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Section 4 - Break-Even

Source: Kathleen Tweeten, Director, NDSU Extension Center for Community Vitality; Community, Economic Development Specialist, NDSU Extension Service (The following is a sample only)


Business - Working Ranch Recreation

Activities include horseback riding and wildlife watching (Based on one week rentals to families of four)
Costs: (this plan is based on - one cabin with meals)
Cabin $30,000 (including furnishings) - Insurance $1,500, Horses (rent) $3,600, Vehicle $1,000, Food $350 (wk), Utilities $20 (wk), Labor (2 people) $1,000 (wk), Advertising $200, Supplies $20 (wk), Bedding $400, Taxes $200, Legal and Accounting $1,000, Benefits $150 (wk), Interest (cabin) $3,000. *Fixed costs - all but cabin and those with weekly costs=$10,900  
*Variable costs - those that are incurred only if cabin is occupied = $1,540
*Unit price - what you plan to charge for a week’s stay = $2,500
*Break even = Fixed Costs = $10,900
1 - Variable Cost as a percentage of unit price 1 - ($1,540 $2,500)
Break even = $10,900 = $28,385   (1 - .616)  

Number of weeks rented needed to break even = $28,385 $2,500 = 11 weeks
Percent of occupancy needed to break even = 11 weeks by est. 25 week season =44%
If unit price was $2,200, break-even would be $36,333, 16 weeks, 64% occupancy

PRICING YOUR PRODUCT -  How much do I charge?
An economist would say charge whatever the market will bear. I believe that the economist's approach to pricing may exclude the very people you may be comfortable with and enjoy the most! Here are some of the factors you should consider in making pricing decisions:
Your competition: What do they offer and for how much? How will your product service differ from your competition? Worth more or less?  
Your costs: What are all of your costs in providing this service?
Your investment: How much will you have to invest to provide this service? What return on your investment are you willing to accept?
What is the market? Will people pay the price? Who is my intended customer?  
Am I willing to take the lead and try pricing differently than my competition, or should I try to be more compatible with existing pricing strategies?  
How do I want to handle gratuities? Don't accept, allow tips, charge automatic service charge, and build into price?
Do I want to work with travel agents? Can I price to pay commissions?  One price for all-important! Travel agents and/or foreign regular guests.  Pricing strategy to use. Packaged all-inclusive, or ala carte?
WHATEVER YOU CHOOSE, BE FLEXIBLE AND WILLING TO CHANGE IN RESPONSE TO YOUR ACTUAL EXPERIENCE!

Some Thoughts to Consider When Pricing Your Farm and Ranch Stay - Arriving at a price which: a. Accounts for all your costs; b. Accurately portrays your added value; c. Is attractive to your customer; d. Is favorably compared with your competition; e. Ensures a realistic profit.

Accounting for Costs:
a. Develop a cost checklist, including "overhead"; b. Marketing expenses if your marketing budget is $15,000 and you plan to have 50 guests all staying for a week, you will need to factor in $300 per person; so if your weekly rate is $1,050, $300 is for marketing. Have a marketing costing checklist and account for travel agent commissions.     Example: Assume 15% commission to booking agent; Assume 25 out of 50 guests comes from this source. Prorated over 50 guests, this is actually a 7.5% commission. If weekly rate is $1,050, travel agent commission equals $78.75 or 26% of your marketing budget.

Accurately Portraying Your Added Value - This is best done by a consumer and/or objective outside party.  Points to consider (sample list only):  1)Location (example: next to national park, major airport, interstate, unique historical site, etc.) 2) Number of guests (capacity); 3)Types of activities available - uniqueness (example: fossils on property, trout stream, work with rare livestock breeds, hunting opportunities, opportunity to ride Spanish barbs, etc.; 4)The host(s) -  - The extent of their involvement, community leader, story teller,  multi-generation rancher, family with kids involved and rodeo participant; 5) Accommodations  -- bunkhouse and/or cabin with private bat; 6) Food  -- all raised on ranch and gourmet cook and 7) Understanding and delivering on the issue of quality.

Attractiveness to Customer- Who is your customer? This is all-important. Once clearly understood, then price must be attractive to them (market tolerance) so you book them and have them return again and again-nurturing customers for lifetime value and lifetime income. Make sure the concepts of quality and added value are defined by the customer.

Favorably Compares With Your Competition - Must know your competition; must know their pricing. Then contrast what you have to offer that they don't. What is unique; what is extra value that you offer. Mistakes to avoid: (1. You are not a dude ranch. (2. You aren’t a guest ranch resort. (3. You aren’t next to Theodore Roosevelt National Park. (4. You are three hours east of Bismarck, not 45 minutes. (5. Your hunter prices are not the same as your summer “dude” prices. (6. You don’t do realistic or objective assessment of what you offer that customers want. (7. You set a price based mostly on what you want to make per person, open your doors and they will come. (8. You define added value and quality and not your customers.

Ensures a Realistic Profit: 1). Must work through what a realistic profit is for you. Need to know some of your competitions only want to break-even (this can undercut you).  2). Must clear $10,000 - example: If 50 guests at $1,050 per week, and then your markup is $200. If $300 is allocated for marketing, does $550 cover your costs?

Other Issues: Deposits - 25-50%; Cancellation Fees - Depends when they cancel and whether you can fill the space; Gratuities - Extra? Included as a service fee? Can you expect one if you are the owner? Do you state them or hope the customer knows? All inclusive pricing versus à la carte pricing; Family pricing - Discount for Kids? Off-season pricing and local customer pricing. Minimum stay and can you have day use customers and overnight customers? How do you arrive at prices for day visitors?
**North Dakota Additions

Source: Permission from the following source: William L. Bryan, Jr., President, Off the Beaten Path, LLC,

POTENTIAL CLIENT FORM

Establishing a customer file on potential clients is a better way you can serve them when they are with you. And, the chances of mis-communication are lessened. In addition, you can discover, over the period of a very few years, a "profile" of the type of person who actually visits you. This information can be used in turn to validate or nullify your current ideas about who your target markets are and how best to spend your advertising dollars.

There are certain aspects about each inquiry that must be recorded. At a minimum, you should include:   
(1) Name of Party and Complete address; (2) Phone numbers (best place to reach during the day);
(3) fax#'s; Email address, etc.  (4) Date of inquiry (day/month/year); Number in party/rooms and bedding preference; (5) Intended date of arrival; Length of stay; Interests; (6) Constraints, source of inquiry (How did they hear about us?) (7) Age and sex of all party members; (8) Profession and reason for choosing a farm/ranch vacation.

It will be much easier to elicit the above information from a phone conversation than from a simple written inquiry. In the case of phone inquiries, it would be helpful to have a ready-made potential client form (see attached) available to fill out during the phone conversation. The information obtained can then be transferred to the computer or to a card file at a later date.

Computers are a wonderful, essential and effective way to maintain customer lists. This information should be compiled in a computer program (database) that later can be "sorted" to show reports by state, number of repeat stays, inquiries by source, professions, etc. Another helpful feature to consider in a computer program is the ability to compile letters and mailing labels from your customer database. A computer program can also facilitate the "sharing" of mailing lists should you so choose to share list with other providers. With a computer and a printer, a small business person can accomplish nearly all his or her own marketing, including the production of brochures and newsletters, creation of a Website and using the Internet to market an communicate with potential customers.

Source: Printed with permission from the following source: William L. Bryan, "Off the Beaten Path" Travel Montana

Potential Client Form (Sample)

Date____Who_______________________Source________________Total Time_____Ent____  
Name____________________________________________phone h)____________________  
Address_____________________________________________________________________
fax)______________________ E-mail_____________________________________________
Rural Vacation________________________________________________________________
Interests_____________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
Ideas_______________________________________________________________________
Adults_______ Kids: M_____ F______ Ages: M___________________F_________________
Dates_____________________________________Number of days_____________________
Fee discussed________________________________________________________________
Deposit discussed ___CC#______________________________________________________
Fax:_____/____/____________ Call Back Date:______/________/_________
Notes/Special Requests:________________________________________________________

____________________________________________________________________________

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