In the following, you’ll find a list with 13 bulletproof tools that you can choose from. You don’t need all of them and not all of them might make sense for your hostel. The choice is yours.
Without further ado, let’s start with the fundamentals and then look at their nuances.
#1 Know The Pricing Basics
Your “rate” is what you charge for a bed. Obviously, it needs to cover your costs as well as your profits.
- If you set your rates too high, your occupancy rate may suffer.
- If your prices are too low, you might leave money on the table.
The bad news is: there’s no formula to calculate the “perfect price”. It simply depends upon too many subjective factors such as your review ratings, location, competition, facilities, your guests, etc.
Your pricing strategy is all about finding the sweet spot in between a “too high” price and one that is “too low”. Fortunately, there are easy-to-notice symptoms if you missed the goal:
- If your occupancy is low despite direct competitors are fully booked, your prices might be too high.
- If you’re sold out “too early” and you seem much busier than your competition, your prices might be too low.
A good start to set appropriate prices is to know your base rate.
#2 Calculate Your Base Rate
Your base rate is what you need to charge to break even. In other words: It’s the absolute minimum you can offer without making losses.
This rate especially gains importance if you’re located in an area where there’s a massive price war (e.g. Thailand, New Zealand, etc.). There are dozens of hostels that aren’t even aware of the fact that their rates result in an overall loss.
Don’t let that be you.
So how do you calculate your base rate?
- 1) Add all your annual operating costs
- 2) Divide it by the number of booked beds that you expect per year
Josh has a hostel with 100 beds and estimates an average occupancy rate of 50%. Hence, he’ll have on average 50 booked rooms per day for 365 days a year = 18,250 booked beds per year.
His total annual costs are $182,250. As a result, he needs to charge at least $10 per bed in order to break even.
Most likely, you’re offering different rooms (e.g. private rooms and dorms). To get a more precise base rate, you can break down the exact same calculation for each room type you offer.
The only exception where you could offer a lower price than your base rate is when you’re applying a “loss leader strategy”.
Simply put, it’s when you’re making a loss on your front-end offer (e.g. your reservations) on purpose because you know you’ll make enough money at the back-end (e.g. additional services).
While this strategy did wonders for companies that sell cheap razors and expensive razor blades, it’s still super risky and a strategy I don’t recommend.
The bottom line: Never ever go below your base rate, even if your competitors do.
#3 Use The Price To Position Your Hostel
The rates you charge massively influence the expectations your guests will have about your hostel. If you want it or not, your guests will treat you based on how you position yourself and pay you accordingly.
The most popular social experiment on the matter took place in 2007 when Joshua Bell – the world’s best violinist – was approached by the Washington Post to take part in a social experiment.
A few days earlier, he mounted a fully booked concert where people paid more than $100 per ticket. That night, he earned more than $60.000 per hour of performing.
The violin he plays on is almost 300 years old and is known to be the most beautiful sounding violin ever crafted – which explains its current estimated value of $3.5 million.
For the social experiment, he was asked to play for one hour with his $3.5 million violin in a local subway. Have a guess how much he earned that day.
A meager $32 per hour. Yikes!
Watch the video here:
So, what made the difference between earning almost 2,000 times more only a few nights earlier?
The way he positioned himself.
And the exact same holds true for you and your hostel. The way you market your hostel determines how you get treated and paid.
Just think about a Lamborghini manufacturer. Do they just sum up the costs and add a margin? – No way! A high price is absolutely central to how they’re perceived by their customers!
Here’s an interesting answer I received in one of my surveys:
Fair enough. Let’s dive in a bit deeper.
#4 Avoid Being The Price Leader
I’ve experienced it over and over that the ones who are attracted by the cheapest price make a large portion of the “pain in the ass”-kind of guests.
There is only one exception to the rule of not being the price leader: If your USP is to be the absolute cheapest place.
The largest hostel chain worldwide called “a&o” with a total of 39 hostels pursues this goal with great success.
They’ve optimized every single aspect of their hostels to keep their costs at the very minimum. Their efficiency allows them to set such low prices and they can guarantee to be the cheapest while still making a profit.
If you’re that big and that’s your main USP, then go for it. For everyone else: Hands off!
Being the cheapest puts enormous pressure on your profitability, disrupts your positioning, and provokes a price war with your competition.
On the other side, higher prices could mean less stress with more enjoyable guests for more money.
Here’s another interesting answer I received in one of my surveys:
Fortunately, there are several methods to achieve this effect which we’ll cover shortly and in more detail. However, the basic idea is always the same:
Try to CREATE an apple to oranges comparison!
Price wars only really hit you if you have no clear unique selling proposition (USP) – something that differentiates you from all others. If you offer the exact same service as everyone else, you’ll be just another “me too”-hostel that will be shopped solely based on price.
The stronger your USP and the more precisely you’ve defined your target market, the less your prices matter.
A popular example of this is the Ocean Beach Hostel in San Diego, USA. Its design is so unique that many travelers are willing to pay a premium price just to experience it first hand.
However, your USP doesn’t have to be your hostel (which is expensive to change). It can also be how you offer your hostel!
In the following, we’re going through a whole bunch of pricing strategies that will help you with this.
#5 Add Bonuses Rather Than Discounting The Price
Throwing in some extras is one of the easiest ways to achieve an apple to oranges comparison. Bonuses are especially effective when the perceived value is much higher than the actual costs.
Coffee lovers – like myself – see a huge value in a hostel that advertises “free coffee” even though the actual costs of offering this additional service are quite low.
Your goal is to make your hostel a no-brainer. You want to be so unique that your guests don’t even think about comparing your prices with the ones of your competitors.
However, the actual “design” of your bonus knows no limits. It could be a free bike rental, free breakfast, free entry into a local gym, free ice cream, etc.
#6 Offer A Guarantee
Have you ever been waiting in line at your favorite ice cream store because people in front of you had samples of different flavors before making their decision?
Well, that’s a perfect example of how risk-averse we humans are.
By offering a guarantee, you can further boost your offer into becoming a no-brainer for potential guests. Yet, most hostel owners and business owners fear that people could abuse their guarantee.
The truth is, most people won’t betray you as long as you deliver what you promised.
Even if you take the few guests into account that will abuse it, most likely, the higher occupancy rate through your guarantee will easily make up for it.
A guarantee could be that if your guests didn’t enjoy their first night, they’ll get a refund.
Or you could offer a “free trial” that allows people to check-in and if they don’t like their room and your hostel after the first 2 hours of their visit, they are allowed to check out without having to pay for it.
The basic idea behind it is that you’re so confident in the service you offer that you’re sure your guests will like it. Allan Dib, author of the 1-Page Marketing Plan (highly recommended), calls this method a “puppy dog close”.
Imagine the following scenario: You’re visiting an animal shelter but you’re unsure if a dog is the right decision. Now, imagine the animal attendant tells you that you can try it out. You take a puppy home and if you don’t like it – just bring it back. No questions asked.
So you take your new 4-legged friend home with you. Your kids play with the puppy the entire afternoon. It licks your hands and falls asleep on your lap. It didn’t take 20 minutes of having it at home and the sale was final.
Not through the attendant’s pitch – but through the puppy!
- Allan Dib
#7 Use Odd Prices
Hundreds of studies have shown over and over again that the price design has a significant influence on the perceived value. [Source]
That’s by no means anything new. Almost all grocery stores use this strategy. Yet, despite all the evidence, most hostel owners find it silly to use this easy and free tool:
FACT: Offering a room for $29.99 instead of $30 leads to more bookings.
Odd prices, and especially the number “.99” signal a special deal – and we all like to make a bargain. Hence, I recommend to set the decimal places of all your prices to “.99”.
The only exception in which studies found even prices to be more effective is when it comes to luxury items. In this case, an even price is perceived as even more valuable.
Remember: you’re dealing with humans – BIG bags of emotions that behave anything but rational.
#8 Limit The Choices
Have you ever had a situation where you were sitting in a restaurant and the menu card had more than 10 pages? If so, how fast were you able to decide upon what you’re going to eat?
I guess it took you quite a bit longer than it does at the hot dog stand around the corner, right?
The thing is, if your potential guests need too much time to decide upon a room, they might end up making no choice at all. In fact, I’ve experienced this effect first-hand.
As I traveled up the east coast in Australia, I searched for a hostel in Surfers Paradise. After ten minutes of comparing the different hostels, I made my decision and proceeded to the booking page.
However, as soon as I landed on their booking engine, I could choose between a 3-bed, 4-bed, 5-bed, 6-bed, 7-bed, 8-bed, and a 12-bed dorm. No joke.
Obviously, all the dorms had different prices. So, I literally sat in front of my computer for 2 minutes unable to decide which would be the best fit for me.
Guess what: Suddenly the other hostel I had a look at before came up in my mind. I went on their website and the only thing they offered was a 4-bed dorm. And the sale was made.
Now, what exactly happened here?
Speaking of human psychology, the fear of making a suboptimal decision prevented me from booking any room at this particular hostel. In other words:
Too much choice paralyzes guests and prevents sales!
The most popular study on the topic is the “jam experiment” conducted at Columbia University.
Researchers offered different numbers of flavored jams on a local market to see how it affects potential customers. Every few hours, they switched from 6 to 24 flavors and back.
The results: People who had the choice between 6 flavors made almost 10 times more purchases than the ones who saw 24 flavors – even though all customers tested an average of 2 flavors. [Source]
Just have a look at the most successful companies out there. How many versions of iPhones does Apple offer? How many software packages does Evernote offer? And what about Dropbox?
You’ll come to the conclusion that 2-3 variants of the same product seem to be the sweet spot between too few and too many options. Hence, I recommend you offer no more than 2-3 different dorm categories in your hostel.
Now, don’t get me wrong. That doesn’t mean that you can’t have more than that. It just means that it’s more effective to display fewer options.
#9 Offer A High-Priced Room
If you’re a small hostel with less than 30 beds, you can skip this chapter. This strategy is rather for medium and large hostels (> 50 beds).
In every market – hostels included – a small percentage of guests are willing to pay up to 10x the price for a similar service.
By offering at least one room that is “special” and more luxury, you will benefit twofold:
- 1) You take advantage of the ones that always want “the best”
- 2) You tap into the psychological power of the “contrast principle”
The contrast principle is one of the six key factors that influence human beings and was made popular in Robert Cialdini’s classic book “Influence: The Psychology Of Persuasion” (recommended read).
Simply put, the contrast principle describes the effect that our perception is biased due to alternative choices.
Adding a $400 navigation system after buying a $60,000 car doesn’t feel as much as purchasing it separately.
The same effect takes place when you’re offering one significantly heavier priced room at the top and have your cheaper options below it.
That way, potential guests will perceive the other rates more appropriate. You can further increase its effectiveness by using even prices for the higher priced room and odd “.99” prices for the cheaper ones.
#10 Monitor Your Competition
Since you’re competing with other lodging facilities (hostels, hotels, B&Bs, Airbnbs, etc.), you need to know who your main competitors are, what they offer and what review ratings they have.
Monitoring their prices will give you valuable insights when it comes to determining whether your price is “too high” or “too low”. A good property management software will take care of that.
That said, don’t get obsessed with your competitors. In my opinion, the most important aspect of spending time analyzing your competition is to find ways to be different.
Furthermore, avoid the temptation to discuss your pricing structure with them. This can easily be perceived as “price-fixing” which is illegal.
There are many definitions of price-fixing. However, in its simplest form, it’s an agreement between you and other companies to not lower the price below a certain amount.
#11 Make Use Of Dynamic Pricing
Yikes! That’s the point where most hostel owners stop reading because they are either overwhelmed with the fancy word or are negatively prejudiced against it. However, most hostel owners already use this strategy without even being aware of it.
I was shocked when I saw the title of this thread on hostelmanagement’s forum:
Dynamic pricing is by no means rocket science and it’s just a tool that you can use. A hammer, for example, can be used to build a house or kill a person. But, to be clear, the tool itself isn’t per se “good” or “bad”.
So what is dynamic pricing?
As the name implies, dynamic pricing means that your prices aren’t fixed but change over time – typically based on supply and demand. The easiest and most common form among hostels is to have different prices in the high, shoulder, and low season.
A more sophisticated approach is to offer higher prices on the weekend (Fri – Sun) compared to during the week (Mon – Thu). More people are off of work on weekends and thus this raises the demand.
Another common method is to raise prices during holidays and special events (New Year’s, festivals, sporting events, etc.).
However, the most elaborate and effective pricing strategy is to use real-time data in order to adjust your rates. Dynamic pricing is all about anticipating demand to find the best price. Hence, the more current your data the better your chances of achieving this goal.
In point of fact, a case study of Xotels showed that they were able to increase the revenue of two hostels by more than 10% year after year just through applying this method. [Source]
I don’t recommend this strategy at the very beginning of starting a hostel. In the first 2-3 years, your focus should be to build a profitable business model.
Using real-time data is rather something to consider when you’re in the later stages of maximizing your overall profitability.
Furthermore, dynamic pricing can easily become time-consuming and complex if you’re NOT using a proper property management software.
It’s not just you who has to understand the system but also your staff that has to be able to clearly communicate all your rates to your guests.
Last but not least, don’t use dynamic prices for guests who are already in your hostel and want to extend their stay. If suddenly they have to pay twice the amount of money for the same bed in the same room, they might feel treated like ripped off cash-cows.
#12 Skip Length Of Stay (LOS) Pricing
While there are many useful tactics that help you create your own pricing strategy, length of stay pricing (LOS) might not be the right fit for you.
The basic idea is simple and logical: You offer enticing deals for guests that stay longer in order to keep your overheads as small as possible.
Single-day bookings are typically the most expensive since it requires time to check-in a guest, change their bedding, do the laundry, etc. Hence, why not offer a slight discount for the ones that stay longer, right?
What might sound like a good idea is often impractical for most smaller lodging facilities:
- 1) Not many online travel agencies (OTAs) allow you to implement it
- 2) Not many booking engines for your hostel website allow such a system
This might change in the future but to this day, I don’t see a cost-effective way for small to medium hostels to use this strategy. But I’ll keep you posted.
#13 Unleash The Power Of A Great Property Management Software (PMS)
Before we get to what I personally recommend, let me set the record straight: I don’t think there’s THE best property management software for hostels.
In my opinion, there are quite a few solutions available that will do the job for you. That said, by choosing one with all the bells and whistles, you will have an unfair advantage over your competitors when it comes to pricing. That’s for sure.
One of the top-notch property management systems for hostels is offered by Cloudbeds. According to my survey, a total of 41% of hostel owners use their PMS.
Cloudbeds has mastered the art of choosing the right prices and makes it a hassle-free task. Their pricing strategy tool is called “Pricing Intelligent Engine (PIE)” and is completely integrated into their property management software.
Thus, it is able to take your occupancy rate and other relevant data automatically into its calculations. This pricing tool alone can make up the entire price of the software. Hence, I feel obliged to make sure you’re familiar with this brilliant tool.
1) Set Seasonal Prices
Cloudbeds PMS allows you to set as many different prices for different seasons as you like. Its interface also enables you to choose different rates for the weekend compared to during the week.
Their integrated channel manager will communicate these changes in real-time to all your distribution channels.
Besides that, you’re able to create different prices for specific events (e.g. New Year’s).
However, what separates their pricing tool from others are the following two possibilities that are – in my humble opinion – genius.
2) Automatically Adjust Your Prices According To Your Occupancy Rate
Since their pricing tool is completely integrated into the system, it allows you to change your rates based on your occupancy rate.
To achieve this, you can create rules such as “when my occupancy is higher than 80%, increase my rates by 20%”. The system also asks you if you want it to make these changes automatically OR if you prefer to receive an alert as soon as the conditions are fulfilled.
Here’s what it looks like:
There’s no limit when it comes to the number of rules you can create. This automation makes pricing a breeze while keeping your cash register ringing.
If you choose an alert instead, you’ll get a notification and can confirm or decline the suggestion within one click:
3) Automatically Compare Your Rates With Your Competition
Cloudbeds PMS allows pulling the real-time prices from up to 15 competitors. This is called a “CompSet”. Simply put, it’s a list of several nearby places that compete with your hostel.
The system allows you to compare all the rates for the following days at one glance.
I can’t think of a faster or more intuitive method than that.
However, you can also see their rates for each day as a spreadsheet where you can make changes in a matter of clicks.
- Green prices = higher rates than you
- Red prices = lower rates than you
And now to the best part: You can also create rules when it comes to your competition.
- Notify me if I’m offering the highest price among my top competitors
- Increase my rate by 10% if I’m offering the lowest price among my top competitors
Do you feel the power of such a tool?
Gosh. I love it.
If you think Cloudbeds is the right fit for your hostel, I definitely recommend making use of the exclusive TheHostelHelper deal: Get $50 + a 10% lifetime discount!
Since this is an exclusive offer, you will not find this on any other website.
This is an affiliate link. That means I will earn a commission, at no extra cost to you, if you use that link to get the exclusive offer.
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