Pricing Factors for Package Holidays PDF

TH1804 Pricing Factors Establishing the right price for package holidays or tour packages and managing the revenues effectively to achieve the required profit margin and thereby sustain the business are fundamental to a tour operator’s financial performance. In short, the package holidays or tour p...

TH1804 Pricing Factors Establishing the right price for package holidays or tour packages and managing the revenues effectively to achieve the required profit margin and thereby sustain the business are fundamental to a tour operator’s financial performance. In short, the package holidays or tour packages must be cost-effective. The tour operators’ main source of income comes from the charges of package holidays or tour packages. Making these cost-effective results in a higher chance of mutual benefit for tour operators and consumers or clients. Tour packages are usually purchased in advance, which give clients time to check the quality and accessibility of the tour package inclusions (destinations, accommodation, and amenities). In order to understand how tour operators price their products, it is essential to develop a good understanding of the costs involved in producing a package (Holland & Leslie, 2018). These costs are the following. Operating Costs – Tour operators need to consider the costs of operating as a business, their expected profit margin, and the costs associated to the distribution of their products. These include fixed costs which stay the same no matter how many passengers or consumers the company carries, such as the wages or salaries of the staff and office supplies. Variable costs, on the other hand, vary according to how much tour operators earn as a business such as sales, trade events, and ad-hoc accommodations. Distribution Costs – The distribution of the packages is how tour packages are made available to the clients. These include the utilization of intermediaries like travel agents because it is a usual practice to provide commission (which they get in return for distributing or promoting tour packages). In reality, this will vary depending on the agreement of the tour operator and the travel agent. In addition to the actual cost of producing, operating, and distributing the tour package or package holiday, the following must also be taken into consideration when pricing (Holland & Leslie, 2018): Competition – The prices charged by competitors must be the benchmark of pricing the product. Demand – The products offered by competitors are usually the ones on high demand, giving clients to have an abundance of choice. Target market – It depends on the willingness of the target market to pay the proposed price. Seasonality – It applies the law of supply and demand (a theory that explains the interaction between the sellers of a resource and the buyers for the resource and defines how the relationship between the availability of a product and the demand for that product has on its price). In other words, there is a low demand in low season and a higher demand in high season. The Pricing Decisions Pricing strategies can be developed for tour operators based on the tour packages offered, the target market, and the status of the brand in terms of product life cycle and their strategy. Tour operators need to assess their position in the marketplace and design a pricing strategy appropriate for the market. These pricing strategies can be any of the following (Holland & Leslie, 2018): Cost plus pricing is also known as “marginal pricing.” Adding the costs of the travel components and the percentage profit can be the simplest way of costing a tour package. However, this strategy takes no account of the value of the package perceived by the customers. For instance, a low price for a premium tour package might give the wrong message to the customer. Essentially, costs are about production, but prices are about value. This may be considered in three (3) ways: 08 Handout 1 *Property of STI  [email protected] Page 1 of 3  TH1804 o Market-based pricing is defined as a process of setting prices of goods or services based on the current market conditions, such as estimating the prices that competitors will charge. o Premium pricing is used for niche market products with upmarket images where high prices are expected to be paid. However, it must be supported with excellent service. o Promotional pricing is similar to discount pricing. Rather than offering low prices towards departure dates, promotional pricing is offered to customers or clients who purchase tour packages in advance. This can also be a driving factor for them to book early. Doing this gives tour operators time to figure out how evident booking trends and popular destinations are. Fluid pricing means that tour operators or travel agents can be supplied with on-screen prices that change by the hour depending on how well the packages are selling, especially the package holidays. This is like the stock market because it allows travel agents and tour operators to adjust their prices depending on availability and demand. Discount pricing is often applied during off-season. This pricing strategy has been commonly used by some tour operators to fill availability in inventory. However, it comes with risks because tour operators or travel agencies that frequently discount prices in order to stimulate demand may be perceived by some customers as low-quality or may also develop a reputation where customers book as late as possible to get the biggest discounts. Last-minute bookings affect their ability to forecast sales and price effectively and devalue the brand in the long run This may also be applicable when clients book for many pax, similar to a wholesale price. Seasonal pricing takes place when tour operators or travel agencies consider a mix of pricing throughout the year to cover high, shoulder (a travel period between peak and off-peak seasons), and low seasons. It is frequently done to cater for different levels of demand over the year. Competitive pricing takes place when a review of the competitors’ pricing is done due to holiday products being price-sensitive. With the ease of comparing products using the Internet, customers or clients often look towards choosing the lower-priced product. Options pricing takes place when a tour operator or a travel agency decides to offer packages with minimal profit. Despite this, revenue increases through sales of optional excursions which may also be featured on brochures. Last-minute pricing is applicable to both the accommodation suppliers and tour operator. It can be explained in relation to the volatility of airfare rates. An airfare rate may suddenly change depending on seat availability and may mark up or down. This can also occur with package tours; for instance, the hosting hotel increased its room price because a special event is situated nearby. A good example of this is the F1 Show in Singapore in 2018. The hotels near the event’s location marked up their room prices few days prior the event. Due to this effect, all the package tours that included hotels nearby marked up their price as part of the overall costing. Another example is Mr. Kenn got a quotation package for 3D/2N Singapore Free and Easy Package for as low as Php 19,000/person for 2 pax, inclusive of airport transfers, breakfast, hotel, and city tour on the second day. After two (2) days, he wanted to confirm the booking with the same details, but the price moved up to Php 25,000/person for 2 pax. The room rate moved up because the pax travel date has a special event. 08 Handout 1 *Property of STI  [email protected] Page 2 of 3  TH1804 Systems Used in a Travel Agency Travel agencies use what are known as agency systems. These handle office management, accountancy, and reservations administration (Gwenda & Archer, 2016). Computer Reservation System or Central Reservation System (CRS) is a computerized system that is used to store and retrieve information and conduct transactions related to air travel, hotels, car rentals, and other activities. It was founded back in the 1950s, so airline companies could automate their booking systems or inventory. It was later extended for the use of travel agencies. Global Distribution System (GDS) is a software that travel agencies use to sell airline tickets or book hotel rooms. Travel agencies and travel agents use this to perform different tasks in preparing the travel needs of their clients, such as booking and reservations for airfare, hotel accommodation, and car rental service, in an automated manner. Travel agencies commonly use these four (4) major players: o Amadeus is a popular international travel agency database that offers Internet-based reservation systems for home-based travel agents, as well as automation projects and features travel agents use around the world. It has been operating since 1992 and is co-owned by private airlines Air France, Lufthansa, and Iberia. In 2016 it was considered the largest GDS provider in terms of market share and revenue. It also controlled nearly 44% of the entire GDS market with most of its bookings in Europe. o Sabre is used by travel agents around the world that enables travel agencies to search, price, book, and ticket travel services that airlines, hotels, car rentals, rail providers, and tour operators provide. It used to be owned by American Airlines and is considered the second largest GDS provider. It has its own GDS and Abacus GDS catering to Asia-Pacific (APAC) region only. Abacus is widely used by travel agencies in Asia. It is operated by Abacus International Pte., Ltd., in Singapore. It enables travel agencies to enjoy enhanced productivity and efficiency to meet the needs of their clients. It was acquired by Sabre in 2015. o Galileo International is a Travelport platform that is used to book rail travel, cruise, car rental, and hotel rooms. Its global distribution services and commitment to partnership reduce operating costs while increasing efficiency and revenues for travel agencies, corporations, and principal suppliers. o Worldspan is a Travelport platform and a Web-based travel e-commerce that offers solutions for conducting all facets of travel business online. It provides travel distribution, technologies, and services to travel companies worldwide such as travel agencies, corporations, principal suppliers, and travel websites. Both Galileo International and Worldspan GDS systems are under Travelport, which is a travel commerce platform that focuses on providing distribution, technology, payment, and other solutions. References: Camilleri, M. (2018). Travel marketing, tourism economics and the airline product: An introduction to theory and practice. Malta: Springer International Publishing. Claravall, B. G. (2013). Travel and tour operations in the Philippines. Sampaloc, Manila: Accumiro I.T. Solutions. Gwenda, S., & Archer, J. (2016). Manual of travel agency practice (3rd ed.). London: Routledge. Holland, J., & Leslie, D. (2018). Tour operators and operations. Croydon: CPI Group (UK) Ltd. Sharma, S. (2018). Tour operation management in tourism. New Delhi: Random Publications. Swain, D. S. (2014, February 26). Travel and tour operations management. Retrieved from Pondicherry University: http://www.pondiuni.edu.in/sites/default/files/travel-agency-op-mgt-260214.pdf on May 30, 2019 08 Handout 1 *Property of STI  [email protected] Page 3 of 3