XII UNIT–6 PACKAGE TOUR (NOTES )
UNIT–6
PACKAGE TOUR COSTING
Introduction
ü Costing a package tour: The significance of estimating a package tour's costs, which include figuring out what it costs to purchase products and services from different vendors such as lodging facilities, resorts, and carriers. Tour operators may better grasp the size of sales and profit margins in both peak and lean seasons by doing costing, which is an essential practice.
ü Components of tour cost: The price covers a range of services that are included in either ready-made or custom tour packages. These elements might consist of lodging, travel, food, entertainment, and other services offered throughout the trip.
ü Reducing costs and competitiveness: Tour operators do a thorough industry search to find the top vendors at competitive prices. By reducing expenses, tour operators may offer customers affordable rates while keeping flexibility in determining profit margins and discounts.
ü Methodical approach to cost reduction: A rigorous strategy is important to avoid needless expenditures and improve the marketability of vacation packages in a highly competitive market.
ü Tour
pricing and strategies:
ü Finally, several elements affect tour pricing, including supplier prices, seasonal fluctuations, demand from customers, and the degree of market rivalry. Setting the best tour rates and guaranteeing profitability need an understanding of these variables.
6.1Meaning and Types of Cost
o Cost and Expenditures: Cost is defined in the paragraph as the total amount of money spent on primary and auxiliary service purchases. It makes clear that cost does not cover unanticipated value releases or the distribution of capital and income, but rather comprises actual or notional costs associated with purchasing services.
o Cost as Value
Addition: Cost is associated with the acquisition of economic resources to aid
managerial decision-making. It is measured in monetary terms and reflects the
amount of resources used for value addition in a business.
o Cost in Tour
Operation Business:
o Financial Significance of Cost: According to the text, costs play a critical role in attaining a company's financial goals. Tour operators strive to improve their company's financial performance and profitability through effective cost management.
6.2 Concept of Tour Costing
Tour Cost
- * The entire expense expended or ascribed to the different components of a package tour is known as the tour cost.
* Customers' likes and preferences as well as the tour operator's business plan influence how much a package tour costs.
* It is easy for tour managers to identify fixed and variable expenses and make the necessary decisions.
* The way that different tour operators determine the pricing differs.
Break-even Analysis
- Break-even
analysis is a key concept of tour costing.
- It
is the point where the total revenue generated from the sale of a package
tour is equal to the total cost incurred for acquiring the services.
- Break-even
analysis can be used to evaluate alternative pricing levels.
- Break-even sales can be obtained by dividing the sum of the total fixed costs and the total variable costs by the package price.
In summary
When setting the price of their packages, tour operators take the cost of the tours into account. Tour operators may use break-even analysis as a useful technique to figure out the best price point for their packages.
Here are some
additional points that could be included in the notes:
- The duration of a package trip, the number of places it visits, the kind of lodging and transportation it uses, and other factors can all affect how much it costs.
- A range of pricing choices, including fixed-price packages, flexible-price packages, and group discounts, are usually offered by tour operators.
- Break-even
analysis is a valuable tool for tour operators, but it is important to
remember that it is just one factor to consider when pricing packages.
Other factors, such as competition and demand, also need to be taken into
account.
Types of Cost
o Variable and Fixed
Costs in Tour Operation Business: The two types of costs in the tour operation
business. Variable costs fluctuate based on production variations, while
fixed costs remain constant in the short run but vary in the long run. Tour
operators calculate both variable and fixed costs, along with
overhead/marketing costs.
o Variable Costs: Variable
costs are directly related to the number of passengers in the package tour.
These costs include expenses for meals, accommodation, entrance fees, and other
per-person charges. They are incurred with the sale of each package and cover
the actual expenses of individual components.
o Fixed Costs: Fixed
costs change with an increase in the number of packages sold over a season.
These costs are incurred before acquiring the variable services for the package
tour. They include expenses for advertising, pamphlets, brochures, salaries,
interest on loans, advances, hiring buses, guides, and interpreters.
o Overhead and
Marketing Costs: Overhead and marketing costs are included across all package
tours and account for around 60% to 70% of the total costs. These costs cover
various administrative and promotional expenses.
o Mark-Up: After
considering all the costs, tour operators typically add a 10-15% mark-up for an
individual tour package to ensure profitability and cover any unforeseen
expenses.
Review Questions:
1.
What do you mean by cost?
Costing refers to the process of determining
and calculating the expenses incurred in producing goods or providing services.
It is a crucial aspect of business operations as it helps in assessing the
total expenditure involved in various aspects of production or service
delivery. Costing involves identifying and analyzing both direct and indirect
costs associated with a particular product, service, project, or activity.
In the context of the tourism industry,
costing is essential for tour operators and travel agencies to estimate the
total expenses incurred in creating and offering tour packages. It involves
calculating the expenses related to accommodation, transportation, meals,
activities, guides, marketing, overhead, and other factors that contribute to
the overall cost of a tour package. By accurately assessing the costs, tour
operators can determine the pricing of their packages, plan their profit
margins, and make informed decisions to manage expenses effectively.
Overall, costing plays a significant role in
financial planning, budgeting, and profitability analysis for businesses across
various industries, including tourism. It helps businesses to stay competitive,
offer competitive prices to customers, and ensure that their operations are
financially viable and sustainable.
2. Explain the meaning and types of costing.
Costing refers to the process of calculating
and determining the total expenses incurred in producing goods or providing
services. It involves the detailed analysis and allocation of costs to
different components of a product, service, or project. Costing is crucial for
businesses to assess the profitability of their operations, make pricing
decisions, and manage their expenses effectively.
Types of Costing:
1. Direct Costing: Direct costing involves
the identification and allocation of costs that can be directly attributed to a
specific product, project, or service. These costs include raw materials,
direct labour, and other expenses directly related to the production or delivery
of the item. Direct costing helps in calculating the cost of goods sold (COGS)
and is useful for pricing decisions and profitability analysis.
2. Indirect Costing: Indirect costing, also
known as overhead costing, deals with the allocation of expenses that cannot be
directly traced to a particular product or service. These costs include factory
rent, utilities, administrative expenses, and other general overheads. Indirect
costing is allocated to products or services based on allocation methods such
as activity-based costing (ABC) or predetermined overhead rates.
3. Activity-Based Costing (ABC): ABC is a
more refined costing method that identifies and allocates costs based on the
specific activities that consume resources. It provides a more accurate
understanding of the cost drivers for each activity and helps in better cost
allocation. ABC is particularly useful in businesses with diverse product lines
or services.
4. Job Costing: Job costing applies to
businesses that produce customized or unique products or services for each
customer or project. It involves the identification and allocation of costs to
specific jobs or projects based on the resources used for each job. Job costing
helps in pricing custom-made products or services and tracking the
profitability of individual projects.
5. Process Costing: Process costing is
suitable for industries that produce homogeneous products in a continuous
manufacturing process. It allocates costs to each stage of the production
process and helps assess the cost per unit for mass-produced items.
6. Standard Costing: Standard costing
involves the setting of predetermined standard costs for various components of
a product or service based on historical data or industry benchmarks. It helps
in comparing actual costs to standard costs, identifying cost variances, and
controlling expenses.
7. Marginal Costing: Marginal costing focuses
on analyzing the changes in costs and revenue as production levels or sales
volumes vary. It helps in making short-term pricing and production decisions by
considering the contribution margin (the difference between sales and variable
costs) of each unit.
Overall, the choice of costing method depends
on the nature of the business, the complexity of operations, and the specific
information needed for decision-making. Effective costing enables businesses to
optimize their resources, improve profitability, and make informed strategic
choices.
3. What is the importance of the break-even point in the tour business?
The break-even point is a critical concept in
the tour business as it helps tour operators assess the level of sales needed
to cover all their costs and start making a profit. It is the point at which
total revenue equals total costs, and the business neither makes a profit nor
incurs a loss. Understanding the break-even point is essential for the
following reasons:
1. Profitability Analysis: The break-even
point helps tour operators determine the minimum number of tour packages they
need to sell to cover their fixed and variable costs. By knowing this point,
they can set realistic sales targets and pricing strategies to achieve
profitability.
2. Pricing Decisions: To cover their costs
and reach the break-even point, tour operators can use the information to set
appropriate prices for their tour packages. It ensures that the prices charged
to customers are sufficient to cover all expenses and achieve profitability.
3. Cost Control: Knowing the break-even point
allows tour operators to analyze their cost structure more effectively. They
can identify areas where costs can be reduced or managed efficiently to improve
profitability.
4. Evaluating Business Viability: The
break-even analysis helps tour operators evaluate the viability of their
business model. If the break-even point is too high or difficult to achieve, it
may indicate that the business needs to reevaluate its strategy or cost
structure.
5. Planning and Budgeting: The break-even
point provides a foundation for financial planning and budgeting. Tour
operators can use this information to set financial goals, allocate resources,
and plan for future growth.
6. Risk Assessment: Understanding the
break-even point helps tour operators assess the risk associated with their
business. If the break-even point is too high, it may indicate that the
business is vulnerable to fluctuations in demand or unexpected costs.
7. Decision Making: The break-even analysis
assists tour operators in making informed decisions related to expansion,
investment, and product development. It helps them understand the financial
implications of various choices and minimize risks.
8. Performance Monitoring: Once the tour
business surpasses the break-even point, tour operators can monitor their
performance more effectively. They can track how changes in sales volume and
costs impact profitability.
9. Pricing Strategies: Tour operators can use
the break-even analysis to devise different pricing strategies based on volume
and profit goals. They can offer discounts, incentives, or promotional packages
to attract more customers and boost sales.
In summary, the break-even point is a vital
tool for tour businesses to ensure financial stability, make informed
decisions, and achieve profitability. It helps them navigate the complexities
of the travel industry and establish competitive pricing strategies while
ensuring the financial health of the business.
4. What do you mean by tour costing and how is
tourism calculated?
Tour costing, also known as tour pricing,
refers to the process of calculating the total cost of providing a tour package
to customers. It involves determining all the expenses associated with offering
the tour, including the costs of accommodation, transportation, meals,
activities, guides, and any other services included in the package.
Additionally, tour costing also takes into account overhead costs such as
marketing expenses, administrative costs, and other indirect expenses related
to running the tour operation.
Tour costing is an essential aspect of the
tour business as it helps tour operators determine the appropriate price to
charge customers for their tour packages. The goal is to set a price that
covers all the expenses incurred in providing the tour while also allowing for
a reasonable profit margin.
The process of tour costing typically
involves the following steps:
1. Identifying Tour Components: The first
step is to identify all the components and services included in the tour
package, such as accommodation, transportation, meals, activities, and any
additional services.
2. Determining Costs: For each tour component,
the tour operator calculates the actual cost of providing that service. This
may involve negotiating rates with suppliers, considering bulk discounts, and
factoring in any other costs associated with the service.
3. Allocating Overhead Costs: Overhead costs,
such as marketing expenses, salaries, and administrative costs, are allocated
to each tour package based on a predetermined allocation method.
4. Calculating Total Cost: The total cost of
the tour package is the sum of all the individual costs for each component,
including the allocated overhead costs.
5. Setting Profit Margin: After calculating
the total cost, the tour operator determines the desired profit margin for the
tour. This is typically a percentage of the total cost that represents the profit
the tour operator aims to make from the tour.
6. Determining Tour Price: The final step is
to add the desired profit margin to the total cost to arrive at the tour price.
This is the price that will be charged to customers for the tour package.
Tour costing is a complex process that
requires careful consideration of various factors, such as seasonality,
competition, customer preferences, and market demand. Tour operators must
strike a balance between setting a competitive price that attracts customers
while ensuring that the price is sufficient to cover all expenses and generate
a profit. Additionally, tour operators may use different pricing strategies,
such as dynamic pricing, early bird discounts, or promotional offers, to
optimize sales and profitability.
5. Observe the variable costs and understand them
from a practical point of view.
Here are some variable costs that are common in the tourism
industry and their practical implications:
- Accommodation: The cost of
accommodation can vary depending on the type of accommodation, the length
of stay, and the time of year. For example, the cost of a hotel room will
be higher in peak season than in the off-season.
- Food: The cost of food can vary
depending on the type of food, the location, and the time of day. For
example, the cost of a meal at a restaurant will be higher in a tourist
destination than in a non-tourist destination.
- Transportation: The cost of
transportation can vary depending on the mode of transportation, the
distance travelled, and the time of year. For example, the cost of a plane
ticket will be higher in peak season than in the off-season.
- Activities: The cost of activities
can vary depending on the type of activity, the location, and the time of
year. For example, the cost of a museum ticket will be higher in a popular
tourist destination than in a less-visited destination.
These are just a few examples of variable costs in the tourism
industry. The specific variable costs that are relevant to a particular tour
will depend on the specific itinerary and the specific needs of the tourists.
From a practical point of view, tour operators need to understand the variable costs of their tours so that they can
accurately price their tours and make a profit. Tour operators can also use
variable costs to track the performance of their tours and make adjustments as
needed.
Here are some additional points that could be considered when
understanding variable costs from a practical point of view:
- Variable costs can be difficult to
estimate, especially for tours that involve multiple destinations or
activities.
- Variable costs can fluctuate over time, so
it is important to keep track of them regularly.
- Variable costs can be affected by factors
such as weather, political instability, and natural disasters.
By understanding variable costs, tour operators can make better
decisions about pricing, planning, and marketing their tours.
6. How tour cost is calculated? Explain.
Tour cost is calculated by considering all the expenses incurred
in providing a tour package to customers. The process involves identifying the
individual components and services included in the tour, determining the costs
for each component, allocating overhead costs, and setting a profit margin.
Here's a step-by-step explanation of how tour cost is calculated:
1. Identify Tour Components: The first step is to identify all
the services and components included in the tour package. This may include
accommodation, transportation, meals, activities, entrance fees, guides, and
any other services provided to the customers.
2. Determine Costs for Each Component: For each tour component,
the tour operator calculates the actual cost of providing that service. This
involves obtaining quotes from suppliers, negotiating rates, considering bulk
discounts, and factoring in any other expenses associated with the service. For
example, the cost of accommodation will include the room rates, taxes, and any
additional amenities provided to the guests.
3. Allocate Overhead Costs: Overhead costs are indirect expenses
that are incurred to run the tour operation but are not directly tied to any
specific service. These may include marketing expenses, salaries,
administrative costs, and other general operational expenses. Overhead costs
are allocated to each tour package based on a predetermined allocation method.
For example, if a tour package accounts for 10% of the total sales volume, it
will be allocated 10% of the total overhead costs.
4. Calculate Total Cost: The total cost of the tour package is
the sum of all the individual costs for each component, including the allocated
overhead costs. This gives the tour operator a comprehensive view of the total
expenses incurred in providing the tour.
5. Set Profit Margin: After calculating the total cost, the tour
operator determines the desired profit margin for the tour. The profit margin
is the amount of profit the tour operator aims to make from the tour package.
It is usually expressed as a percentage of the total cost. For example, if the
total cost is $1,000 and the desired profit margin is 20%, the profit margin
would be $200.
6. Determine Tour Price: The final step is to add the desired
profit margin to the total cost to arrive at the tour price. The tour price is
the amount that will be charged to customers for the tour package. Using the
example above, the tour price would be $1,200 ($1,000 total cost + $200 profit
margin).
It is important for tour operators to carefully calculate the
tour cost to ensure that the price charged to customers is sufficient to cover
all expenses and generate a profit. Additionally, tour operators may use
various pricing strategies and promotional offers to attract customers and
maximize sales while maintaining profitability.
7. What are the different types of costs involved in a tour package?
In a tour package, various types of costs are involved, which
can be categorized into the following:
1. Variable Costs: Variable costs are expenses that vary
directly with the number of tourists or the level of production. These costs
increase or decrease based on the volume of services provided in the tour
package. Examples of variable costs in a tour package include:
o
Accommodation costs: The cost of hotel rooms or other lodging
facilities for the number of tourists on the tour.
o
Meals: The cost of meals provided to tourists during the tour.
o
Entrance fees: Fees for entry to attractions, museums,
historical sites, etc.
o
Transportation costs: Expenses for providing transportation
services such as flights, buses, or trains based on the number of tourists.
2. Fixed Costs: Fixed costs are expenses that remain constant
regardless of the number of tourists or the level of production. These costs
are incurred to maintain the tour operation and are not directly related to the
number of services provided. Examples of fixed costs in a tour package include:
o
Administrative costs: Salaries, rent, and other expenses
associated with running the tour operation.
o
Marketing and advertising expenses: Costs related to promoting
and marketing the tour packages.
o
Insurance: Premiums for insurance coverage for the tour
operation.
3. Overhead Costs: Overhead costs are indirect expenses that
support the overall operation of the tour business. These costs are not
directly attributable to a specific tour package but are spread across all
packages. Examples of overhead costs in a tour package include:
General administrative expenses: Costs for utilities, office
supplies, and other general operational expenses.
o
Staff training and development: Expenses for training and
developing the tour staff.
o
Customer service and support: Costs for maintaining customer
service and support teams.
4. Opportunity Costs: Opportunity costs refer to the potential
benefits or profits that are forgone when choosing one alternative over
another. In the context of tour packages, opportunity costs may arise when a
tour operator chooses to offer one tour package over another, resulting in the
loss of potential revenue from the alternative package.
5. Direct Costs: Direct costs are expenses that can be directly
traced to a specific tour package and are essential for delivering that
package. These costs include items like accommodation charges, transportation
costs, and entrance fees.
6. Indirect Costs: Indirect costs are expenses that cannot be
directly attributed to a specific tour package but are essential for running
the overall tour business. Examples include administrative salaries and
marketing expenses.
Tour operators need to carefully analyze and consider these
different types of costs to ensure they price their tour packages
appropriately, cover all expenses, and maintain profitability. Proper cost
management is crucial for the success of the tour business.
Preparation of Cost Sheet
o
Cost Sheet: A cost sheet is a document that outlines the cost of
each component involved in the package tour. It requires continuous efforts and
cost estimation to determine the expenses accurately and arrive at an
attractive price that will lead to increased sales and profit margin.
o
Competitive Price: In the package tour business, various
combinations of costs are calculated to establish a competitive price for the
tour package. This pricing strategy aims to attract customers and stand out in
the market.
o
Direct Costs: The costs directly associated with the package
tour are categorized as direct costs. It includes expenses related to
accommodation, transportation, meals, entrance fees, guide fees, activities,
and any other direct expenses for the tour.
o
Indirect Costs: Indirect costs are expenses that are not
directly tied to a specific component but are essential for the overall
functioning of the tour business. It includes administrative costs (salaries,
training, etc.), advertising, sales promotion, publicity, and overhead costs.
o
Profit Margin: A tour operator aims to make a profit on each
sale of the package tour. Typically, a profit margin of around 15 per cent is
considered, which includes the commission or override received from the
principal service providers (hotels, airlines, etc.).
o
Cost Analysis: Proper cost analysis and continuous efforts are
necessary to manage and control costs effectively. A well-calculated cost sheet
helps the tour operator set an appropriate selling price for the package tour,
ensuring that all expenses are covered, and a reasonable profit margin is
achieved.
o
Sustainability: Efficient cost estimation and pricing strategies
are essential for the long-term sustainability of the tour business. By
maintaining competitive prices and managing costs, the tour operator can
attract customers, generate revenue, and maintain profitability.
Review Questions:
1. What is the
procedure for preparing the cost sheet?
The procedure for preparing a cost sheet in the context of a
tour package involves several steps to accurately calculate the costs and
arrive at a competitive selling price. Here's a step-by-step procedure for
preparing a cost sheet:
1. Identify Tour Components: List down all the components or
elements that will be included in the tour package. These components may
include accommodation, transportation, meals, entrance fees, guide fees,
activities, and any other direct expenses related to the tour.
2. Gather Cost Data: Collect detailed cost data for each
component from various suppliers, such as hotels, airlines, restaurants, and
activity providers. Ensure that you have the latest and most accurate pricing
information from reliable sources.
3. Categorize Costs: Divide the costs into direct and indirect
costs. Direct costs are directly linked to specific components, while indirect
costs are general overhead expenses not directly tied to any specific element
but essential for the overall operation of the tour business.
4. Calculate Direct Costs: Calculate the total direct costs by
summing up the expenses associated with each component of the tour. This may
involve calculations for accommodation charges, transportation expenses, guide
fees, meals, activity costs, etc.
5. Calculate Indirect Costs: Calculate the total indirect costs,
which may include administrative expenses (salaries, training, utilities, rent,
etc.), advertising, sales promotion, and other overhead costs.
6. Determine Profit Margin: Decide on the desired profit margin
for the tour package. This profit margin should cover the company's operational
costs and provide a reasonable return on investment.
7. Add Markup and Commission: Include any additional markup or
commission from the principal service providers (hotels, airlines, etc.) in the
cost sheet.
8. Calculate Total Cost: Sum up the direct costs, indirect
costs, profit margin, and any other applicable charges to calculate the total
cost of the tour package.
9. Set Selling Price: Based on the total cost, determine the
selling price for the tour package. Ensure that the selling price is
competitive and attractive to potential customers.
10. Regular Updates: Keep the cost sheet updated with the latest
cost data and market trends to ensure accurate pricing and profitability.
11. Review and Analysis: Conduct a thorough review and analysis
of the cost sheet to ensure that all costs are accounted for and the selling
price is appropriate for the market and business objectives.
By following this procedure and continuously monitoring costs
and market conditions, tour operators can prepare an effective cost sheet that
helps in pricing their tour packages competitively while ensuring
profitability.
2. Explain the direct cost and indirect costs of tour packages.
In tour packages, direct costs and indirect costs are two types
of expenses that tour operators consider while calculating the overall cost of
the package. Understanding the distinction between these costs is essential for
accurate pricing and financial planning. Here's an explanation of direct costs
and indirect costs in the context of tour packages:
1. Direct Costs:
Direct costs are expenses that are directly associated with
specific components or elements of the tour package. These costs can be easily
traced and attributed to a particular service or activity provided to the
tourists. Direct costs vary based on the number of tourists or the usage of the
services. Some examples of direct costs in tour packages include:
- Accommodation Charges: The cost of booking hotel rooms or
other lodging facilities for the tourists.
- Transportation Expenses: Costs related to hiring buses, taxis,
flights, or any other mode of transportation for the tourists.
- Meals and Food Expenses: The cost of providing meals and food
services to the tourists during the tour.
- Entrance Fees: Charges for admission to tourist attractions,
museums, parks, historical sites, etc.
- Guide Fees: Payments to tour guides or interpreters for
providing services to the tourists.
- Activity Costs: Costs of arranging activities or excursions
for the tourists.
Direct costs can be easily calculated by multiplying the cost
per unit (e.g., per person or per group) by the number of tourists or the
quantity of services utilized.
2. Indirect Costs:
Indirect costs, also known as overhead costs, are expenses that
are not directly linked to a specific component of the tour package. Instead,
these costs are incurred to support the overall operation of the tour business.
Indirect costs are generally not easily traceable to individual services but
are essential for the smooth functioning of the company. Some examples of indirect
costs in tour packages include:
- Administrative Expenses: Salaries, training, and other
expenses related to the tour company's staff and management.
- Advertising and Sales Promotion: Costs associated with
marketing and promoting the tour packages.
- Office Rent and Utilities: Rent and utilities expenses for the
office space used by the tour company.
- General Office Supplies: Costs for stationery, printing
materials, and other office supplies.
- Insurance and Legal Expenses: Expenses for insurance coverage
and legal services.
Indirect costs are usually allocated to various tour packages
based on predetermined allocation methods, such as percentage of revenue or
percentage of direct costs.
By distinguishing between direct costs and indirect costs, tour
operators can accurately assess the total expenses involved in providing tour packages and make informed decisions regarding pricing, profitability, and
cost management.
3. How does a tour operator arrive at the net income?
A tour operator arrives at the net income by calculating the
total revenue generated from selling tour packages and then subtracting all the
expenses incurred in providing those packages. The net income is the final
profit or loss left after deducting all the costs and expenses from the total
revenue. Here's the step-by-step process to calculate the net income for a tour
operator:
1. Total Revenue:
The first step is to calculate the total revenue earned from
selling tour packages. This includes the total amount received from customers
for booking tours, accommodations, transportation, activities, and any other
services offered in the packages.
2. Direct Costs:
Next, the tour operator calculates all the direct costs
associated with providing the tour packages. Direct costs are the expenses
directly linked to specific components of the tour, such as accommodation
charges, transportation expenses, meals, entrance fees, guide fees, and
activity costs.
3. Indirect Costs:
After calculating the direct costs, the tour operator determines
all the indirect costs (overhead costs) incurred to support the operation of
the tour business. Indirect costs may include administrative expenses,
advertising and sales promotion costs, office rent, utilities, general office
supplies, insurance, legal expenses, and other general operating expenses.
4. Gross Profit:
The gross profit is calculated by subtracting the direct costs
from the total revenue. It represents the profit earned before considering the
indirect costs.
Gross Profit = Total Revenue - Direct Costs
5. Operating Profit:
The operating profit is obtained by subtracting the indirect
costs from the gross profit. It represents the profit earned after considering
both direct and indirect costs but before accounting for taxes and interest.
Operating Profit = Gross Profit - Indirect Costs
6. Net Income:
Finally, the net income (or net profit) is calculated by further
deducting any taxes, interest, and other financial expenses from the operating
profit. If the result is positive, it indicates a net profit, and if it's
negative, it represents a net loss.
Net Income = Operating Profit - Taxes - Interest - Other
Expenses
The net income provides a clear picture of the financial
performance of the tour operator, indicating the final profit or loss generated
from its operations. Positive net income reflects profitability, while negative
net income indicates a loss in the business. Tour operators analyze their net
income to assess the success of their business strategies, pricing decisions,
and overall financial health.
6.3 Components
of Tour Cost
The cost components of a package tour include:
- Research and Product Development: This
includes the cost of market research, as well as the cost of developing
new packages.
- Travel Cost: This includes the cost
of airfare, rail travel, and transfers.
- Accommodation: This includes the cost
of hotel rooms, as well as the cost of other accommodations, such as
camping or homestays.
- Food and Beverage: This includes the
cost of meals, snacks, and drinks.
- Sightseeing and Activity: This
includes the cost of activities such as tours, excursions, and entrance
fees.
- Marketing and Sales Promotion: This
includes the cost of advertising, brochures, and other marketing
materials.
- Administrative and Investment: This
includes the cost of salaries, office space, and other administrative
costs.
- Miscellaneous Costs: This includes
the cost of items such as porterage, tips, and insurance.
Calculating the Cost of a Package Tour
The total of each component's cost is used to determine the cost of a package tour. Each component's price will change based on the particular trip. For instance, the cost of lodging will change based on the kind of lodging, the area, and the season.
The tour operator will add a markup to the overall cost to cover their profit after calculating the costs of all the components. Usually, the markup is expressed as a percentage of the overall price.
Pricing a Package Tour
The price of a package tour is determined by several
factors, including the cost of the tour, the competition, and the demand for
the tour. The tour operator will need to carefully consider all of these
factors when pricing a package tour.
In summary
When organizing a trip, the price of a package tour is a crucial consideration. Travelers may choose which trips to reserve with knowledge of the various pricing components.
Review Questions:
1. How to incorporate
the components of tour cost?
Including the tour cost components entails using a methodical process to compile, examine, and compute the different costs related to a package tour. The following is how tour operators might include the tour cost components:
1. Research and Product Development: Conduct market research to
understand customer preferences and interests. Identify potential tourist
destinations and attractions. Estimate the cost of exploring and developing new
tour packages.
2. Travel Cost: Gather information on international and domestic
airfares, rail travel, and other transportation options. Negotiate with
airlines and transport companies to get the best rates.
3. Accommodation: Contact hotels and resorts to negotiate room
rates and book accommodations for the tour group. Consider factors like room
types, meal plans, and additional services.
4. Transfer: Calculate the cost of transportation services
needed to move tourists between destinations and activities. Include costs for
buses, taxis, or other transfer options.
5. Food and Beverage: Estimate the cost of providing meals and
beverages to the tourists during their stay. Consider different meal plans and
dining options.
6. Sightseeing and Activity: Work with local tour operators or
activity providers to determine the cost of sightseeing tours and excursions.
Divide the cost of activities across the tour group.
7. Marketing & Sales Promotion: Budget for advertising and
promotional activities to attract customers. Consider commissions and
incentives for travel agents.
8. Administrative and Investment: Account for administrative
expenses like salaries, allowances, and office rent. Include investments in
reservation systems and other technology.
9. Training and Development: Allocate funds for staff training
and professional development programs.
10. Printing and Publicity: Include the cost of printing
brochures and other promotional materials. Budget for foreign promotional tours
and events.
11. Payment of Interest: Consider the interest payments on
capital borrowed to run the tour business.
12. Depreciation of Assets: Factor in the depreciation of assets
like software, hardware, and electronic devices over time.
13. Miscellaneous Costs: Account for miscellaneous expenses like
porterage charges, tips, entrance fees, insurance premiums, and welcome
dinners.
Tour operators may determine the overall cost of the package tour by adding up all of these charges once each component has been identified and an estimate of its cost has been made. Tour operators may establish competitive rates for their packages while maintaining profitability thanks to this thorough cost analysis. It also enables them to comprehend the cost structure and make wise choices to maximize the efficiency of their business operations.
2. Explain the importance of cost over marketing and promotion
The importance of cost control over marketing and promotion lies
in achieving a balanced and sustainable business model for tour operators.
While marketing and promotion are crucial for attracting customers and
increasing sales, effective cost control ensures profitability and financial
stability in the long run. Here's why cost control is essential:
1. Profitability: Cost control directly impacts the profit
margins of tour operators. By keeping a close eye on expenses, tour operators
can ensure that the revenue generated from tour packages exceeds the total
cost, leading to higher profitability.
2. Competitive Pricing: Effective cost control allows tour
operators to set competitive prices for their packages. By optimizing costs,
they can offer attractive rates without compromising on the quality of
services, making their offerings more appealing to customers.
3. Value for Customers: When tour operators manage costs
efficiently, they can provide better value to customers by offering
high-quality services at reasonable prices. Satisfied customers are more likely
to recommend the tour operator to others and become repeat customers.
4. Flexibility in Pricing Strategies: By controlling costs, tour
operators gain flexibility in their pricing strategies. They can offer
discounts or promotions without incurring losses, making it easier to respond
to market demands and changing customer preferences.
5. Financial Stability: Controlling costs ensures a stable
financial position for tour operators. They can manage cash flow effectively,
handle unforeseen expenses, and invest in business growth without risking
financial instability.
6. Enhanced Competitiveness: Cost control enables tour operators
to be more competitive in the market. They can allocate resources efficiently,
invest in technology and infrastructure, and differentiate themselves from
competitors.
7. Risk Mitigation: Uncontrolled costs can lead to financial
risks and business uncertainties. By actively managing costs, tour operators
reduce the risk of financial strain during lean periods or unexpected market
changes.
8. Sustainable Growth: Sustainable growth is vital for the
long-term success of tour operators. Cost control supports sustainable growth
by ensuring that expenses are managed in a way that aligns with the company's
revenue and business objectives.
9. Efficient Resource Allocation: Cost control helps tour operators
allocate resources wisely. They can identify areas where investments are most
effective, optimize operational efficiency, and improve overall performance.
10. Adaptability to Market Dynamics: In the dynamic tourism
industry, market conditions can change rapidly. By having a strong grasp of
costs, tour operators can adapt to market fluctuations and adjust pricing
strategies accordingly.
In conclusion, while marketing and promotion play a significant
role in attracting customers and driving sales, cost control is equally vital
for tour operators to maintain profitability, competitiveness, and financial
stability. Balancing cost management with marketing efforts is essential for
creating a sustainable and successful tour operation business.
3. What are the implicit and explicit costs of the package tour?
In the context of package tours, implicit and explicit costs
refer to different types of expenses that tour operators incur while designing and
offering tour packages. These costs are essential to consider while determining
the overall cost of the package and setting its price. Here's an explanation of the implicit and explicit costs of the package tour:
1. Explicit Costs:
Explicit costs are tangible and easily identifiable expenses
that are directly associated with providing the services included in the
package tour. These costs are explicit or openly stated in financial records
and can be easily quantified. Some examples of explicit costs in the package
tour include:
- Accommodation Costs: The expenses incurred for booking hotel
rooms for the duration of the tour.
- Transportation Costs: The costs related to booking air, rail,
bus, or any other mode of transportation used during the tour.
- Meals and Beverages: The cost of providing meals and beverages
to the tour participants during the trip.
- Entrance Fees: The charges for accessing attractions, museums,
parks, or other tourist sites included in the itinerary.
- Guide or Interpreter Fees: The fees paid to tour guides or
interpreters who accompany the group during the tour.
- Activity Costs: The expenses associated with additional
activities or excursions included in the tour package.
- Administrative Costs: The overhead costs, such as salaries,
office rent, utilities, and other administrative expenses.
- Marketing and Sales Costs: The expenses related to
advertising, promotion, and sales efforts to attract customers for the tour.
2. Implicit Costs:
Implicit costs, on the other hand, are opportunity costs that
are not explicitly stated in the financial records but represent the value of
resources that could have been used elsewhere if not for the tour operation.
These costs are often more challenging to quantify as they involve forgone
alternatives. Some examples of implicit costs in the package tour include:
- Owner's Salary: If the owner of the tour operation actively
works in the business without drawing a salary, the implicit cost is the salary
they could have earned in an alternative job.
- Own Capital Investment: The implicit cost is the return on
investment that the owner could have earned if they had invested their capital
in other ventures.
- Time and Effort: The time and effort invested by the tour
operator in designing and planning the tour, which could have been used for
other activities or projects.
- Unutilized Assets: If the tour operator owns assets like
vehicles or properties that are not fully utilized for the tour, the implicit
cost is the potential revenue that could have been generated if those assets
were used differently.
Both explicit and implicit costs are crucial for tour operators
to accurately assess the total cost of offering a tour package and determine an
appropriate pricing strategy to ensure profitability and competitiveness in the
market.
6.4Pricing Package Tour
- Pricing and Positioning: The pricing of a package tour
is influenced by how the tour operator positions and brands the product.
Factors like target market, perceived value, and competitors' pricing play a
crucial role in determining the package's price.
- Margins and Costs: After analyzing market trends and
assessing the costs involved in providing the services, the tour operator adds
their desired profit margins to determine the selling price of the package.
- Operational Costs: The price of the package also
includes operational costs, such as administrative expenses, marketing, and
sales promotion.
- Mark: The mark-up is the additional amount added to
the net rate of services, allowing the company to maintain a profit margin on
each sale.
- Net Rate: Net rate is the rate at which the tour
operator purchases services from suppliers before adding their mark-up.
- Gross Profit: Gross profit is the rate at which a
supplier quotes for products or services they provide to the tour operator.
- Commission: The commission earned by the tour operator
from suppliers constitutes a significant portion of their earnings in tour
operations. It is a form of compensation for bringing business to the
suppliers.
Review Questions:
1. What is pricing?
and how it is done in a package tour business?
Pricing in the context of a package tour business
refers to the process of determining the selling price of a tour package that
includes various travel and hospitality services for a specific destination or
itinerary. It involves calculating the cost of services, adding the desired
profit margin, and arriving at a competitive price that is attractive to
customers while ensuring profitability for the tour operator.
Steps in Pricing for a Package Tour Business:
1. Cost Calculation: The first step in pricing a package
tour is to calculate the cost of all the components included in the package,
such as transportation, accommodation, meals, activities, and other services.
2. Profit Margin: The tour operator then decides on the
profit margin they want to achieve for each package sale. This margin varies
depending on the business strategy, market conditions, and competitive
landscape.
3. Market Research: Conducting market research to
understand customer preferences, competitor pricing, and market demand is
essential. This information helps in setting a competitive price that appeals
to potential customers.
4. Positioning and Branding: The pricing strategy also
considers the positioning and branding of the package. Higher-end luxury packages
can command premium prices, while budget packages may target price-sensitive
customers.
5. Seasonality and Demand: Package prices may vary based
on the season and demand fluctuations. Prices during peak travel seasons or
holidays may be higher than off-peak periods.
6. Inclusions and Exclusions: Clearly defining the
inclusions and exclusions in the package is crucial. Customers should know what
services they are paying for and what additional expenses they might incur.
7. Promotions and Discounts: Tour operators may offer
promotional discounts or special offers to attract more customers or fill empty
seats on specific departures.
8. Flexibility: Having flexible pricing options allows
customers to choose different accommodation categories, transportation options,
or activities, providing them with choices based on their preferences and
budget.
9. Dynamic Pricing: Some tour operators use dynamic
pricing techniques, where prices may fluctuate based on factors like real-time
demand, availability, and booking patterns.
10. Competitive Analysis: Keeping an eye on competitors'
pricing strategies and adjusting the package pricing accordingly can help
maintain a competitive edge in the market.
The ultimate goal of pricing in a package tour business is to
strike a balance between attracting customers with competitive prices and
ensuring the company's profitability and sustainability. Effective pricing
strategies can lead to increased sales, customer satisfaction, and a thriving
tour business.
2. How does a tour operator label the price of a package tour?
A tour operator labels the price of a package tour based on the
cost of services included in the package, the desired profit margin, market
demand, and competitive analysis. The pricing process involves several steps,
and the final price is determined by considering various factors. Here's how a
tour operator typically labels the price of a package tour:
1. Cost Calculation: The tour operator calculates the
total cost of all the services included in the package, such as transportation,
accommodation, meals, activities, guides, and other expenses.
2. Profit Margin: The tour operator decides on the profit
margin they want to achieve for each package sale. This margin is added to the
cost to determine the selling price.
3. Market Research: Market research is conducted to
understand customer preferences, competitor pricing, and market demand. This
information helps in setting a competitive price that appeals to potential
customers.
4. Positioning and Branding: The pricing strategy is
aligned with the positioning and branding of the package. Luxury packages may
command higher prices, while budget packages may target price-sensitive
customers.
5. Seasonality and Demand: Package prices may vary based
on the season and demand fluctuations. Prices during peak travel seasons or
holidays may be higher than off-peak periods.
6. Inclusions and Exclusions: The tour operator clearly
defines the inclusions and exclusions in the package. Customers should know
what services they are paying for and what additional expenses they might
incur.
7. Promotions and Discounts: Tour operators may offer
promotional discounts or special offers to attract more customers or fill empty
seats on specific departures.
8. Flexibility: Having flexible pricing options allows
customers to choose different accommodation categories, transportation options,
or activities, providing them with choices based on their preferences and
budget.
9. Dynamic Pricing: Some tour operators use dynamic
pricing techniques, where prices may fluctuate based on factors like real-time
demand, availability, and booking patterns.
10. Competitive Analysis: The tour operator keeps an eye
on competitors' pricing strategies and adjusts the package pricing accordingly
to maintain a competitive edge in the market.
After considering all these factors, the tour operator arrives
at a final price that reflects the cost of services, the desired profit margin,
and market considerations. The labelled price is then communicated to customers
through promotional materials, brochures, websites, and other marketing
channels. Transparency in pricing and clearly defining the value proposition of
the package are essential for building customer trust and satisfaction.
6.5Pricing Strategies
1. Cost-Based Pricing: This
strategy involves calculating the average cost of each element of services in
the package tour and adding a markup to reach the breakeven point and make a
profit. It is a common approach used by companies like Thomas Cook and Oberoi
Hotels.
2. Competition-Based Pricing:
In this strategy, the pricing is determined by considering the prices of
competitors. The tour operator may set the price at the same level as
competitors or slightly above or below. This strategy helps maintain
competitiveness in the market.
3. Consumer-Based Pricing: This
pricing strategy targets customers based on their affordability and purchasing
behaviour. Tour operators design package tours after assessing the
socio-economic backgrounds of customers to meet their needs and preferences.
Additional Pricing Strategies in
Tour Operation Business:
4. Rack Rate Pricing: This
is the full rate before any discounts are applied and is often printed in tour
brochures for the upcoming season.
5. Seasonal Pricing:
Different pricing is set for low, high, and shoulder seasons to cater to the
varying demand driven by seasonal factors.
6. Last-Minute Pricing:
Discounts are offered from the daily quoted prices to encourage last-minute
bookings. This tactic is commonly used to fill remaining slots in tours.
7. Per-Person Pricing: The
pricing is set per person or per category of service, such as adult, child, or
additional person. It can also be applied to services like taxi arrangements.
8. Per Unit Pricing: This
approach sets a price for one unit of the package, which may include multiple
individuals (e.g., husband, wife, children). It is often used for packages that
include accommodation, transfers, and sightseeing with meals as per the
European Plan (EP).
Tour operators must carefully
consider these pricing strategies to find the right balance between
profitability and customer satisfaction. Pricing plays a crucial role in
attracting customers and establishing a competitive edge in the tour operation
business.
Review Questions:
1.
What is strategy? Explain the need for strategy in preparing tour
package prices.
**Strategy** is a deliberate, well-thought-out method that enterprises, organizations, or people use to accomplish particular goals or objectives. It entails making choices and taking action based on a thorough comprehension of the circumstances both now and in the future. To succeed, strategies are necessary to direct the distribution of resources, create action plans, and manage uncertainty.
In the context of preparing tour
package prices, having a well-defined strategy is crucial for the following
reasons:
1. **Competitive Edge:** The
travel and tourism industry is highly competitive, with numerous tour operators
vying for the attention of potential customers. A well-thought-out pricing
strategy helps a tour operator position their packages in a way that
differentiates them from competitors and provides a competitive edge in the
market.
2. **Profitability:** Effective
pricing strategies ensure that tour packages are priced to cover all costs,
including direct expenses, overheads, and a reasonable profit margin. It is
essential to strike the right balance between offering attractive prices to
customers and ensuring the business's financial viability and profitability.
3. **Market Demand:** Pricing
strategies should align with the demands and expectations of the target market.
Understanding the needs and preferences of customers helps tour operators
tailor their packages and pricing to meet customer expectations, resulting in
increased demand and customer satisfaction.
4. **Value Perception:** Pricing
is not just about setting a number; it is about conveying the value of the
package to customers. A well-crafted pricing strategy communicates the unique
benefits and experiences offered in the tour package, making customers feel
that they are getting value for their money.
5. **Seasonal Variations:** The
travel industry often experiences fluctuations in demand based on seasons and
holidays. A pricing strategy should consider these seasonal variations and
adjust prices accordingly to attract customers during peak and off-peak
periods.
6. **Flexibility:** A good
pricing strategy allows for flexibility to adapt to changing market conditions,
competition, and customer feedback. It should empower tour operators to make
real-time adjustments in response to market dynamics.
7. **Brand Positioning:** The
pricing strategy should align with the tour operator's brand positioning.
Whether positioning the packages as luxury, budget-friendly, family-oriented,
or adventure-driven, the pricing should be consistent with the intended brand
image.
8. **Long-Term Sustainability:**
A pricing strategy should support the long-term sustainability of the tour
operation business. It should take into account the business's growth plans,
expansion, and the development of a loyal customer base.
9. **Relationship with
Suppliers:** The pricing strategy should consider the relationships with
various suppliers involved in the package. A fair pricing strategy ensures a
mutually beneficial relationship with hotels, transport providers, and other
service providers.
In conclusion, a well-planned
pricing strategy is essential for tour operators to effectively meet the needs
of the market, stay competitive, achieve profitability, and sustain long-term
growth in the travel and tourism industry. It allows tour operators to align
their pricing decisions with their business goals and customer expectations,
ultimately leading to successful tour package offerings.
2. Discuss various pricing strategies
in tour packages.
In the tour package industry,
pricing strategies play a crucial role in attracting customers, maximizing
revenue, and maintaining a competitive edge. Tour operators employ various
pricing strategies based on market dynamics, target customers, seasonality, and
business objectives. Here are some common pricing strategies used in tour
packages:
1. **Cost-Based Pricing:** This
strategy involves calculating the total cost of providing the tour package,
including direct expenses like accommodation, transportation, meals, and
activities, along with overhead costs. A markup or profit margin is added to
the total cost to arrive at the final selling price. Cost-based pricing ensures
that all costs are covered and that the business makes a profit.
2. **Competition-Based Pricing:**
This strategy involves setting the price of the tour package based on the
prices charged by competitors in the market. Tour operators may choose to price
their packages at a similar level as their competitors or offer a slightly lower
or higher price depending on factors like package inclusions and quality of
services.
3. **Consumer-Based Pricing:**
Consumer-based pricing takes into account the perceived value of the tour
package from the customer's perspective. It considers factors such as the
target market's willingness to pay, their income level, and the overall demand
for the package. Tour operators may offer different packages at different price
points to cater to different customer segments.
4. **Dynamic Pricing:** Dynamic
pricing involves adjusting the tour package price in real time based on demand
and supply conditions. Prices may fluctuate based on factors like seasonality,
availability, booking trends, and time of booking. Dynamic pricing allows tour
operators to optimize revenue and fill capacity during peak and off-peak
periods.
5. **Bundling and Unbundling:**
Bundling refers to offering a package that includes multiple services and
activities at a single price. It creates value for customers and simplifies
their booking process. Unbundling, on the other hand, involves offering
individual components of the package separately, allowing customers to
customize their experience and pay only for what they need.
6. **Seasonal Pricing:** Seasonal
pricing involves setting different prices for the same package based on peak,
shoulder, and off-peak seasons. During high-demand periods, prices may be
higher, while discounts or special offers may be available during low-demand
periods to attract more customers.
7. **Last-Minute Pricing:**
Last-minute pricing offers discounts or special deals on tour packages close to
the departure date to fill remaining seats or accommodations. This strategy
incentivizes customers to make spontaneous bookings and helps tour operators
avoid underutilized resources.
8. **Promotional Pricing:**
Promotional pricing involves offering short-term discounts, deals, or
incentives to attract more customers during specific marketing campaigns or
events. It can create a sense of urgency and encourage immediate bookings.
9. **Value Pricing:** Value
pricing focuses on emphasizing the unique value and benefits of the tour
package, justifying a higher price based on the quality of services, exclusive
experiences, or added conveniences.
10. **Rack Rate Pricing:** Rack
rate is the full, undiscounted price of a tour package before any special
offers or discounts are applied. It serves as a reference point for customers
to understand the value of promotional deals and discounts.
To sum up, tour operators employ a variety of pricing techniques to maximize profits, satisfy client demands, and maintain their competitiveness in the ever-evolving travel sector. The tour operator's overall company objectives, consumer preferences, the competitive environment, and market conditions all influence the price approach that is chosen.
3.
Analyze them comparatively and find the reasons for different types
of pricing.
Let's analyze the different
pricing strategies used in tour packages comparatively and explore the reasons
behind their implementation:
1. Cost-Based Pricing:- Reason:
Cost-based pricing ensures that all direct and indirect costs associated with providing
the tour package are covered, and the tour operator makes a profit. It provides
a straightforward approach to setting prices based on actual costs incurred.
2. Competition-Based Pricing: - Reason: This strategy is driven by the need
to stay competitive in the market. By pricing the tour package in line with or
slightly below competitors, tour operators aim to attract price-sensitive
customers and maintain market share.
3. Consumer-Based Pricing:-
Reason: Consumer-based pricing takes into account customer preferences,
affordability, and perceived value. Tour operators tailor their prices to
different customer segments, providing options for varying budget levels and
increasing the package's appeal to a broader audience.
4. Dynamic Pricing: -
Reason: Dynamic pricing is used to respond to fluctuating demand and supply
conditions in real time. It allows tour operators to maximize revenue by
adjusting prices based on factors like seasonality, booking trends, and
available inventory.
5. Bundling and Unbundling: - Reason: Bundling packages appeal to
customers seeking convenience and an all-inclusive experience. It simplifies
the decision-making process and may offer cost savings compared to purchasing
individual services separately. Unbundling caters to customers who prefer
customization and want to pay only for specific components of the package.
6. Seasonal Pricing: -
Reason: Seasonal pricing acknowledges the variations in demand throughout the
year. During peak seasons, when demand is high, tour operators can charge
premium prices to maximize revenue. Conversely, off-peak pricing helps attract
customers during slower periods and avoids underutilized resources.
7. Last-Minute Pricing: -
Reason: Last-minute pricing incentivizes customers to book quickly, reducing
the risk of unsold inventory and maximizing revenue. It also appeals to
spontaneous travellers looking for discounted opportunities.
8. Promotional Pricing:-
Reason: Promotional pricing is used to create buzz and excitement around the
tour package, driving short-term sales. Special deals and discounts can attract
new customers and encourage repeat business.
9. Value Pricing: -
Reason: Value pricing focuses on highlighting the unique value proposition of
the tour package. By emphasizing the quality of services, exclusive
experiences, or added benefits, tour operators justify higher prices and cater
to customers willing to pay for premium experiences.
10. Rack Rate Pricing: -
Reason: Rack rate pricing provides a reference point for customers to
understand the original price of the package before any discounts or
promotions. It helps customers perceive the value of promotional offers and
make informed decisions.
Tour operators employ diverse pricing methods to cater to a range of consumer preferences, market dynamics, and corporate objectives. Tour operators may optimize income potential, serve a diversified client base, and adjust to the always-shifting dynamics of the travel sector by using a diverse pricing strategy.
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