Should you raise your prices in the face of inflation?

Over the past few weeks, as we have been working with them to create their pricing grids for the coming season, a number of customers have expressed their concerns about rising costs: higher energy prices, raw materials, equipment, higher salaries, etc. 

One of their first questions was: should we raise our prices?

6.6% is the annual inflation rate in France in August 2022. The previous year we were at 3.4%. Inflation appeared quite suddenly, but is now at levels not seen for decades. Tourism professionals are now seeing their margins shrink, and are wondering whether they should raise their prices. But is this really a good idea? Here’s an overview.

First reaction: Raise prices

Faced with rising prices, our clients’ first reaction was to ask us to add an extra 5 to 10% to all the grids we had created. These grids had been prepared on the basis of supply and demand, whether constrained (Spill) or lost (Spoilage). This demand is understandable, and all things being equal, it’s a way of preserving our margins. We pass on our purchase costs in our selling price.

This could work if prices in the tourism industry were calculated on a cost+ basis. Although cost+ pricing is not the one that generates the most value. This principle involves multiplying the product’s costs by a coefficient greater than 1 to find its selling price.

In practical terms, what does that mean?

For example, restaurateurs generally multiply the purchase price of a bottle of wine by four to define the price on the à la carte menu. In tourism, however, the price can vary by a factor of 1 to 10 between the very low and very high seasons. Or by a factor of 1 to 2 between customers who bought in advance and those who bought last minute for the same week/date/journey/etc. But the costs associated with a week in early July are the same as in early August.

What’s more, in the tourist industry variable costs are very low compared with fixed costs.

Two examples:

  • In the airline industry: the aircraft is bought, the marketing is paid for, the seat costs are paid for, the flight crew is paid for, the slot is paid for, regardless of whether the aircraft is full or not. The variable costs will be linked to the petrol that is added.
  • In campsites: the mobile homes are bought, the pool complex has been refurbished, the staff are paid, the marketing is paid for, the sheets are paid for, etc. regardless of whether or not there are customers at the campsite that week. The variable costs will be the cost of refurbishing the mobile home.

And yet... This is not always the case

In the tourism industry, customers buy because the service offered meets their expectations within the budget they are prepared to spend. Not only is the problem of rising costs not a factor in their purchasing decision, because they don’t care. But they’re also seeing their purchasing power eroded by inflation, and they don’t care about that.

So raising the price means running the risk of being out of the customer’s budget, and that means not making the sale. So instead of gaining €50 on a €1,000 stay (5% increase on €1,000), you lose €1,000. We would then need 20 customers to accept the increase for each customer we lose.

So what's the right thing to do?

In a situation where costs are rising, you need to maximise your overall sales and not just focus on increasing the average price. This means deploying all the levers of Revenue Management (although be careful not to overdo it). In order, this involves :

  • Maximising sales volume through a rather conservative pricing strategy.
  • Overbooking fully booked dates to anticipate cancellations and no-shows.
  • Steering min stays as effectively as possible to encourage adjacent dates to fill up.
  • Control pricing classes and sales channels before considering price increases. If the price sells, let’s keep it and maximise sales by recovering commissions and other discounts.
  • Raise prices at the right times so as not to fill up too early (on a given date/week/typo/category).

But also…

  • Don’t be too pretentious about last-minute price rises. It’s better to say to yourself: « Perhaps I could have passed on a small increase... » than to deprive yourself of the last few sales.
  • Calculate the real contribution of each negotiated contract, including the shift in demand. Then increase the value of any contracts that are causing you to lose value.
  • Implement Revenue Integrity to ensure that you collect what the customer is prepared to pay.
  • Adapt your pricing conditions for groups so that they do not deprive you of demand in the event of cancellation.

Now more than ever, with inflation squeezing margins, Yield Management is important.

Keywords: Inflation, pricing grids, Spill, cost+, variable cost, Revenue Management, Revenue Integrity, pricing conditions