5. Market Ready

Price for Value

Once the itinerary is built it’s time to check-in on the pricing strategy for the new adventure.

A simple way we often come across is to simply add up all the costs and then adding a markup to cover overhead and profit. This is called “cost plus pricing” and has the advantage of ensuring that all expenses are covered while being a straightforward calculation. The most common way of increasing the price to show the added value of the experiential elements is to include additional components, like a take-away, which will increase the cost portion of the calculation. This can be combined with an increased markup percentage to reflect the intangible value of the experience.

A different approach, called “value based pricing”, looks at the value your guests put on the experience as the driving factor in deciding what the price for the new experience should be. This approach works best when we’re selling adventures based on the emotions they create. This accounts for the intangible value a purpose based experience create, which is much more than the sum of its parts. Implementing value based pricing requires a change of mindset.

1. Start by establishing a target price based on:
   • Similar experiences. Taking a look at what similar experiences are selling for in other destinations can give you a starting point.
   • Local market conditions. Visitors are often willing to pay more for a similar experience in a well known destination. In general we find that our prices need to be 10 to 30% cheaper in Central Alberta compared to if we were based in Banff.
   • Guests’ context. Visitors on a once in a lifetime vacation are typically willing to pay more for a unique experience than locals. Price according to your ideal guest but keep in mind that you may need to offer promotions to certain segments to keep your pricing aligned with the value they place on the experience.
   • Alignment with other experiences you offer. A signature experience should be priced differently than a supporting experience. Where does this new adventure fit in your line up?
2. Determine if you can offer the experience at the target price:
   • Evaluate start-up costs. What is the minimum investment you need to make in order to bring this new adventure to market? How many tours will it take to recoup this investment?
   • Determine ongoing capital costs. Equipment like snowshoes that are used for the tour will need to be replaced over time. This can be accounted on a per tour basis or as part of the overhead.
   • Establish program delivery costs. Take a look at the costs associated with each departure.
   • Decide on required margins. We find that this typically needs to be 20-40% or higher in order to cover overhead and generate a profit.

Use that information to determine if it is feasible to offer the adventure at the target price based on the expenses and desired margin. If the target price is not feasible, can the costs be reduced or the price increased?

A note on markup and margins. In the cost plus pricing method we multiply the total costs by a percentage amount to determine the final price. This the markup. In the value based pricing method we first calculate a price, then substract the costs to determine how much money is left as profit. That amount, usually calculated as a percentage, is our margin. Because of the way they are calculated the margin and markup percentage do not match up. A 40% margin is equivalent to an 80% markup.

The more unique and differentiated an experience is, the easier it is to charge based on value.

The pricing sheet we use for our adventure is available here.