Revenue Management Glossary

Cost Based Pricing

Definition

Cost-Based Pricing is a pricing strategy where the room rate is set by calculating the total cost of providing the service and then adding a fixed profit margin. This method ensures that all expenses—such as staffing, utilities, amenities, and cleaning—are covered before profitability is factored in.

How to use it

In hospitality, Cost-Based Pricing is often used as a baseline to ensure financial sustainability. Revenue managers often use this method in conjunction with demand-based strategies to create guardrails for dynamic pricing models.

Formula

Room Rate = Total Cost per Room + Desired Profit Margin

Related Terms

Value-Based Pricing, Dynamic Pricing, Floor Rate, Break-Even Point (BEP), Contribution Margin
“Cost-Based Pricing ensures every room sold contributes to both covering operational costs and achieving profit, providing a reliable foundation for smarter pricing decisions.”

Hannah Lee

Hannah Lee
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