PRICING YOUR TOURISM BUSINESS - Tourism …€¦ · Correctly pricing your tourism business will...

©2013 Small Business Development Corporation(All Rights Reserved)

PRICING YOUR TOURISM BUSINESS

A PRACTICAL STEP BY STEP GUIDE TO

HELP YOU COMPLETE THE TOURISM BOOST ONLINE PRICING TOOLS


INTRODUCTION It is very important to price your tourism business correctly. Basing your pricing only on your competitor’s prices and customer expectations is not enough. You also have to factor in all the expenses you occur to run a tour or let out a room, as well as the costs associated with running your business, such as marketing, licenses etc… And, let’s not forget about profit! You would not have started a business unless you planned to make money from it. Correctly pricing your tourism business will help you to cover all costs and generate the hard earned profit that you deserve. This step by step guide and the accompanying online tool will help you determine the point at which your tourism business breaks even and the ideal retail price to make a profit that you wish to achieve whilst factoring in all costs. This booklet is designed to help you complete the Tourism BOOST ONLINE PRICING TOOL. Just fill in all the blanks from step 1 through to step 6 and then transfer the information into the online tool. The tool will then automatically calculate key figures for you such as your net rate, retail rack rate and breakeven point. To get you started we have developed a multi-choice a quiz; test your pricing knowledge on the next page! This booklet also includes some activities along the way to help you get your pricing right.

PRICING FACTORS TO CONSIDER The average price you sell your product for can vary, some of the factors that influence pricing are:-

1. SEASONALITY You may vary your price depending on high or low season.

2. OPERATING COSTS

The higher your operating costs, the more expensive your prices will need to be so that you cover all expenses.

3. COMPETITION

There is no point pricing your product out of the marketplace, you need to stay competitive or be able to justify the high price.

4. DEMAND

People will pay more if there is a high demand in a region; similarly they will pay less if there is an abundance of choice.


QUICK QUIZ 1. FIXED COSTS ARE…

a. Prices that are set in advance b. Costs that need to be paid no matter how many tourists you carry or rooms you let c. Costs that occur depending on the number of tourists carried or rooms let

2. VARIABLE COSTS ARE… a. Costs that change depending on how many tourists you carry or rooms you let b. Prices that change depending on seasonality c. Costs that change depending on suppliers

3. WHAT DOES AVERAGE CAPACITY MEAN IN RELATION TO TOURS? a. The maximum number of tourists per tour b. The minimum number of tourists per tour c. The average number of tourists carried or room let per tour

4. WHAT DOES OCCUPANCY RATE MEAN IN RELATION TO ACCOMMODATION? a. The maximum number of rooms occupied each night b. The minimum number of rooms occupied each night c. The average number of rooms occupied each night

5. WHEN PRICING YOUR TOURISM BUSINESS YOU SHOULD… a. Consider what your competitors are charging b. Consider what tourists will actually be willing to pay c. Factor in all costs and determine your desired profit level d. All of the above

6. IS IT COMMON TO PAY COMMISSION IN THE TOURISM INDUSTRY a. Yes b. No

7. WHAT IS BREAKEVEN PRICE? a. The price you charge to travel agents b. The price at which you cover all costs c. The price you charge when customers book directly through you

8. IF YOU OPERATE THE BUSINESS SOLEY ON YOUR OWN WITH NO STAFF SHOULD YOU FACTOR WAGE COSTS INTO YOUR PRICING? a. Yes b. No

YOUR SCORE

/8 Answers at rear of booklet


INFORMATION YOU NEED TO PRICE YOUR TOURISM BUSINESS To successfully complete this step by step guide and the online pricing tool you need to have the following information readily available:-

1. TOUR OR ACCOMMODATION DETAILS You will need to provide information about your business, such as the different tour types you offer and the number of passengers or how many different room types you have.

2. DAILY COSTS (FIXED) You need to determine the fixed costs associated with operating your business, such as fuel, labour etc...

3. DAILY COSTS (VARIABLE) You need to determine the costs associated with taking passengers on tour or letting out rooms, such as meals, third party activities, linen and room cleaning

4. ANNUAL BUSINESS COSTS (FIXED) You need to calculate the total costs associated with operating your business. These costs occur whether you have tours operating or not, this is why they are called fixed. For example costs that are fixed include insurance, marketing, lease payments, bank fees, accounting fees, salaries etc...

5. AVERAGE CAPACITY If you have been trading for a number of years you should know your average capacity. If you are new to the industry you will have to estimate your future capacity based on factors such as visitation to the region, competitor analysis and customer feedback.

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STEP 1 - CAPACITY To be able to effectively price your tourism product you need to identify some basic factors about your business, such as how often you run a tour or how many rooms you have. Fill in your answers to the questions below about the MAXIMUM CAPCITY for your business.

TOUR OPERATOR

How many different types of tour do you have available?

Names of different tours MAXIMUM number of passengers per tour

MAXIMUM number of times tour operates per year

ACCOMMODATION PROVIDER

How many different types of rooms do you have available?

Names of different rooms Total number of rooms per room type


STEP 2 – ACTUAL CAPACITY AND OCCUPANCY Now that we know your maximum capacity we need to work out realistically your actual capacity. For example, you may be able to carry 20 passengers on tour 365 days of the year, but chances are these are not your actual figures. You may only carry an average of 10 passengers and conduct the tour 300 days of the year.

TOUR OPERATOR If you have been trading for a number of years you should know your average capacity. If you are new to the industry you will have to estimate your future capacity based on factors such as visitation to the region, competitor analysis and customer feedback.

Names of different tours AVERAGE number of passengers per tour

AVERAGE number of times tour operates per year

ACCOMMODATION PROVIDER If you have been trading for a number of years you should know your average occupancy rate. If you are new to the industry it can be difficult to estimate your predicted occupancy. Use the Tourism WA ‘Quarterly Tourism Snapshots’ to get the average occupancy rates for your region – www.tourism.wa.gov.au

Names of business AVERAGE occupancy rate per room type

%

http://www.tourism.wa.gov.au/


STEP 3 - FIXED AND VARIABLE COSTS WHAT IS A FIXED COST? Fixed costs DO NOT vary, they stay the same no matter how many rooms you let or tourists you carry. It does not matter if you carry 1 or 20 passengers the costs will STAY THE SAME. It does not matter if you let out 1 room or 10 the costs will STAY THE SAME.

WHAT IS A VARIABLE COST? Variable costs CHANGE, they are dependent on how many rooms you let or tourists you carry. If you carry 10 passengers the costs will be different to if you carry 20. Or, if you let out 1 room, as opposed to all your available rooms, the costs will change.

You will now need to determine your own fixed and variable costs. If you have been in business for a while you should know your figures, if your business is new you will need to obtain quotes and give rough estimates. Use the tables on the next page to enter all your fixed and variable costs for each tour or room type and then when you are ready enter the details into the Tourism BOOST online pricing tool to help you determine your final pricing results.

ACTIVITY – FIXED VS VARIABLE COSTS Using the examples below tick () which costs are fixed and which are variable.

Example cost Fixed Variable

Fuel for a bus tour

Wages for a bus tour

Meals whilst on tour

Room cleaning

Activities whilst on tour

National park permits

Vehicle registration

Amenities for rooms (soap, shampoo etc...)

Cleaning of room linen

Answers at rear of booklet


TOUR OPERATOR – FIXED AND VARIABLE COSTS PER TOUR

Names of different tour types FIXED COSTS VARIABLE COSTS

Labour Fuel Other Meals Activities Other

$ $ $ $ $ $

$ $ $ $ $ $

$ $ $ $ $ $

$ $ $ $ $ $

$ $ $ $ $ $

$ $ $ $ $ $

$ $ $ $ $ $

$ $ $ $ $ $

$ $ $ $ $ $

ACCOMMODATION PROVIDER – VARIABLE COSTS PER ROOM TYPE

Names of different rooms Linen cleaning

Room cleaning Amenities Other

$ $ $ $

$ $ $ $

$ $ $ $

$ $ $ $

$ $ $ $

$ $ $ $

$ $ $ $

$ $ $ $

$ $ $ $

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STEP 4 - ANNUAL BUSINESS COSTS The next step is to calculate the total costs associated with operating your business. These costs occur whether you have passengers on your tour or not, this is why they are called fixed. For example: insurance, marketing, lease payments, bank fees, accounting fees, etc... If you have a profit/loss statement you can use the latest report from your accountant, if you are new to the industry use the table below to help you estimate your ongoing annual expenses. Operating Expenses Item Amount Notes

Accounting and legal fees $

Advertising and promotion $

Business loan payments $

Business travel and accommodation $

Depreciation $

Electricity and gas $

Employees' superannuation $

Equipment lease and hire purchase $

Insurance $

Interest and bank charges $

Membership to professional organisations $

Other business premises costs $

Printing, postage, stationery, packaging $

Registrations, licences and permits $

Rent of business premises $

Repairs, maintenance and cleaning $

Stationery and office supplies $

Taxes $

Telephone/internet connection $

Training $

Vehicle operating costs $

Wages and salaries $

Workers compensation insurance $

Other Expenses $

Total operating expenses $


HOW MUCH DO YOUR TOURS OR ACCOMMODATION CONTRIBUTE TO YOUR OVERALL BUSINESS? Some tourism businesses offer lots of different experiences for their visitors. For example, you might offer luxury safari camping and also cultural tours. So that you can price each element of your business accurately it is important to determine how much each element contributes to your overall business. In terms of percentage how much does the product you are pricing contribute. For example, if all your business does is offer tours then you would enter 100%. However, if you also offer activities or hire equipment you might enter 80%. Use the table below to help you determine the correct percentages. Tick which answer relates best to you and then apply a percentage figure to it.

Business activity Percentage of business

I only offer tours 100%

I only offer accommodation 100%

Accommodation is my core business, but I also offer some tours and activities. What percentage of your business is accommodation?

%

Tours are my core business, but I also offer some other activities. What percentage of your business are your tours?

%

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STEP 5 - MARK UP PERCENTAGE As mentioned earlier, one of the main aims of any business is to make a profit. The only way to do that is to correctly price your product, factoring in mark-up. There is no set figure for mark up; however the mark up you set needs to make you a profit on the one hand, yet be competitive on the other. You don’t want your price to be radically different to that of your competitors – if it is too cheap people may question your professionalism, if it is too expensive and doesn’t offer more value you may lose customers. Below are some average net profit percentages for various tourism business, this information is based on the FMRC Business Benchmarks. The percentages below are calculated before any salary has been paid to the owner/operator.

Type of business FMRC Net Profit Average

Bus/coach transport 20%

Caravan parks and camping grounds 22%

Gift shop 14%

Guest house operation 23%

Motel/hotel operation 18%

Restaurant operation 14%

Travel agency service 25% Mark-up or profit is the most dynamic element of your pricing; you can return to this step later in the online guide and alter the mark up percentage to see how it affects your pricing. Based on the percentages listed above you should be calculating your figures using a mark-up of somewhere between 14% to 25%.

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STEP 6 - COMMISSION Some tourism operators believe they save money by not paying commission to third-party sellers. But, here's another way to look at it - what do you lose by not paying commission?

CONSIDER THESE SIMPLE QUESTIONS... 1. Is your website ranking highly and are you generating great international bookings directly?

2. Are you consistently full and happy with the way your business is performing?

Answered YES to both these questions? Congratulations! Maybe you don't need to branch into the tourism distribution channels as you seem to be doing very well on your own. Answered NO? Maybe another sales avenue could be beneficial to you. Retail Travel Agents, Tour Wholesalers and Inbound Tour Operators can open up new markets for you in a very cost effective way. But they also need to be paid. Commission is usually the major source of revenue for retail travel agents, wholesalers, inbound operators and visitor centres. Tourism operators need to understand how commissions are divided between the different levels of sellers and allow for the payment of commission in their prices. Tourism operators do find it difficult to justify the commission required by some agents, yet the costs in accessing these markets are generally beyond the reach of small operators. For example, it can cost up to $10,000 to attend just one international tourism trade show. You need to weigh it up - Do you want to open up new markets? YES? Then the most cost effective way to do this is through the commission structure.

HOW MUCH COMMISSION SHOULD I PAY? The level of commission varies depending who sells your product and which distribution method is used. For example, working directly with a Visitor Centre you will pay less than working with an International Tour Wholesaler. Here are the average commission levels payable to third-party sellers.

Third party seller Average commission

Travel agents/ Visitor centres 10% - 20 %

Tour wholesalers 25% - 30%

Inbound tour operators 25% - 30%


DIVERSIFYING YOUR INCOME STREAM "Don't put all your eggs in one basket"� is a common phrase for investing, but it also applies to your business income. Diversifying your income stream is a great way to protect your business against the unknowns such as a downturn in the market, or loss of a major third-party seller. It is a good idea to spread your sales through avenues such as wholesalers, inbound tour operators, direct bookings, retail agents and Visitor Centres. Direct sales will give you instant money and help your cash flow. Tour wholesalers sometimes take four to eight weeks to pay an invoice which may impact on your cash flow.

CALCULATING THE RIGHT COMMISSION FOR MY PRICING To ensure you price your business consistently you need to calculate the AVERAGE commission level you will be paying to third party sellers such as Inbound Tour Operators, Tour Wholesalers and Visitor Centres. Also factor in direct sales that do not incur any commission. You can then input this percentage into the Tourism BOOST online pricing tool. For example, if 80% of your sales come directly and only 20% through third party sellers you need to calculate the commission percentage accordingly. Use the table below to help you calculate the average commission you pay across all your sales avenues.

Sales avenue Average commission

Direct to consumer 0%

Visitor Centre %

Online travel agents %

Tour wholesalers/IOTs %

Other %

AVERAGE COMMISSION To calculate your average commission add up all the percentages listed above and then divide by 5.

Note: This is not an exact calculation method, but it will assist you in pricing your product more accurately.


RESULTS The final page of the Tourism BOOST online pricing tool is the results page. To help you understand your results use the glossary below. Glossary Meaning

Breakeven price The price at which you cover all costs and breakeven. This figure does not factor in any profit to you or commission fees.

Net rate The minimum selling price that covers all your costs and makes you a profit. This price does not factor in commission to third party sellers.

Recommended Retail Price (RRP) This price covers all your costs, including profit and commission to third party sellers. It is the recommended price you should be selling your product for.

Breakeven number of PAX/ROOMS This is the number of passengers you need to take on tour or rooms you need to let per night to cover all your costs and break even.

RevPar

Revenue per available room, or RevPAR for short, is a ratio commonly used to measure financial performance in the hospitality industry. The metric, which is a function of both room rates and occupancy, is one of the most important gauges of health among hotel operators.

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ANSWERS QUICK QUIZ Q. FIXED COSTS ARE…

A. (b) Costs that need to be paid no matter how many tourists you carry or rooms you let Q. VARIABLE COSTS ARE…

A. (a) Costs that change depending on how many tourists you carry or rooms you let Q. WHAT DOES AVERAGE CAPACITY MEAN IN RELATION TO TOURS?

A. (c) The average number of tourists carried or room let per tour Q. WHAT DOES OCCUPANCY RATE MEAN IN RELATION TO ACCOMMODATION?

A. (c) The average number of rooms occupied each night Q. WHEN PRICING YOUR TOURISM BUSINESS YOU SHOULD…

A. (d) All of the above Q. IS IT COMMON TO PAY COMMISSION IN THE TOURISM INDUSTRY

A. (a) Yes Q. WHAT IS BREAKEVEN PRICE?

A. (b) The price at which you cover all costs Q. IF YOU OPERATE THE BUSINESS SOLEY ON YOUR OWN WITH NO STAFF SHOULD YOU FACTOR WAGE COSTS INTO YOUR PRICING?

A. (a) Yes

ACTIVITY – FIXED VS VARIABLE COSTS Example cost Fixed Variable

Fuel for a bus tour

Wages for a bus tour

Meals whilst on tour

Room cleaning

Activities whilst on tour

National park permits

Vehicle registration

Amenities for rooms (soap, shampoo etc...)

Cleaning of room linen


Small Business Development Corporation 140 William Street

PERTH WA 6000 Telephone: (08) 6552 3300 or 13 12 49

Facsimile: (08) 6552 3399 Email: [email protected]

www.smallbusiness.wa.gov.au

mailto:[email protected]

http://www.smallbusiness.wa.gov.au/

PRICING YOUR TOURISM BUSINESS - Tourism …€¦ · Correctly pricing your tourism business will...

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