Re-pricing to allow for spiraling energy costs

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Ben McNevis
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Re-pricing to allow for spiraling energy costs

Post by Ben McNevis »

My head is spinning. Moreso than normal.

We knew that all hosts will need to consider raising prices fairly dramatically to account for the increased energy costs. We've done nothing about it yet because we have been on the new tariffs for just a few months while the need for heating has been low.

Today, I've been trying to work it all out. Our properties are in Scotland so we also need to consider the costs of the new licensing scheme and the cost of compliance.

My first thought was to work out the estimated increased energy costs for summer and winter separately, and then apportion those increases according to the average booked nights for summer and winter. That seems quite logical and not too difficult to do. But then, with relatively few winter bookings, we find a very big increment on our winter prices. That must surely deter bookings and hence the spinning head.

My next thought is that any management consultant or economist would say that we should price according to what the market will bear. The usual shortcut to this is that you look at competitor's prices and set yours accordingly. But how can we know whether competitors have adjusted their prices yet to take into account all of the increases in costs? How can anyone know what the market will really bear with the increased cost of living for everyone?

We really don't want to start making a loss and we also don't want to set our prices so high that nobody will book (also leading to making a thumping loss). I guess a suck-it-and-see approach is best in the very long term. In the shorter term it means we may be thin on bookings or thin on margin.

All ideas welcome!
Cheers, Ben
www . scotland-cottage.com www . scottish-cottage.com


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Drax
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Re: Re-pricing to allow for spiraling energy costs

Post by Drax »

We have also been pondering what prices to set for 2023 and have not yet come to a clear-cut answer.
There have been lurid headlines today that households may have to pay energy costs £500.00 per month this coming winter.
One thing we have done that will to an extent partially solve the problem of winter energy costs, is to close our holiday let down for the winter months of November, December, January and February.
This will enable us to carry out maintenance and improvements on the property. Also, it means we can have a 4 month 'break' from the business.
Keep your powder dry.
Pengman
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Re: Re-pricing to allow for spiraling energy costs

Post by Pengman »

I’m definitely in the ‘set prices according to what the market will bear’ category. I identify my competitor properties within a 3 mile radius of mine and benchmark against them, charting their prices for the 4 seasons for the year ahead. I then set my prices at just below the average. When I last did this, about 4 months ago, the first thing I noticed was that I had far more competitor properties than before, evidence surely of people rushing headlong during and immediately after Covid to cash in on the ‘buy to holiday let’ market. But re prices, I found that for the summer season I was higher priced than my competitors, but approximately 15% lower priced than them for the rest of the year. My property had always let well in the summer so I decided to leave my summer rates stand and not reduce them. But for the rest of the year, I increased them by 15%. Then about 3 months ago I noticed that the stream of autumn and winter bookings I’d had over previous years wasn’t happening this year. I monitored the situation for a few weeks then decided to backtrack on my 15% increase to make my property super competitive in what was obviously becoming a difficult market. As things stand now that doesn’t appear to have worked and it seems to me that any future autumn and winter bookings will be last minute bookings if guests decide they can afford it. Not forgetting of course that overseas travel is virtually fully open again, so there must be a pent up demand for autumn and winter city breaks to many European destinations which must be impacting UK stays.

My gut feeling is that, in the current market anyway, you can’t factor increasing energy costs into holiday letting rates - guests aren’t buying energy, they are buying holiday accommodation. Hosts will just have to take the hit on rising energy costs, suffer reduced profits, but hopefully survive to fight another day. Undoubtedly this will sort out the men from the boys and I expect to see some of the new entrants to the market bailing out and ‘flipping’ before long (who knows - one of them might even be me!). But I also see a minor marketing opportunity - suggesting to potential guests that they turn their boilers off, turn off the lights, and visit our property and use our energy!

Finally, I use a Nest thermostat to control heating in my property and have in the past noticed that some guests turn the thermostat up to maximum - a whopping 32 degrees C! My system would never achieve that - it would just bust a gut trying to achieve its maximum, something like 27 degrees C. Suffice to say I shall be putting a lock on it this winter and guests won’t be able to set it any higher than 22 degrees C!
I came, I saw, I bought it.
russellt
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Re: Re-pricing to allow for spiraling energy costs

Post by russellt »

How about a 'fuel surcharge' approach? I certainly see this when airlines experience the pain of increased costs for fuel. They add a surcharge.

It would mean you don't have to change your base pricing, and can flex the surcharge in the very short-term based upon lived experience, competition, changes in fuel costs, etc. Also, as a separate 'surcharge', it would help to explain to guests why your pricing has increased.

(However, i am also seriously considering closing for the winter and using the access time to do maintenance, etc)
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AngloDutch
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Re: Re-pricing to allow for spiraling energy costs

Post by AngloDutch »

The local market here in the Netherlands has always been 'rental rate + additional costings' which makes it easier just to increase our energy costs. We had winter nights (Oct - Mar) set at EUR 15 and summer nights (Apr-Sept) set at EUR 12 since 2018. At the end of 2021, we increased our nightly energy costs to EUR 25 (winter) and EUR 18 (summer). This after we saw a 30% increase to our energy bill (EUR 540 to EUR 700 monthly) between the period November 2020 and September 2021.

Now in 2022, we have seen a further rise of some 350-475%, depending on which energy company's variable contract we currently look at.

Our current 1-year contract ends in November and there has been talk about a further 50% increase from 1st October. I have an idea that we will be paying somewhere between EUR 3,500 - EUR 4,000 per month from December onwards, but this is based on our usage from Nov 2020-Nov 2021 (where we were in strict lockdown onwards from Nov 2020 right through until the end of June 2021, so basically closed as we could only accommodate 1 single household for most of the time).

During 2022, we have been very full, as many groups from 2020 and 2021 finally managed to stay with us. Not only have they of course used a lot of energy (some groups now much larger due to extra children arriving over the last few years), but for the 3rd year running we have also seen reduced income (some deposits were paid as far back as 2019 in some cases).

So, should we base our future energy instalments on the period 2020-2021 or on 2021-2022? If we choose the latter, then it looks like we will be paying around EUR 6,000 per month this winter. But that of course is the average monthly instalment over the whole year. During the winter months, the actual usage is of course much higher. Many of the energy firms here are switching to Dynamic pricing, where you pay for your actual use each month. Therefore, surpassing the EUR 10,000 barrier per month during the winter months is a distinct possibility for us if we continue with the same number of bookings through a colder than normal winter.

So, it looks like we have the 'Sword of Damocles' waiting for us at the end of November. We have been aware of this impending disaster for most of this year as we have seen the energy prices steadily rising.

A while back, we put up our energy costs by 400% (from the original 2018 rate) to EUR 60 and EUR 48 per night.
Having communicated with a couple of LMHers when the LMH site was down these last few weeks, we have now decided not to increase our energy rates any further. We have in the last week reduced them back down to EUR 25 and EUR 18 per night. I don't think that potential guests will accept these kinds of increases, and neither will they accept it if we try and compensate the higher energy costs by raising other additional costs or our actual rental rates. Those same guests are probably having to reduce the budget they have available to spend on an accommodation (that's if they can now afford to come at all) and we have of course competition from other accommodations locally where the owners are not in the same position as us (having a badly insulated farmhouse with a very old roof).

We have guests booked for Christmas and New Year this year (both are groups on their 3rd attempt, both originally bookings for December 2020). One paid their balance payment in December 2021 just before the 3rd Dutch lockdown, the other group has to make an additional payment of just EUR 250 (for a rate difference). So, that is the only incoming future payment that we will have from these two groups. They will be staying with us for almost two weeks in total, so in theory, it could cost us some EUR 5,000 in energy costs just to accommodate them. I don't think that we can cancel them for the 3rd time, even though we have thought about just closing down this winter completely. Even if we managed four full weekends per month this winter, I don't think it is going to cover the energy bills.

Our gas boiler is already set to 'Summer setting' and we will make sure that the winter settings are reduced to the lowest possible temperature (no lower than 60'C of course due to Legionella growth) and will set the thermostat to around 17'C as long as it doesn't get too cold. We have also thought about tapping off some of the radiator valves in the main room (here are five large radiators in that room alone), and have installed a water-saving shower head in the only shower in the accommodation (there is no bath). But how far can we go before guests would find it unacceptable? We could ask them to consider their energy use, but we can't enforce it, of course.

We live at one side of the same building and have already bought boxes of candles and an electric heater. Our family members are aware that showering can only be a maximum of a few minutes (with water to be shut off and back on during the showering) and use of the bath forbidden from December onwards. We will not be using our radiators (heated via the gas boiler) or gas fire at all on our side of the property.

Unfortunately, we have a government here that doesn't really want to interfere in the energy market and will probably only offer some (more) help to those on low incomes. Self-employed/businesses or those earning more than the minimum will probably be told just to continue riding out the storm.
Pengman
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Re: Re-pricing to allow for spiraling energy costs

Post by Pengman »

Drax wrote: Thu Jul 28, 2022 4:50 pm One thing we have done that will to an extent partially solve the problem of winter energy costs, is to close our holiday let down for the winter months of November, December, January and February.
Assuming you and your property are in the UK, don't forget that your property must be available for letting as furnished holiday accommodation for at least 210 days in a (tax) year to satisy the availability condition of HMRC rules (HMRC guidance note HS253 refers). Closing it for 4 months will put you on 245 days so you're well over the 210, but you then have to actually let it as furnished holiday accommodation for 105 days in the year to satisfy the letting condition so you've got less 'available days' (if you will) to achieve that.
I came, I saw, I bought it.
Drax
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Re: Re-pricing to allow for spiraling energy costs

Post by Drax »

Looking back on the previous years we have been in the holiday let business we have never had much custom during these 4 months (November, December, January and February) except over the Christmas/new year period, even then it has only been for a few days.
During the remaining 8 months of the year we have always managed to achieve and exceed the required 105 days.
But you have made a fair point, thank you.
Keep your powder dry.
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