In order to determine the best price for your organization’s products or services, and once you’ve calculated the unit cost to create those products or services1, you can employ one or more of the following pricing strategies and achieve the marketing goals of your organization.
1 For more information on how to calculate unit costs, read our Tip Sheet: Pricing for Profit and Purpose.
Below are four below-cost strategies that can be employed to attract new customers or to reduce inventory levels quickly, as well as four sustainable strategies, where costs are covered, and revenue is maximized to help sustain and even grow your organization.
If your organization gives away your product or service for free you’ll lose money, although in theory you will have infinite demand. After all, if there is no cost to the customer, then there is no financial barrier to buy. However, customers in any business, including visitors to historic sites, are likely to not place value on their purchase if there is no price.
However, a freemium strategy gives away a limited number of products and/or services in order to encourage visitors. For example, parking may be free, or a tour may be free with the price of admission.
Similarly, a loss leader strategy is designed to sell a product or service below what it costs to produce (or offer.) The idea is to create a “door crasher” special that draws visitors and customers to your location, at which time the business attempts to sell other products and services at more sustainable prices.
Preferential pricing is very common in non-profit organizations and socially motivated businesses. In this strategy, there are different prices for different audience segments. For example, admission fees may be discounted (possibly well below cost) for school groups, or for seniors or for the unemployed. The purpose of preferential pricing is to maximize the number of customers (visitors) at your site. Ideally, the “full price” segment will generate sufficient revenue to offset the losses incurred for the discounted segments of your audience. (i.e. your adult admission is set high enough such that the average revenue per visitor is equal to or above your costs.
Be aware that if your historic site employs a below cost pricing strategy and a price is set too low, there can be a decrease in demand. This “price paradox” occurs when a customer, due to the low price, believes that the experience they are about to have is actually not worth paying for.
Similarly, if the price is set too high in an attempt to maximize revenue without a strong value proposition for the customer, then of course some customers may consider going elsewhere with their time, interest and money. A value-based strategy, and certainly a luxury strategy, rely on your organization to create and convey a unique, valuable experience for the customer.
There are exceptions — where an average donation per visitor will exceed the costs of providing the experience — but unless very specific marketing and engagement measures are taken, a “by donation” pricing strategy will invariably lead to lower revenues, lower return visits, and will typically also lower the perception of value for a visitor to your site.
Absorption pricing is simply where the price (or more accurately the average price) equals the cost to provide a particular good or service. For any business, this strategy is a basic minimum to remain operational over time, but it leaves very little extra to cover lost revenue due to weather, staff challenges, marketing shortfalls or other operational risks.
A cost-plus strategy is a way to cover all costs, plus “add a little bit” (perhaps 5-10%) to help mitigate business risks, or to generate a modest surplus that can be reinvested in capital upgrades, new staff, new initiatives or more marketing.
Employing a value-based pricing strategy is ideal. In this approach, your historic site charges your customers what the customer perceives the product or service to be WORTH. This is more intuitive at first, although the strategy is often informed by the prices set by competitors (which is why it can also be called competitive pricing). Your organization may want to do some market research or market testing to help define a value-based price.
Luxury pricing (also known as prestige pricing) is when the price is set well above costs and potentially unrelated to costs. The number of customers will decrease, but in a luxury strategy, a limited number of customers is part of the reason for the high price. Think of luxury brands like Ferrari or Rolex. The cost of these items is a fraction of the price, but the price is well above most competitors for reasons built on branding and perhaps intangible benefits like status or prestige. Applying a luxury pricing strategy at historic sites may seem unlikely, unless the site is offering a very unique experience (dining with the Queen, for example). However, there are some cases where historic jewelry or art (or reproductions) could demand a luxury pricing strategy in a gift shop or proprietary catalogue.
