5 Things to Consider When Costing and Pricing a Tour

One of the key factors for success in the tourism industry is the right tour costing and pricing. Set the price too high and people won’t buy. Set it too low, and you’ll go out of business.

To ensure that consumers purchase your tours and partners promote them, your prices must be consistent, accurate, and competitive.

If you are developing a new vacation package, have you considered listing your existing tour offer on various distribution channels? Or perhaps attract another type of travelers?

• The Best Distribution Channels in Travel and Tourism

The cost and price of your products are connected with the decisions you make in the early stages of product development.

This article will help you determine the individual elements that make up the cost and price of your products. Read on and learn how to better costing and pricing a tour.

What you should consider when costing and pricing a tour

Finding an optimal price for your travel products involves researching, doing some math and a little bit of trial and error.

Below you can find what is necessary for a tour operator to get as close as possible to the ideal price of a tour.

Define your pricing objective

The pricing objective is the goal you want to achieve with your pricing strategy. There are multiple pricing objectives, some of the most common are:

• Premium pricing — charging a high, rarely discounted price to preserve the status of your brand.
• Differentiation — thinking of price as one of the differentiation factors of your brand. For instance, you could aim to be the best budget travel company in New York.
• Closing sales — closing as many sales as possible, which often implicates negotiations and discounts.
• Price leadership — setting a lower price than the competition.
• Price discrimination — charging a high price to customers who are willing to pay more while still selling to price-sensitive customers. For example, by offering coupons that are valid only on Thursdays, you may attract price-sensitive travelers while travelers who are willing to pay more will travel at their convenience.

Take your time to choose the right price objective for your business. You should pick the one that is in accordance with your marketing, financial, strategic and product goals.

• How to Profit from a Discount Strategy for Tours and Activities

Remember, business and market conditions change over time, and may your price objective as well. Review it when you feel it’s necessary, and don’t be afraid to change it according to a future business scenario.

Determine the demand

The demand has an important role in tour costing and pricing

According to Investopedia:

Demand is an economic principle referring to a consumer’s desire to purchase goods and services and willingness to pay a price for a specific good or service.

Demand in the tours and activities sector means how many tourists would book your tour for a determined price.

Other factors that have a direct impact on the demand for your experiences are:

• The degree of competition in your market
• How unique is your product
• The quality of the overall experience

To estimate the demand for your product, you can perform surveys, price experiments, and statistical analyses. Creating your ideal customer persona will also help you measure the size of your market.

• Get to Know the Ideal Customer for Your Tour Business

Calculating demand may be a complex task, so it’s a good idea to hire a specialized company to handle it for you.

Estimate your costs

Costing an experience is different than costing a good.

For the first one, you are essentially selling a service. Of course, your offer may include add-ons that are goods. But pricing those items is not the objective here.

To price an experience you should consider the many expenses needed to keep your business running. From energy bills to organizing, distributing, selling, and leading a tour.

Your final price should be able to cover all the expenses directly related to the tour, and also a fraction of the expenses that will occur despite the tour. Those are the direct and indirect costs respectively.

Some of the expenses connected to a tour operator business are:

• Maintenance of the equipment used during the tour/activity
• The salary of tour guides, sales personnel, customer service, etc.
• Training courses you will offer to your staff
• The commission for distributing your tours — depends on your chosen channel (business partners, direct bookings, Online Travel Agencies, etc.)
• Internet, mobile phone, energy, rent, and other bills
• Government taxes according to the country you operate
• Your monthly investment in marketing

The list of expenses goes on. But you should know all of them to better costing and pricing tour tours.

For that reason, don’t hesitate in asking for help from a professional accountant. Setting the correct cost will save you a lot of money.

Analyze your competition

Tour operators should benchmark their prices against competitors to establish a reference price.

A reference price is a price that a traveler considers fair to pay for your tour in comparison to competitors’ tours.

When benchmarking the competition you should note the differences between the experience you are offering and the ones your competitors are offering.

What are their differentials? What is their price? Which channels do they use to distribute their tours? Who is the market leader? What are their payment conditions?

Each detail matters. By understanding your competition it will be easier to see your own strengths and weaknesses, and what is considered a fair price for your tours in the eyes of your customers.

Select a pricing method

Unfortunately, there isn’t an ultimate formula for tour costing and pricing. Although would be great just to add the inputs, set the parameters and… voilà! Here you go the right price for your experience.

As I said at the beginning of this article, finding the price that works better for your business is more or less a trial and error journey.

The good news is that you can use one of the methods I’ll describe below as the starting point for your journey.

Cost-oriented pricing

This method involves calculating the cost of a tour and then adding a percentage markup to determine the final price. That’s the easiest way to calculate what a tour should be priced at.

There are essentially five ways that you can do that:

1. Cost-plus pricing involves adding a certain percentage to the cost to fix the price. For example, if the cost of a wine experience is $150 per person
   and the marketer expects 12% profit on costs, then the selling price will be $168. The difference between the selling price and the cost ($18) is the profit.
2. Mark-up pricing is a variation of cost pricing where tour operators increase the cost of a tour before offering a significant discount. That way, travelers feel like they are getting a deal and travel companies can get more profits. Mark-ups are calculated as a percentage of the selling price and not as a percentage of the cost price.
3. Mark-down pricing means that you offer your products at a discounted rate in order to increase the number of bookings you receive.
4. Break-even pricing covers all the relevant fixed and variable costs. The sales revenue equals the cost of sold tour and vacation packages. There is neither profit nor loss.
5. Target return pricing is the pricing method where a tour operator sets prices to achieve a certain level of return on investment (ROI).

Market-oriented pricing

When using this method you will set a final price based on the current market conditions.

This means you should know very well the market that you are operating including your competitors, demand, etc.

This method fits well with companies that offer products with a high intangible value. That’s the case for tour operators.

Each experience is unique and customers will perceive a higher value as more memorable the experience is.

In a similar way to costing oriented pricing, there are different techniques to find a final price based on the market:

1. Perceived value pricing considers perceived value as the primary factor for fixing prices, and the costs as a secondary factor. If the customer perceives a higher value, then the price fixed will be high, otherwise, it should be lowered.
2. Going-rate pricing sets the price by major competitors. If a major
   competitor changes their price, then the smaller travel companies may
   also change their price, irrespective of their costs or demand.
3. Differentiated pricing may charge different prices for the same tour or vacation package depending on certain conditions.
   • Customer segment pricing: Here different customer groups are charged different prices for the same tour depending on the size of group bookings, payment terms, and so on.
   • Time pricing: Here different prices are charged for the same tour at different departures or season. It includes off-peak pricing, where low prices are charged during low-demand tunings or season.
   • Area pricing: Here different prices are charged for the same tour in different market areas. For instance, a travel company may charge a lower price in a new market to attract travelers.

If you want to dive deeper into the matter, the book Pricing Done Right is a good start.

Conclusion

Calculating the tour costing and pricing is essential for all tour operators and it’s something that should be done in the early stages of your business.

Finding the right prices for your products will prevent future losses. If you are in the market for a while, consider checking your pricing objectives and updating your market research.

That is something you should do once in a while to make sure your prices are competitive and that you are receiving what is fair for your tours.

If you found this article useful, download our guide The Best Way to Price Tour and Vacation Packages.

ORIOLY
on August 18, 2021

by Felipe Fonseca