Package Tour Costing PDF

UNIT VII – PACKAGE TOUR COSTING LEARNING OUTCOMES: 1. Meaning and Types of Cost 2. Concept of Tour Costing 3. Components of Tour Cost 4. Pricing Package Tour 5. Pricing Strategies Costing the package tour is an important exercise that determines the scale of sale...

UNIT VII – PACKAGE TOUR COSTING LEARNING OUTCOMES: 1. Meaning and Types of Cost 2. Concept of Tour Costing 3. Components of Tour Cost 4. Pricing Package Tour 5. Pricing Strategies Costing the package tour is an important exercise that determines the scale of sale and margin of profit in a peak and lean season. The actual cost of buying the services is incurred to acquire the goods and services for production and consumption. Cost is defined as the total expenditures for acquiring the various components of services from the hotel, resort, transporter, etc for the tailor-made or ready-made packages. Cost is something that each tour operating company makes an in-depth survey of the available supplies in the market and the capability of the suppliers. The reduction of cost can help the tour operator tag a competitive price and it makes the tour wholesaler flexible in keeping profit margin and discounts for the customers. In a cut-throat competitive market environment, costing the elements of services included on the package tour needs methodical approach to curtail unwanted expenditures and increase the salability of tour packages. In this context, this unit aims to explain the meaning and types of cost, concept of tour costing, components of tour cost, preparation of cost sheet, tour pricing, calculation of tour price, pricing strategies and factors influencing the tour costing. MEANING AND TYPES OF COST Cost is otherwise explained as the sum total of all expenditures for buying the principal and ancillary services. Cost is the amount of expenditures that may be actual or notional incurred on buying services. Cost does not include distribution of capital and revenue along with certain unexpected value releases. The value release or the acquisition of economic resources in order to take managerial decisions is called cost. The concept of cost is measured in monetary terms that the amount of resources is used for the purpose of value addition. Moreover, cost is the monetary value of resources used for acquisition of assets and production of outputs. In financial terms, cost is represented as to realize the objective of a business firms. In the tour operation business, tour wholesaler uses all knowledge and skills to control the cost and maximize the output. Tour operators incur the cost of booking the hotel rooms, airline, cruise line seats, railway seats and bus seats and other primary services. CONCEPT OF TOUR COSTING Tour cost is represented as the total cost incurred or attributed to various elements of package tour. The sum of costs for booking the services is incurred to design the FIT and GIT tour package. As such, tour operator does not own the primary services of package tour and it assembles the services in bulk from the accommodation and transport companies. However, the cost of package tour is determined by the tastes and preferences of customers and the business strategy to increase the sale of more tour packages. Tour managers easily find the variable and fixed costs and take appropriate decisions. The method of calculating the costs largely vary from one tour operating company to other depending on their core competency and company’s business strategy. Break-even analysis is one of the key concepts of tour costing. It is the total revenue generated from the sale of package tour and it must be equal to the total cost incurred for acquiring the services. This technique is used to evaluate alternative pricing levels. Thus, break-even sales can be obtained by dividing the sum of the total fixed costs and the total variable costs by the package prices. TYPES OF COST Like any other manufacturing business, tour operation business has two types of cost. One is variable costs that vary as per the variations of production and the second is fixed costs that do change in short run, but it varies in the long run as every cost is variable in the long run. Tour operators generally work out the variable costs and fixed costs along with the overhead/marketing costs. Variable costs change as per the number of pax in the package tour. The services that require variable cost include meals, accommodation, entrance fees and other costs charged at a rate per person. It includes the actual expenses (direct costs) of rooms, tickets, and other package components incurred with the sale of each package. The change of fixed costs occurs when the sale of number of packages increases over a period season. Fixed costs are incurred before acquiring the variable services for the package tour. These costs often include advertising, pamphlets, brochures, salary, interest on loan and advances. Thus, fixed costs also include hiring buses and guides or interpreters. The overhead and marketing costs as part of the variable and fixed costs are included across the package tours. Thus, there is a variation of between 60 per cent and 70 per cent between Fixed, variable, and overhead costs in the package tour. Tour operations, after taking all these costs into considerations, usually add 10-15 per cent mark-up for an individual tour package. PREPARATION OF COST SHEET A cost sheet reflects the cost of each component in the package tour. It requires continuous efforts for working out the cost estimates in order to find an attractive price that will increase sale and profit margin. In a typical package tour business, several combinations of costs are calculated to arrive at a competitive price. Here we may divide the costs of the elements of services in the package into direct and indirect costs. The direct costs include administrative cost that includes salary, training, official tours, telephone and internet bills, rent, electricity, and employee amenities. The indirect cost include advertising, sales promotion, and publicity. Thus, a tour operator can make a profit of around 15 per cent on each sale of the package tour that includes the commission or override from the principal service providers. The component of tour costs is given in Table 1. COMPONENTS OF TOUR COST The sum total of cost components of a package tour is known as the cost of package sold. However, the process of ascertaining a package cost becomes complicated, if it not done which a budget is established. Hence, it is wise to prepare the tour budget before the costing and pricing and reviewing the cost structure of competitors. The budget is based on the market research to determine the exact and accurate cost. The projected cost helps the tour planners to determine and adopt effective pricing strategies. Before the printing of final price in the promotional brochures and websites, tour wholesalers look into several other variable costs. Generally, a package tour includes the cost of travel and ground services. Thus, the cost components of a package tour include:  Research and Product development  Travel cost  Accommodation  Transfer  Food and beverage  Sightseeing and Activity  Marketing & Sales Promotion  Administrative and Investment  Miscellaneous Costs Research and Product Development: The expenditure on market research is used to conduct study on the travel behaviour and motivations of customers. It incurs cost to prepare a survey report. The cost for development of new packages includes the process of planning and exploring new places of tourist interests. Travelling and Transfer: International and domestic air fares, rail travel, and transfer and departure tariffs are also included in the cost component of package tour. Accommodation: The cost of booking rooms constitutes one third of total cost of package tour. Tour operators get best possible room rate after negotiations. Sightseeing & Activity: Tour operators arrange several value-added activities in sightseeing and excursion tours. The cost of activity is equally divided across the members of group. Administrative and Technical Cost: This cost is incurred towards the payment of salary, allowance, incentives, etc. It is also added to the total tour costing. Technical cost includes the acquisition of new software, hardware and computers for the reservation of hotel rooms, air, train and bus and ferry tickets. Training and Development: The cost of training staff is indirectly included in total cost. Tour operators hire the trainers for in-house training or send the staff and senior managers to professional institutes. Marketing and Sales Promotion: Marketing cost includes advertising and sales promotion. The sales promotion includes discounts, commission and other benefits to the travel agents and customers. Printing and Publicity: The cost of printing tour brochures is included in total tour costing. The cost of foreign promotional tour is included in total cost of package tour. Payment of Interest: Tour operators incur the cost of payment of interest to the banks on the investment of capital to run the business. Depreciation of Assets: Tour operators incur depreciation cost in the long run due to the obsolete nature of software and hardware, and electronic gadgets. Miscellaneous Cost: This cost includes porterage charges at airports and railway stations, tips at hotels or airports, entrance fees, insurance premiums, gifts and welcome dinners. PRICING PACKAGE TOUR Tour operator takes lots of precaution for giving a price to the package tour. The pricing the package depends on the positioning and branding of the product. After examining the trends, tour operators add their margins and cost of package. Further, the price on the package is labeled after estimating the operational costs and margin of profit. It is absolutely the freedom of tour operator to price the package. Some of the essential elements of the cost include mark up, net rate and gross profit. Mark up is the extra amount which the company can maintain on each sale. Gross profit is the rate at which a supplier quotes for products/ services that it delivers. The commission constitutes a major share of earnings in tour operations. PRICING STRATEGIES Setting pricing for tourism businesses is a strong mix of marketing strategy and financial analysis. Tourism products are very rarely identical, often because of location, but also because of the people and the components that make up the experience you provide a traveler. It can be incredibly diverse and pricing strategies can evolve as a tourism business develops it’s brand and market share. Even star ratings for accommodation only give a general guide for travellers on what the pricing will be – there are not set criteria. There are three types of traditional pricing strategies in tour operation business:  Cost-based Pricing: This type of pricing strategy is used to make over the cost in order to reach at the breakeven point. It calculates the average cost of each element of services in the package tour and it adds a markup over and above the average cost to earn profit. This very common and typical pricing strategy. For example, Thomas Cook and the Oberio Hotel were used to be known for adopting the cost-based pricing strategy as there were no competitors to them. In the subsequent time, they moved to the other pricing strategies like competition and  consumer-based pricing.  Competition-based Pricing: This pricing strategy takes tab of the prices of its competitors in order to tag the price of its own product. Price may be set at the same price of competitor or it may be a little above or below the price of competitor. Unlike the package tour market in early nineties, there has been a great change in the pricing due to the penetration of foreign and domestic tour companies with aggressive marketing and sales promotion. There is a marginal difference in the price of outbound package tour of SOTC and Cox & Kings.  Consumer-based Pricing: This is a form of pricing that is primarily set to target customers by taking the affordability and the quantity of purchase into considerations. Gone are the days, it was producer dominated market; it is now consumer-driven and led market. Thus, the inbound, domestic and outbound tour operators design the package tour taking socio-economic backgrounds of customers. All package tours are designed after assessing the market. After from the typical and age-old pricing strategies, these are the following pricing strategies used in the tour operation business:  Rack Rate Pricing: It is full rate before discounts are given. It is generally printed in the tour brochures for the forthcoming season.  Seasonal Pricing: A wide mix of pricing of package tour is set to cater low, high and shoulder seasons as tourism is largely driven by the season.  Last Minute Pricing: It is a common method of giving discounts from the daily quoted prices in order to close bookings. It is put in the flash items in the websites for last minute booking. In the group travel, tour operators offer some additional services or discount the prices to get minimum booking to operate the tour.  Per Person Pricing: This type of pricing is set per person or for each category service. It can be per adult or child or additional person. It can be a taxi at the disposal of customers.  Per Unit pricing: It is set of price for one unit of package. It may include husband and wife with children cost free. Sometime, the package includes room, transfer and sightseeing cost. The room rate generally includes breakfast as per the European Plan (EP).