STEP 6: PRICING THE PACKAGE TOURS
There are seven calculations involved in pricing a package. Use the Pricing Worksheets that follow the description of these seven calculations to price a package that you wish to produce. A completed set of Pricing Worksheet Samples is in the Appendix.) Calculation 1 Calculate the total cost per person of operating the package (package variable cost). This is the cost you will incur for each person who is included in the package. The cost may include meals, rentals, entry fees, accommodation, baggage handling, ground transport (if charged per person), gratuities, etc.
Use the Package Itinerary Planning Sheet(s) used in Step 5 to help you.
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Calculate the total cost per person that will occur regardless of the number of people in the package (package fixed cost). This is the package operating cost and does not vary according to the number of people in each package. It may include marketing (if it is done specifically for this one package), ground transport (if charged per package -e.g. a weekly van rental), a driver, a guide or an interpreter.
Calculate the total fixed cost of the package and then divide by the number of total possible participants to arrive at the cost per person. For example, if you determine that you will incur $2,000 of fixed costs per package and each package will hold 20 customers, your package fixed cost per person is $2,000 divided by 20 customers = $100.
Calculate the share of the total annual overhead cost of the business (business fixed cost) that you want the package to contribute to the business. This is the per-person contribution that you want the package to make to the annual overhead costs. Overhead costs may include package development, marketing, wages, administration, office costs, telephone, staff training, rent and insurance.
Calculate the total package cost per person.
Add the package variable cost per person (box A), the package fixed cost per person (box B) and the business fixed cost per person (box C) to get the total cost of operating the package for each person. (These numbers go in the first blank column of calculation 4.)You have now calculated your costs as if you were going to be operating full packages all of the time.
This is a best-case scenario, and you now need to build a realistic increase into your price to account for the fact that you may not sell all of your package seats during the season. In order to do this, you need to estimate as closely as possible your occupancy rate for the package in the coming year, and then divide your total per person package cost by this amount.
For example, if you arrived at a package cost of $45 per person, and if you realistically expected to sell 60% of the available seats in the package, you would divide $45 by 60% to arrive at a package price of $75 per person. If you arrived at a package cost of $300 per person and you expect to sell 70% of your available seats in the package, you would divide $300 by 70% to arrive at a package price of $429 per person.
Doing this type of calculation reduces your risk of financial loss and results in significantly increased profits if you sell more seats.
Add an appropriate amount of profit. Profit margins are added to the package price in order to provide a return to the business owner that is over and above any money made from wages earned, and to provide a reasonable return on the money invested in the business.
Profit margins may range anywhere from 2% -30%, but generally fall in the 5% 10% range. The amount added may ultimately depend on the customer’s willingness to pay, your original goals and objectives, and your desire to attract the customer. Your profit margin for a high-season package might be higher than for a low-season package. The high-season profit can buoy your business over slower times, allowing you to keep staff, relieve low-season cash-flow shortages, etc.
After you have determined the profit margin you wish to add to the package, multiply that percentage by the figure in box D, and then add the resulting number to figure D.
Add travel agent and wholesaler commissions. Commission amounts will vary depending on how you are intending to sell the package. Travel agents generally require a commission of at least 10%; travel wholesalers require a commission of 20% – 30%. If you are planning on selling directly to your customers, you may not need to add a commission.
However, if you will have mixed sales direct and indirect, you will need to add commission. For those packages that you sell directly, you would then keep the commission amount for yourself. If you know what proportion of sales will be direct and what proportion will be indirect, you may be able to calculate a weighted- average commission.
For example, if you expect 50% of your sales to come from each method and you need to offer a 30% commission to the indirect marketer, you may choose to add a smaller commission of 15% to the package.
Multiple the commission rate you decide on by the figure in box E, and then add the resulting number to figure E.
Adjust the price for a full spectrum of customer types. You may decide to adjust the package price up or down according to a variety of factors. These may include discounts for groups, rates for single occupancy, rates for children, low-season and high-season rates, and the willingness of some groups to pay more than others.
You will have to determine these amounts based on your assumptions of who will travel and how much you can afford to increase and decrease your profit margin. Add the percentage that you decide on for each factor to the number in box F. This will give you the different package prices for a variety of customer types.
SAMPLE PRICING WORKSHEET PACKAGE DESCRIPTION
The following pricing example is for a backcountry ski-touring package in the Kootenay region of southeastern British Columbia. A backcountry lodge has recently been constructed by a ski guide who guides groups and hires an assistant guide as required. The package includes all ground transportation to and from the airport, helicopter transport from the hotel in Nelson to the lodge and back, all meals accommodation, equipment rental, guiding and interpreting. The guests arrive on the afternoon of the first day and are transported from the airport to a hotel for the night.
On the morning of the second day, they are flown by helicopter to the lodge, where they receive instruction and ski through to the fifth day.
On the sixth day, after a half day of skiing, the guests are flown from the lodge back to Nelson, where there is a wind-up party. They stay overnight in the hotel.
On the last day of the package, the guests are transported to the airport to catch their flights home. The business has been open for a number of years and its occupancy rate is high, over 80%. All figures are rounded off to the nearest dollar.
Calculate the package variable cost. Package variable cost per person Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Total cost per person Meals 18 25 25 25 25 35 6 159 Accommodation 35 Hotel 30 lodge 30 lodge 30 lodge 30 lodge 30 hotel 190 Transportation 10 van 80 flight 80 flight 10 van 180 Ski equipment rental 20 20 20 20 20 100 Safety equipment rental 6 6 6 6 6 30 Wind-up party 15 15 Total package variable cost A 674
Calculate the package fixed cost. Package fixed cost Cost per package Divide by the number of spaces available on tour Total cost per person Guide wages (Guide and assistant guide) 750 12 63 Cook wages 625 12 52 Helicopter flights for two guide and one cook 480 12 40 Other Total package fixed cost B 155
Calculate the share of the total business fixed cost (overhead) you want the package to contribute. Business fixed cost Annual cost Multiply by the percentage you want this package to contribute (i.e. 2.5%) Divide by the number of spaces available in this package Total cost per person Marketing 15000 375 12 31 Owner, management and guiding wages 35000 875 12 73 Package development 1800 45 12 4 Administration and Support staff 8000 200 12 17 Office cost 6500 163 12 14 Telephone 2400 60 12 5 Insurance 3600 90 12 8 Lodge payment 11000 275 12 23 Total business fixed cost C 175
Calculate the total package cost per person. Total package cost per person Carry forward the package variable cost per person from box A 674 Carry forward the package fixed cost per person from box B 155 Carry forward the business fixed cost per person from box C 175 Add A + B + C 1004 Divide by a realistic sales occupancy rate ( i.e. 80%) to get the total package cost per person D 1255
Add the appropriate amount of profit. Carry forward the total per person package cost from box D 1255 Multiply by the profit percentage you want to add to the package(i.e. 5%) 63 Add the two numbers to get the total per person package cost, including profit E 1318
Add travel agent and wholesaler commissions. Carry forward the total package cost per person including profit from box E 1318 Multiply by the commission percentage you want to add to the package (i.e.10%) 132 Add the two numbers to get the total package cost per person, including commission and profit F 1450
Adjust the price for a full spectrum of customer types. Carry forward the total package cost per person including commissio n and profit (Box F) Add percentag e of the price increase for single occupancy (i.e.10%) Add percentag e of the price increase for highseason booking 0% Subtract discount percentag e for group booking (i.e. 5%) Subtract discount percentag e for children under 12 years of age (15%) Subtract discount percentag e for low season booking (20%) 1450 145 0 72 217 290 Adjuste d Price 1595 1459 1378 1233 1160
ADMINISTRATION OF THE PACKAGE
Decisions need to be made regarding administrative details that facilitate the operation of the package and portray a professional image. These may include:
- How customers or their agents can reserve seats in the package. Options may include, telephone, facsimile, Internet/Email and regular mail.
- How records of reservations will be kept, how to handle reservations when the package is full, cancellation deadlines, customer payments and mailing list.
- How customers prove their purchase upon arrival.
This usually involves customers receiving some form of voucher that acts as their proof of purchase, provide confirmation to you of the service level required and provides identification of the particular agency that originated the sale, if applicable.
administering reservations vary among companies. If there is enough time between the initial reservation and travel commencement, it is suggested that a deposit be secured. Final payment should be received prior to the product being used.
Companies providing volume sales may negotiate less strict requirements and use roll-over deposits. (Please see Glossary.)
Travel agents, tour operators, suppliers, and consumers rely heavily on, 1- 800 numbers, fax and internet to make reservations. The cost of a 1-800 line, fax and internet has decreased, making this service more affordable for small business operators.
Operations Terms and Conditions
spell out company payment and cancellation policies.
Cancellation policies are often flexible to promote positive public relations with repeat clients. Examples of terms and conditions can be viewed on the back of better travel brochures.
Tour operators generally receive advance payment for travel arrangements and therefore can be accommodating in meeting payment schedules of product and service suppliers.
Confirmation and travel documents are sent directly to the booking agent, who in turn, sends them to the client.
Vouchers and Travel Documents
A voucher or travel coupon will include these details:
- Name of Tour Operator, Tour Name, Passenger Name, Supplier Name
- Dates and Services to be Supplied (coupon value)
- Official Validation Stamp
Travel documents require a step-by-step itinerary. For a group, the itinerary may be incorporated into a tour operator’s materials to provide the escort with a daily activity schedule.
For the FIT traveler, a precise itinerary will ensure the client can conduct his or her own tour with confidence, and can easily find local points of interest along the way.
DESCRIPTIONS – CONDITIONS – WAIVERS
Suppliers and/or operators dealing with TOUR WHOLESALERS should provide clear and concise information on all conditions affecting the provision of their product. These should be communicated in written form and provide the following information.
- A thorough description of what the program consists of.
- All ingredients of the offer should be listed and it should be noted whether or not they are actually included in the price quoted.
- A list of exact arrival and departure dates.
- An indication for what periods the prices are quoted.
- A clear description of payment procedures, e.g. deposit requirements, final payments, cancellation procedures and charges.
- A clear description of reservation and booking procedures
- The pricing, such as single room charges or others should be spelled out.
- An indication whether the prices are quoted net or gross.
- An indication, if applicable of what the commission payment structure is.
When doing so it should be realized wholesalers generally expect a commission of at least 20 percent, as approximately 10 percent has to be passed on to the retailers.
When quoting net prices, these must be net and not those that the consumer would be charged locally.
Any conditions outlining responsibility must be clearly expressed in exact terms.
Any specific insurance requirements must be detailed, exactly. With regard to communications, the ideal method from the standpoint of speed and maintaining proper records is the fax machine or email. The fax or email should not only be used as a means to exchange information on offers, reservations or booking, but also to keep wholesalers abreast of new developments that effect the status of the product. Finally, suppliers should ensure that their fax number, website and email is on their business cards, stationery and tariffs.