XII NOTES UNIT 6 PACKAGE TOUR COSTING

 UNIT  6

PACKAGE TOUR COSTING 

 

In the context of a package tour, costing is the process of figuring out how much it will cost to acquire the many services that are needed to create and provide tour packages. It entails figuring out the true cost of hiring services for either custom or ready-made trip packages from suppliers including hotels, resorts, transporters, and other vendors.

 

Here are the key points related to costing in the context of package tours:

 

1. **Determining Costs:** Tour operators carry out a thorough analysis of the market's supply and evaluate the qualifications of different providers. This enables them to determine the overall cost needed to obtain the services and parts needed for their travel packages.

2. **Competitive Cost:** Tour operators can establish competitive pricing thanks to costing. They can preserve profit margins, provide competitive prices, and maybe even provide clients discounts by cutting expenses.

 

3. **Methodical Approach:** The process of pricing tour packages in a market that is competitive demands a rigorous and systematic approach. This aids in cutting back on wasteful spending and improving the travel packages' marketability.

 

4. **Components of Cost:** The components of tour costs can include expenses related to accommodations, transportation, meals, excursions, guide services, and more.

 

5. **Preparation of Cost Sheet:** Costing involves creating a cost sheet that outlines all the expenses associated with putting together a tour package.

 

6. **Tour Pricing:** Once the costs are determined, tour operators calculate the final tour price by adding a margin or markup to ensure profitability.

 

7. **Pricing Strategies:** Tour operators may employ various pricing strategies, such as cost-oriented pricing, market-oriented pricing, or competitor-based pricing, to set the final price of their tour packages.

 

8. **Factors Influencing Tour Costing:** Several factors influence the costing process, including market conditions, supplier negotiations, seasonal variations, and the quality of services included in the package.

 

In conclusion, costing is a crucial process that aids in the establishment of competitive rates, cost control, and the provision of alluring trip packages to clients while preserving profitability for tour operators.

6.1  Meaning and Types of Cost

 The meaning and types of cost. Let's break it down point by point:

1. **Sum Total of Expenditures:** Cost is the sum total of all expenditures incurred to purchase both principal and ancillary services.

 

2. **Actual or Notional Expenditures:** Cost can include both actual and notional expenditures associated with acquiring services.

 

3. **Excludes Capital and Revenue Distribution:** Cost does not involve the distribution of capital and revenue. It focuses on the expenses related to services.

 

4. **Value Release and Managerial Decisions:** Cost represents the acquisition of economic resources necessary for making managerial decisions. It reflects the value released for decision-making.

 

5. **Measured in Monetary Terms:** The concept of cost is measured in monetary terms, indicating the amount of resources utilized for value addition.

 

6. **Monetary Value of Resources:** Cost is the monetary value of resources utilized for acquiring assets and producing outputs.

 

7. **Financial Representation:** In financial terms, cost is represented to achieve the objectives of a business firm.

 

In the context of the tour operation business:

 

8. **Cost Control:** Tour wholesalers use their knowledge and skills to control costs effectively.

 

9. **Maximizing Output:** The objective is to maximize the output while managing costs efficiently.

 

10. **Cost Components:** Tour operators incur costs related to booking hotel rooms, airline seats, cruise line seats, railway seats, bus seats, and other primary services when organizing tours.

 

In conclusion, costs in business are the actual monetary worth of the expenditures paid to get resources and services. It is quantified in monetary terms and encompasses a variety of expenses. Profitability in the tour operator business depends on optimizing output and managing expenses.

6.2 Concept of Tour Costing

Tour costing refers to the process of determining the total cost associated with various elements of a package tour. In the given paragraph, several key points about tour costing are highlighted:

 

1. **Components of Tour Cost**: The cost of the trip comprises the money spent on making the service reservations needed to create a package for free independent travellers (FITs) and group-included tours (GITs). The main services of the package trip are usually not owned by tour operators, thus these are purchased in bulk from lodging and transportation providers. The tour's overall cost includes several components, including lodging, transportation, and other services.

 

2. **Customer Preferences and Business Strategy**: Customer choices and preferences have an impact on the price of a package tour. It is also influenced by the business plan used to boost the selling of additional trip packages. Tour operators need to comprehend their intended clientele and customize their services accordingly.

 

3. **Variable and Fixed Costs**: Tour managers must recognize and control the fixed and variable expenses related to the package tour. While fixed costs, such as administrative charges, are fixed and do not change based on the number of tourists, variable costs might include expenses like meals and admission fees.

 

4. **Break-Even Analysis**: In tour costing, break-even analysis is an essential concept. It entails figuring out the point at which the overall amount of money made from selling package tours is equal to the total amount of money spent on hiring the services. This study assists tour operators in identifying the price points at which they are neither profitable nor profitable.

Depending on their core capabilities and business plans, different tour running companies may use different methods to calculate tour prices.

Types of Cost

 

The two main types of costs in a tour operation business:

 

1. **Variable Costs**:

  (i) Expenses that vary in direct proportion to shifts in production or the number of passengers (pax) on the package trip are known as variable costs.

(ii) These expenses cover things like food, lodging, admission fees, and other things that are paid for individually. These are regarded as the upfront expenses related to each package's selling.

  (iii) Variable expenses fluctuate in response to variations in the number of passengers on a package trip since they are directly correlated with tourism numbers.

2. **Fixed Costs**:

   (i) Fixed costs remain relatively constant in the short run but may vary in the long run. In the long run, all costs are considered variable.

   (ii) Before obtaining the variable services required for the package trip, fixed expenditures are incurred. Advertising, pamphlets, brochures, wages, interest on loans, advances, and expenditures for hiring busses, guides, and interpreters are a few examples of fixed costs.

  (iii) These costs are incurred irrespective of the number of tourists or package sales.

   (iv)  Fixed costs are associated with the day-to-day operation of the tour business.

 

Furthermore, marketing and administration expenses are included in both fixed and variable prices for different package trips. These expenses range from sixty percent to seventy percent of the overall cost of a package tour. trip operators sometimes mark up the price of a single trip package by 10–15 percent to pay these expenses and turn a profit.

 Preparation of Cost Sheet

 

The process of preparing a cost sheet for a package tour business. Here are the key points :

 

1. **Cost Sheet Purpose**: A cost sheet is a financial document that reflects the cost associated with each component of a package tour. Its primary purpose is to estimate and understand the costs involved in creating a tour package.

 

2. **Continuous Cost Estimation**: The preparation of a cost sheet requires continuous efforts to calculate and update cost estimates. This is essential for determining an attractive selling price that can boost sales and profit margins.

 

3. **Competitive Pricing**: In the package tour business, various combinations of costs are calculated to arrive at a competitive selling price. This competitive pricing is crucial for staying competitive in the market.

 

4. **Division into Direct and Indirect Costs**: The costs of the elements of services included in the tour package are typically divided into two categories:

   - **Direct Costs**: These are costs directly related to the tour's operation. Examples include administrative costs (e.g., salaries, training, official tours), telephone and internet bills, rent, electricity, and employee amenities.

   - **Indirect Costs**: These are costs associated with promoting and marketing the tour package. They include expenses for advertising, sales promotion, and publicity.

 

5. **Profit Margin**: A tour operator can achieve a profit margin of around 15 percent on each sale of the package tour. This profit includes not only the markup on costs but also the commission or override received from the principal service providers.

 

The cost sheet serves as a valuable tool for tour operators to understand and manage their expenses, set competitive prices, and maximize profitability in the package tour business.

 

6.3  Components of Tour Cost

 

 The various components of tour cost in the context of a package tour business. Here are the key components of tour cost:

 

1. **Research and Product Development**: This includes expenditures related to market research, which is used to understand the travel behavior and motivations of customers. It also covers the cost of preparing survey reports. Additionally, costs associated with the development of new tour packages, including planning and exploring new tourist destinations, are part of this component.

 

2. **Travel Cost**: Travel costs encompass both international and domestic expenses, such as airfares, rail travel, and transfer and departure tariffs. These are the costs incurred in facilitating the transportation of tourists.

 

3. **Accommodation**: The cost of booking rooms for tourists constitutes a significant portion of the total cost of a package tour. Tour operators negotiate to obtain the best possible room rates for their clients.

 

4. **Transfer**: Transfer costs pertain to the expenses associated with moving tourists between locations. This can include transportation from airports or train stations to their accommodations.

 

5. **Food and Beverage**: The cost of meals and beverages provided to tourists during their tour is included in this component.

 

6. **Sightseeing and Activity**: Tour operators often arrange value-added activities as part of sightseeing and excursion tours. The cost of these activities is distributed among the members of the tour group.

 

7. **Marketing & Sales Promotion**: Marketing costs encompass advertising and promotional activities. This can include expenses for discounts, commissions, and other benefits offered to travel agents and customers to promote the tour.

 

8. **Administrative and Investment**: Administrative costs involve payments for salaries, allowances, incentives, and other administrative expenses. Additionally, this component includes the acquisition of new software, hardware, and computers for tasks like hotel room reservations and transportation ticket bookings.

 

9. **Training and Development**: The cost of training staff is indirectly included in the total cost. Tour operators may hire trainers for in-house training or send their staff and senior managers to professional institutes for training and development.

 

10. **Printing and Publicity**: The cost of printing tour brochures and promotional materials is included in the overall tour cost. Additionally, the expenses associated with foreign promotional tours are part of this component.

 

11. **Payment of Interest**: Tour operators incur costs related to interest payments to banks for the capital invested in running the business.

 

12. **Depreciation of Assets**: Over time, tour operators incur costs due to the depreciation of assets, such as software, hardware, and electronic gadgets, which become obsolete.

 

13. **Miscellaneous Costs**: This category includes various additional costs, such as porterage charges at airports and railway stations, tips at hotels or airports, entrance fees to attractions, insurance premiums, and expenses related to gifts and welcome dinners.

 

These components collectively contribute to the total cost of a package tour, which is essential for pricing, budgeting, and profitability considerations within the tour business.

 

 

6.4  Pricing Package Tour

The pricing of package tours and the factors involved in determining the price. Here are the key points from the paragraph:

 

1. **Tour Operator's Precaution**: Tour operators take several precautions when determining the price of a package tour. This suggests that pricing is a careful and considered process.

 

2. **Positioning and Branding**: The pricing of a package tour depends on how the product is positioned and branded. This implies that the perceived value and quality of the tour influence its price.

 

3. **Examining Trends**: Tour operators examine industry trends, which likely includes factors like customer preferences, market demand, and competitive pricing.

 

4. **Margins and Cost**: Tour operators add their margins to the cost of the package. This indicates that the price needs to cover both the cost of providing the tour and generate a profit for the operator.

 

5. **Estimating Operational Costs and Profit Margin**: The price on the package is determined after estimating the operational costs, which are the expenses associated with running the tour, and the desired profit margin.

 

6. **Freedom of Pricing**: Tour operators have the freedom to set the price for their packages. This implies that they can use their discretion when pricing their tours.

 

7. **Essential Cost Elements**: Some of the essential elements considered in pricing include:

   - **Markup**: This is the additional amount that the company can maintain on each sale. It contributes to the profit.

   - **Net Rate**: The net rate is the base rate before any markups or commissions are added.

   - **Gross Profit**: This is the rate at which a supplier quotes for products or services they deliver. It may be a reference point for pricing the package.

   - **Commission**: The commission received by the tour operator constitutes a significant portion of their earnings in tour operations. It's a key component in determining the overall cost and pricing structure.

 

In summary, pricing a package tour is a strategic process that takes into account various factors, including costs, profit margins, industry trends, and the discretion of the tour operator. Commission plays a crucial role in the financial aspect of tour operations.

 

6.5  Pricing Strategies

 

Pricing strategies used in the tourism business. Here are the key points:

 

1. **Mix of Marketing and Financial Analysis**: Pricing in the tourism business is a balance of marketing strategy and financial analysis. It's not solely about costs but also how the product is marketed.

 

2. **Diverse Tourism Products**: Tourism products vary due to factors like location, people, and components that contribute to the traveler's experience. This diversity influences pricing strategies.

 

3. **No Set Criteria for Pricing**: Star ratings for accommodation provide a general guide, but there are no set criteria for pricing. This suggests that pricing can vary widely.

 

4. **Three Traditional Pricing Strategies**:

   - **Cost-Based Pricing**: This strategy aims to make a profit over the cost by calculating the average cost of each element in the package and adding a markup. It's a common approach and was used by companies like Thomas Cook and Oberoi Hotel.

   - **Competition-Based Pricing**: This strategy considers the prices of competitors, setting prices at or near the competition. Pricing has evolved due to market changes and increased competition.

   - **Consumer-Based Pricing**: This pricing strategy targets customers based on affordability and purchase quantity. It reflects the shift to a consumer-driven market, considering customers' socioeconomic backgrounds.

 

5. **Additional Pricing Strategies**:

   - **Rack Rate Pricing**: This is the full rate before any discounts are applied, often found in tour brochures.

   - **Seasonal Pricing**: Prices vary for low, high, and shoulder seasons, aligning with tourism's seasonal nature.

   - **Last Minute Pricing**: Discounts are offered from daily quoted prices to encourage last-minute bookings. Common in group travel.

   - **Per Person Pricing**: Prices set per person, which can vary for adults, children, or additional persons.

   - **Per Unit Pricing**: Pricing is based on a unit of the package, which may include room, transfer, and sightseeing costs, often with breakfast included.

 

These tactics demonstrate how pricing in the tourist sector is dynamic and subject to shifts in the market and customer preferences.