Pricing Your Tourism Product
To be successful in the marketplace, a product must be priced accurately and competitively. This requires a clear understanding of the individual costs of all product components and their impact on total product price.
Factors influencing pricing
- Seasonality – Fluctuations in business between high and low seasons.
- Operating costs – Includes general overheads, promotion and labour costs which can vary, depending on business peaks and troughs.
- Competition – This influences the maximum price for which a product can be sold.
- Demand – Generated by existing and potential customers.
Calculating a basic sale price
A base net rate is what an operator must receive from the sale of a product. Base nett rate is generally calculated considering overheads and other operating costs, allowing for a margin on the price that is considered profit.
Examples of overheads and operating costs include:
- Labour costs (including yourself and your staff)
- Cleaning, maintenance and repairs
- Stock (including stationery, linen, food, petrol, stamps, machinery and uniforms)
- Bank fees
- Insurances
- Marketing (including research, advertisements, promotions, brochures, consumer or trade events and travel costs)
- Commission rates
Nett Rate = operating costs and profit
Pricing Pointers
- Consider all costs and include in pricing
- Differentiate between fixed costs (eg rent) and variable costs (eg promotions). Variable costs, including the actual cost of a product, will change as product demand changes
- Be realistic to ensure you obtain profits while retaining a competitive edge
- Understand market demands and their impact on price.
- Consider what can be added to improve sales without sacrificing profit
- Improve ease of payment for customers by providing credit card facilities/Internet payment facilities
- Consider expanding the distribution channels available to sell a product, using travel agents, wholesalers and inbound operators
- Ensure commission rates for all intermediaries are factored into retail price
- Be sure of different pricing levels for different intermediaries and quote accordingly
- Anticipate and allow for delayed payments when dealing with sales agents (eg wholesaler voucher system)
- If packaging, determine the most appropriate pricing method for the particular product (eg disguised or visible)
Commissions
Smaller operators usually sell direct to customers, thereby providing the best profit margin. However, expanding the number of distribution channels selling a product can improve sales and profitability. Establishing a business link with sales intermediaries does involve some costs. These are usually not upfront costs, but incurred after a sale is made.
This is commonly known as a ‘commission’ and is classified as a distribution cost. Using a combination of distribution channels to sell a product can contribute to improved bookings and ultimately increase profits.
Pricing and commission structures are an important factor in deciding which distribution system (or systems) you choose to rely on. Any product or package distributed through the distribution system will need to be fully commissionable.
The cost of covering commissions on top of operating costs may seem daunting to some operators, however it is important to remember that you only pay a commission on those bookings actually made through the wholesaler or travel agent, and you may not have received that business otherwise.
The commission must be included in your rack or retail rate, and should not be added to this rate. For example, if your product sells for $110, the nett rate you would receive from a Retail Travel Agent would be less 10 per cent – $99. Commissions are an important factor in developing pricing for your tourism product, especially when considering entering the inbound tourism market.
Retail Price = net rate + distribution costs. Distribution costs must be added to nett rates to
create a retail price. A retail price is the maximum price a customer pays for a product, irrespective of where it is bought.
The following is a guide to industry standard commission structures:
| Sales Method | Level of Commission | Explanation |
|---|---|---|
| Inbound operator | 30% | A nett price providing a 30% margin is agreed with the inbound tour operator, on behalf of the overseas client, wholesaler or travel agent |
| Tour wholesaler | 20% | A wholesaler will receive 20% commission to cover the costs involved in selling your product. |
| Retail travel agent | 10% | A travel agent retains a standard 10% commission once the booking is confirmed. |
| Direct with consumer | Nil | If the client buys the product directly from your, it is relatively easy to set the price. however, the gross rate should bet the same as that provided to ITOs, wholesalers and retails agents. |
| Source: Tourism Australia, 2009. Please note information on the subject of commission levels is intended as a guide only. | ||
