How to Price Your Venue: When the Price is Right…
When it comes to pricing, there is no right or wrong. It is not exact science but market mechanism instead. Still, we can use some approach to give us a peace of mind that we have conducted certain methodology when we decide on the pricing.
1. Cost + Margin
The simple method will be to identify the costs associated in running the venue. List all expenses and determine which one you can pass on to the customers. Only use the costs you need to absorb and then add the margin.
If you are familiar with accounting, you might also be familiar with depreciation. Usually, depreciation is considered as part of your direct cost. This might be a bit of a stretch, but you can determine the cost of your building (but not your land because land is not depreciated) and divide that by 20 years, then by 365 days and then by the hours your venue is going to be rented. For example:
You purchased your restaurant for IDR 10 bn (without the furniture and equipment), whereby IDR 6 bn is for the land and IDR 4 bn is for the building. Your restaurant is going to be booked for a 3-hour seminar, but you reckon that you also need time to prepare the space before the event and clean the space after the event. So, in total it is going to be 7 hours. Your restaurant usually operates for 12 hours. Hence, you could calculate your depreciation by:
[IDR 4 bn/20 years/365 days] x 7 hours/12 hours = IDR 319,635.
Insight: Do note that I am using straight line depreciation method here and there are other depreciation methods such as sum of years or double declining method.
Disclaimer: I am not an accountant, do consult with professional accountant to be more exact.
The next question is how big of a margin you should consider. There are several factors that could determine the answer to this:
a) check out the publicly listed companies. Ok, this approach sounds so serious but this is a good exercise. You could check out the gross margin of publicly listed companies that have rental business, calculate the average or median and use it as a benchmark;
b) how bad do you want the business? When you want it bad, then you can take lower margin. Yet, when business is good, margin could improve as well;
c) how much is your competitor charging? Let’s discuss this on Point #3.
Insight: One more thing you should consider is in Indonesia, rental income is taxed at 10% final tax. Say, after your calculation you come up with cost + margin = IDR 9,500,000. You could price your venue at IDR 9,500,000/0.9 = IDR 10,555,556.
2. Opportunity Cost
When you rent out your venue for an event, you are foregoing revenue your space could generate at the same time. Using the same example as above, you could estimate how much revenue you could generate during the 7 hours where your restaurant is closed for the event. Perhaps you have 12 table in your restaurant. Occupancy rate is 25%, average time spent is 1 hour, and average check is IDR 600,000 per table. Then, your opportunity cost will be:
25% x 12 tables x 7 hours x IDR 600,000 = IDR 12,600,000.
If your venue is serving food and/or drinks, you can use this as minimum spending for the event too. As such, you might not be subject to the rental income tax as the revenue you receive is from sale of food and/or drinks. Your revenue will be subject to corporate income tax after deducted by your expenses.
Disclaimer: Do consult with your tax consultant as I am not a tax consultant.
There are a lot of assumptions you need to put in this kind of calculation. This will also force you to think about occupation rate, average time spent, and average check, if you haven’t thought about it. Yet, this kind of exercise is useful for your business.
3. Relative Pricing
In valuation, we use fundamental valuation and relative valuation. You might have generated the pricing using fundamental approach, like the above-mentioned approaches, but you might want to check how your pricing compared to others and compared to recent transactions.
It is wise to research how others price their venues, especially when you have many competitors in the surrounding area. Your future customer could walk away and rent the space next door if they are price sensitive and they find out that you are a tad more expensive. The downside of this methodology is, in general, no 2 venues are exactly the same. Hence, you could come up with a handful of excuses on why your pricing point should not be the same as your neighbor. All is fair, as long as you know how to justify it. For instance:
· You are pricing your venue higher because you don’t charge the customer separately for the electricity bill;
· Your rental price includes equipment such as projector, screen, sound system, and microphone; or
· There is no corkage fee.
Another method we could consider is to check out your last or recent transaction, if you have any. Let’s say, your restaurant was recently booked for a whole day event at IDR 20 mn. Then, you can quickly prorate the rental for this upcoming event:
7 hours/12 hours x IDR 20,000,000 = IDR 11,666,667.
If you don’t, again, do your research on the neighborhood offering price. This could be a good starting point.
We are aware that each of the above-mentioned methodology could yield different price. Then, which one should you choose? You can calculate simple average of the three.
[IDR 10,555,556 + IDR 12,600,000 + IDR 11,666,667]/3 = IDR 11,607, 408.
Or, you can also do weighted average and add more weight on method you like best. Still, at the end of the day, it boils down on Point #1b: how bad you want the business. I’ll leave you at that.