- How to Price Your Venue: Simple Pricing Methodology
How to Price Your Venue: Simple Pricing Methodology
How to Price Your Venue: When the Price is Right…
When it comes to pricing, there is no right or wrong. It is not an exact science but a market mechanism instead. Still, we can use some approach to give us peace of mind that we have conducted certain methodologies 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 a 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 the 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.
You purchased your restaurant for €1 million (without the furniture and equipment), whereby €600.000 is for the land, and €400.000 bn is for the building. Your restaurant will be booked for a three-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 seven hours. Your restaurant usually operates for 12 hours. Hence, you could calculate your depreciation by:
(€400.000 / 20 years / 365 days) x (7 hours / 12 hours) = € 31,96
Insight: Do note that I am using the straight-line depreciation method here, and there are other depreciation methods, such as the sum of years or the double declining method.
Disclaimer: Please consult with a professional accountant, to be more exact.
The next question is how big of a margin you should consider. Several factors could determine the answer to this:
- Check out the publicly listed companies. Ok, this approach sounds so serious, but this is good exercise. You could check out the gross margin of publicly listed companies that have a rental business, calculate the average or median and use it as a benchmark;
- How badly do you want the business? When you want it badly, then you can take a lower margin. Yet, when business is good, the margin could improve as well;
- How much is your competitor charging? Let’s discuss this on Point #3.
Insight: One more thing you should consider is the tax. The rental income in the Netherlands is taxed at 21% final tax, but it will differ per country. Say, after your calculation, you come up with cost + margin = €950. You could price your venue at €1149,50 (21% VAT is €199,50).
Check out Venopi Dutch VAT Calculator to see how much you should price your venue.
2. Opportunity Cost
When you rent out your venue for an event, you are foregoing revenue your space could generate simultaneously. Using the same example above, you could estimate how much revenue you could generate during the seven hours your restaurant is closed for the event. Perhaps you have twelve tables in your restaurant. The occupancy rate is 25%, the average time spent is one hour, and the average check is €50 per table. Then, your opportunity cost will be:
25% x 12 tables x 7 hours x €50 = €1050
If your venue serves food and/or drinks, you can use this as minimum spending for the event. As such, you might not be subject to the rental income tax as the revenue you receive is from selling food and/or drinks. Your revenue will be subject to corporate income tax after deducted from your expenses.
Disclaimer: Please consult with a tax consultant, to be more exact.
There are a lot of assumptions you need to put in this kind of calculation. This will also force you to consider occupation rate, average time spent, and average check if you haven’t considered 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 a fundamental approach, like the above-mentioned approaches. Still, 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 find out you are a tad more expensive. The downside of this methodology is that no two venues are exactly the same. Hence, you could devise a handful of excuses for why your pricing point should not be the same as your neighbour's. 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 a 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. Suppose your restaurant was recently booked for a whole day event at €2000. Then, you can quickly prorate the rental for this upcoming event:
7 hours / 12 hours x €2000 = €1166,67
If you don’t, again, do your research on the neighbourhood offering price. This could be a good starting point.
We are aware that each of the above-mentioned methodologies could yield different prices. Then, which one should you choose? You can calculate a simple average of the three.
(€1149,50 + €1050 + €1166,67) / 3 = €1122
Or, you can also do a weighted average and add more weight to the method you like best. Still, at the end of the day, it boils down to how badly you want the business. I’ll leave you at that.