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Paper 02: Travel Agency and Tour Operations,

Itinerary Preparation & Tour Package Design
Module 26: Pricing Strategies and Distribution Mechanism

THE DEVELOPMENT TEAM

Principal Investigator Prof. S. P. Bansal
Vice chancellor, Indira Gandhi University,
Meerpur, Rewari, Haryana
Co-Principal Investigator Dr. Prashant K. Gautam
Director, UIHMT , Panjab University,
Chandigarh
Paper Coordinator Prof. Mohinder Chand
Chairman, Department of Tourism and Hotel
Management Kurukshetra University
,Kurukshetra Haryana
Content Writer Prof. Mohinder Chand
Chairman , Department of Tourism and Hotel
Management Kurukshetra University
,Kurukshetra Haryana
Content Reviewer Prof. Ravi Bhushan Kumar
Department of Tourism and Hotel Management
Kurukshetra University ,Kurukshetra Haryana
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ITEMS MODULE DESCRIPTION

Subject Name Tourism & Hospitality
Paper Name Travel Agency And Tour Operations, Itinerary Preparation & Tour
Package Design
Module Title Pricing Strategies And Distribution Mechanism
Module Id Module No-26
Pre- Requisites Basic Knowledge About Travel Agency And Tour Operations
Objectives To Study The Pricing Strategies And Distribution Mechanism
Keywords Cost Plus Pricing, Marginal Cost Pricing, Distribution Channel, Strategy

TABLE OF CONTENTS
1. Learning Outcomes
2. Introduction
3. Pricing Strategies And Distribution Mechanism
3.1 Various Pricing Strategies
3.1.1 Cost Based Pricing
3.1.2 Demand/Market-Based Pricing
3.1.3 Competition Oriented Pricing
3.1.4 Product Line Pricing

3.1.5 Tender Pricing

3.1.6 Affordability Based Pricing

3.1.7 Differentiated Pricing

3.2 Distribution Mechanism

4. Summary
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QUADRANT-I

1. Learning Outcome
After completing this module students will be able to:
i. Understand the Travel Agency Pricing and Distribution Mechanism.
ii. Various types of pricing Strategies
iii. Know the Distribution Mechanism.

2. Introduction
Travel agencies and tour operators play an intermediary role linking producers of travel
services (e.g. air passenger transport, accommodation, etc) to consumers. Generally, travel
agency and tour arrangement services can be regarded as a type of distributive services where
the underlying products sold are travel services. In pricing this type of services, one faces two
important issues similar to that in pricing distributive services in selling goods, i.e. how to
measure margin prices when they are not directly observable, and how to treat quality change
and adjustment. In tourism, the position of the distribution sector is much stronger: trade
intermediaries (travel agents and tour operators, charter brokers, reservation systems and
other travel distribution specialists) have a far greater power to influence and direct demand
than their counterparts in other industries do. These players have controlled demand in the
market and also have more influence on the distribution channels. They have efficiency to
increase the bargaining power with service suppliers and are in a position to influence their
pricing, product policies and promotional activities. This module is an attempt to develop an
understanding of pricing strategies employed by the travel agencies and tour operators along
with distribution Mechanism used in the industry.

3 Travel Agency Pricing and Distribution Mechanism

Travel agency pricing and distribution mechanism comprise various pricing strategies
employed and making product easily available to the tourists. Generally, a travel agency
adopt different types of pricing according to the behaviour of the market. It is not easy for a
travel agency to implement differential pricing except for certain specific purpose. Many
travel agencies may exercise differentials prices during the peak and lean seasons such as
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group rates; contract rates for airline crew; special conference rates or special concessions to
attract customers, and promotional pricing etc. Normally, travel agency pricing tends to
follow or conform to pricing standards applicable to the particular destination/ market or
resort. However, in today’s competitive environment travel agency may tends apply pricing
being generated in the hotel location, tourist location, international or national conference
venue, and so on. Nevertheless, hotel pricing also suffers from a degree of lack of flexibility,
although to a lesser extent than that of the hotel product. The depreciated valuation of the
hotel property / assets, financial efficiencies, credit policies and other factors, specially cost
of empty room-nights, fixed overheads also have a bearing on pricing strategies.

Pricing procedure means the process of working out the prices of a product.
Generally, the steps involved in the pricing process differ according to the pricing
objectives and pricing methods selected by tour operators. Following steps can be a
general guideline for pricing in tour operation.

1. At first target market should be identified with their geographical 1ocations,

profile (age, sex, income, education etc).

2. The tour operator should decide about the desired market position and price
image for package.

3. The tour operator should determine the amount of price elasticity of demand
of the package and the degree of price sensitivity of target customers,

4. Assess the life cycle stage of the product (destination) and firm e.g. if a tour
operator/ travel agency is new one then prices should be lower. Similarly, to
popularise a destination prices should be low.

5. Assess the composition of the product line of the package i.e. the types and
no of hotel rooms, types of transportation etc.
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6. The relevant costs of all elements (i.e. hotel tariff, transport, handling
agency etc.) should be calculated with a margin of further fluctuation in
exchange value and taxes etc.

7. Analyse the prices offered by competitors for similar types of packages,

8. Analyse other factors such as season, political instability, economic

situations, strikes, various problems at destinations (e.g. water scarcity in
Shimla in peak season).

9. Assess the price time to time. Try to justify the price in terms of its special
features of services/attractions etc. involved in package. Further, Cash
discounts, volume discounts, rebates etc. can be offered in lean months.

10. The tour operator should remember that pricing involves not only the
economic considerations for buyers, but psychological considerations too.
Some packages are index of quality or luxury or status or technical -physical
excellence e g. Sterling/Dalmia resorts, hang-gliding and skiing etc. Thus,
there must be personal touch in service’s and pricing of a tour package.

3.1 Various Pricing Strategies

The main aim of tour operator is to generate a tour package that is cheaper than the
package developed by the tourists then self directly. There is numerous tour operators in the
tourism industry but there is differentiation among them, for example all selling an identical
and highly standardized product, leads to very high price sensitivity among customers of
mainstream products. Sometimes the destination is often not of great importance, neither for
the tour operator nor the tourist. Therefore, pricing strategies are crucial for both the
mainstream market and the specialist holiday market. Thus, the price of the holiday product is
the most important marketing & sales tool in the tour operation industry.
Pricing strategy means the way, procedure or plan for fixation of price of a product/
service. The pricing strategy is employed to achieve the desired pricing objectives. There are
several methods / strategies of tour pricing which are appropriate for achieving a particular
pricing objective or a combination of pricing objectives in the tour operation industry.

Some methods of pricing can be discussed under following headings.

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3.1.1 Cost Based Pricing

Under this category there are several methods:

 Mark up Pricing: it is very simple and easy method to fix price of tour package.
In this method selling price of the product is fixed by adding a margin to the cost
price. It assumes that demand of product cannot be known accurately but costs are
known. Therefore a reasonable mark up is added to the costs which are adjusted by
trial and error to fix total price of product. The main objective is to minimize profits
in the short run without sacrificing sales due to excessive prices. This method is
normally adopted by transport operators who conduct chartered tours.
 Absorption cost Pricing: This method uses standard costing techniques and
identifies the variable and fixed costs of producing a package tour, selling and
administration. In order to calculate total cost these three costs required to add
some margin to reach final profit. This method is not dynamic and cannot take
opportunities of increasing demand. This method is unable to adjust with lower
demands. Tour operation industry is a seasonal industry and this method does not
suit for it.
 Marginal Cost Pricing: This method aims at maximizing the total contribution to
the firm towards fixed costs and profits. It does not seek to absorb the total costs in
each unit of sale. The marginal costs will include all the direct valuable costs of the
products/ service. It gives flexibility to leave out a portion of the fixed costs
unrecovered depending on the market situation. This method is very useful in
package tours where tour operator deals with many products/product lines under
competitive market conditions. It gives flexibility for realizing the fixed costs
through different products at different rates depending on market conditions. Since
in a package tour, the rate of different items is not known to customer, so without
his knowledge the tour operator adjusts the price according to the competition of
market or rates of peak/lean season or from expensive destination to cheap
destination. Thus, the customer finds a package cheaper than he can get
independently from individual seller. The main merit of this method is that it
works as long as the tour operator is assured of the target profit. The main demerit
of this method is that it assumes a level of demand for the product independent of
price. There is a chance that a much better opportunity for profit is lost by keeping
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the price too low. There is also a chance that the sale volume is lost because of
expectation of a higher level - of profit which the market cannot return.

3.1.2 Demand/Market-based Pricing

This method expects that the profit is independent of the costs involved but dependent on the
demand. This method is more suitable for fixing prices in tourism industry.

 Ability to pay: What the customers can bear’ pricing is normally used by handling
agency and guides\ Porters in mountains. It involves trial and error and is not safe
concept. This method is used where monopoly/Oligopoly conditions exist and
demand is relatively inelastic to price. Under this method buyers are bound to adjust
in course of time when an agency sets its prices on the basis of what the buyers can
bear. This method is very common in adventure tour packages e.g. water sports,
skiing, hang gliding, mountaineering, golfing etc. where tourists are bound to
purchase the package because they have little option.
 Skimming Pricing: the main aim of this method is to attain high price and high
profits in the early stage of selling of a tour package. Under this method tour
operators sell tour packages to that market segment at high price which do not bother
much about the price. This method is very useful in pricing of new products,
especially those which have a luxury or special elements which satisfies status of
customers. In such situation the seller enjoys patronage of a wealthy and non-price
sensitive segment of market e.g. those packages which includes golfing, hang-
gliding, ballooning, convention/conference, cruises, luxury resort holidays palace on
wheel etc.
 Penetration Pricing: This method aims to achieve greater market penetration
through relatively low price. This method is useful in launching of new
products/services/destination under certain circumstances especially when it is non
luxury item, price sensitive and there is stiff competition from other tour operators or
there are other substitutes and the seller concentrates on quantity. This approach is
usually practiced in tourism industry. New tour operators/travel agents handling
agency/hotels and other service sector opt for this strategy to get a big market.

3.1.3. Competition Oriented Pricing

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Tourism industry is a service industry and pre purchase testing is very difficult. Many
components e.g. guiding, escorting and reservation etc. which have negligible cost of
developing so they can lower the price in comparison to others to get mere business.

3.1.4 Product Line Pricing

When a tour operator produces and sells a large variety of’ tour packages
that can be grouped into a few homogeneous product lines (the packages in a given
product line are related to each other, sales of one influences the others) . These
tour packages have inter-related costs of producing and distribution. In such
situation, the aim of the tour operator is not to fix optimal price for each tour
package independently of the other packages but to fix the prices of each tour
package in such a manner that the entire product line is priced optimally resulting
in optimal sales of all tour packages. This method has some problems of joint
costing and pricing that makes this method more complex. It has been noticed that
a change in price of one item can affect the sale of other items. As mentioned
earlier, an exclusive tour is a type of product line where many items are included
into a package and all are interrelated. Their prices are fixed in such a manner that
the price of whole package appears logical.

3.1.5 Tender Pricing

Tender pricing is also known as competition oriented method of pricing and

is of a special type of pricing method. It is more applicable to MICE products and
the products/services purchased and contracted by institutional customers such as
MICE tour packages. Usually such customers go by competitive bidding through
sealed tenders or by quotation. They seek the best item/service at lowest price
which is not common practice in tourism industry. However, the tour operator
takes quotations from hoteliers, transporters and transfer agencies to get low price
and best/satisfactory services. Some packages which are prepared by some
institutions, corporate sectors, schools etc. are asking the tour agents/opera tors for
quotations.

3.1.6 Affordability Based Pricing

It is relevant with such products which can be afforded by all sections of

population (travellers). Normally, the pricing of pilgrimage packages by some tour
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operators, religious institutions, charity trusts etc. are done in the same manner.
So, their basic objective of pricing is not to get high profit, but almost no profit no
loss basis.

3.1.7 Differentiated Pricing

Some tour operators practice a method of pricing where different prices are
charged for the same product or service in different zones/areas of market or class
of customers.

This is very common practice in tourism e. g. the porters with horses/ponies

boatmen charge different rates from local people and tourist. The prices vary for
old persons, students and rich people for many souvenirs and services at
destinations.

3.2 Distribution Mechanism

The entire success of tourism industry depends on the efficient distribution mechanism.
Generally, tourism distribution channels are of two categories namely direct and indirect.
The direct distribution channels normally link suppliers and consumers without the aid of
intermediaries. The indirect distribution channels involve a wide range of intermediaries such
as tour operators, wholesalers, consolidators, travel agents, corporate travel departments,
incentive travel companies, as well as diverse organizations or associations. It has been seen
that all of these channel operators have the potential to significantly influence the travel
patterns, trends, behaviours and direction of specific travel markets. Generally, when the
destination is closer to the tourist in terms of physical, product awareness and experiential
the direct distribution channels will become more powerful in the market. However, in the
last two decades Internet has significantly changed the distribution channels in the travel
industry.
Tourism distribution process is dependent on other industries serving travellers such as the
transportation industry (airlines, railways, roadways, shipping lines), travel agents and tour
operators, national and state tourism organisations, hotel industry, shopping and
entertainment providers. In sum, those industries which provide certain other facilities to the
traveller or the tourist which are bought when accommodation and food are assured. Some
interesting features of tourism distribution need critical examination not only to serve the
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tourists but also significant for the other industries development. Firstly, the cooperative
distribution system which operates on a reciprocal basis, without affecting regular business of
the enterprises in chain of distribution. The main intermediaries in this distribution system are
travel agents; tour operators; airlines and special business clientele. Secondly, the system is
increasing development of franchising. The franchising may take various forms but it
basically involves making available to the franchisee (the beneficiary) of a service, system
that is designed and controlled for quality standards by the franchiser. Thus, the franchisee
gets the advantage of being part of a reservation and sales system which ensures a certain
level of business which may not be available otherwise.

The franchisee also benefits from the image of the franchiser, professional advice and
training provided by the franchiser. In the process, the franchisee improves operational image
and efficiency. At the same time, the franchiser’s distribution system is expanded and the
franchisee is well motivated to succeed in the business.
The distribution channels are the circulatory system of a tourism company. Recently,
competitions in a global marketplace and electronic distribution techniques have increased
the importance of distribution channels in tour operation industry. On the other hand, in the
global economic market, most of travel companies should need to create innovative ways to
approach in new and existing markets. This has forced to emerge new distribution channels
in the tourism market place. Moreover, in some cases tour wholesalers may sell direct to the
public through their own retail travel agency outlets. A wholesaler in the travel industry is
similar to a wholesaler in any other industry. However, they differ is that the wholesaler in
the travel industry generally does not take title to the "goods" they "sell". They act as one of
the "middle person" involved in distributing travel services. They are the link between
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suppliers (ground operators/businesses which deliver the tourism experience, carriers etc.)
and the retail network (Travel Agents).

4. SUMMARY

Travel agency and tour arrangement services can be regarded as a type of distributive
services or margin services. The price concept of the margin is similar to that for trade
margin in selling goods. Thus, in principle, it is possible to develop an approach similar to the
ABS’s approach to pricing retail trade margin services on goods. In pricing travel agency
and tour arrangement services, one faces similar challenges to those in pricing retail trade on
goods. For example, one has similar issues with quality adjustment which was previously
discussed in the literature mainly in the context of trade margin on goods. Collecting useful
data from travel agencies and tour operators is a big challenge. This is mainly due to different
bookkeeping practices in sale and purchase, and that data recorded in their management
accounts do not always meet the requirement for the pricing purpose. Thus, Price is the
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exchange value of a product which is one of the most important decisions for
marketing of a product. As mentioned earlier tourists are sensitive to price and
after certain change in price, they can see for alternatives. Pricing is a difficult task
when an agency has to set it for first time. There are several internal and external
factors which influences the decision of pricing. Pricing strategies vary from tour
operator to tour operator. Tourism distribution relies on interdependence with other
industries serving travellers and tourists such as the transportation industry (airlines, railways,
roadways, shipping lines), travel agents and tour operators, national and state tourism
organisations, shopping and entertainment providers. In sum, those services which provide
certain other facilities to the traveller or the tourist which are bought when accommodation
and food are assured.