UNIT 9 TOUR COSTING & PRICING

Structure
9.0 Objectives
9.1 Introduction
9.2 Cost – Concept & Definition
9.3 Various types of Costs
9.4 Tour Package & Its Types
9.4.1 Cost components in case of tour package
9.4.2 Costing in case of various types of tour packages, similarities and
differences.
9.4.3 Single Room Supplement, Triple Room Reduction & other cost
supplements.
9.5 Controllable and non-controllable costs in tour packages
9.6 Basics of pricing in case of tour packages.
9.7 Let Us Sum Up
9.8 Key Terms
9.9 Some Useful Books
9.10 Answers to Check Your Progress ‘Exercises’
9.11 Terminal Questions

9.0 OBJECTIVES

After studying this unit, you should be able to

 Understand the concept of cost and its various types.
 Identify various cost components of a tour package.
 Understand the costing process for various types of tour packages.
 Understand and calculate Single Room Supplement, Triple Room Reduction
 Understand various controllable and non-controllable cost elements of a tour package.
 Understand the basics of tour package pricing.

9.1 INTRODUCTION

One of the most important functions of a tour operator is to prepare tour costing and pricing
of package tours. Doing costing, pricing of the packages and further selling them to the
perspective tourists are three important stages of tour operation business. In this unit, you will
read and understand the tour package’s costing and pricing in details. Once the destinations
and attractions along with services are decided, the next part is to prepare a detailed travel
plan or “tour itinerary”. This includes daily activities to be performed during the tour from
departure till return back at the place of origin. Tour itinerary brings various components of
tour package while doing the costing and pricing. You will find the meaning of the concept
of cost, various types of cost and components of cost along with different types of pricing.
The process of finding final cost of a tour package and basics of the tour pricing have also
been explained in details.

9.2 COST – CONCEPT & DEFINITION

“Cost” is an important economic concept. In simplest terms, cost refers to the amount of
payment made to acquire any goods or services. You go to a market and purchase a pen for
Rs. 50, that becomes the cost of that pen, for you. But, is Rs. 50 the only cost involved here?,
what is about the fuel expenses for using your bike or say the time it took to go to market and
come back. So, if we go a bit deep into the concept of cost, it comes out as financial valuation
of resources, materials, risks undergone, time and other utilities consumed to acquire various
goods or services.

9.2.1 Definition and Meaning of Cost

Cost can be defined in various ways, depending on the context, it can take the form of a verb
or noun. Further, it can be defined as economic cost as well as accounting cost. Let us have a
look at some of the definitions of cost.

(As a verb) – Cost (of an object or service) requires the payment of (a specified sum
of money) before it can be acquired or availed. For example cost of one way air ticket from
Delhi to Bombay is Rs. 5000/- per person

(As a Noun) - An amount that has to be spent or paid to buy or have the ownership of
something.

In business and accounting, cost refers to the monetary value that a company spends
in producing a specific good or service. It simply denotes the ‘outflow of money’ occurred on
creation of a good or service. It does not include the mark up or profit. In case of business
and accounting, cost differs from the seller and buyer’s perspective. In case of a travel agency
if a package tour requires an outflow of Rs. 50,000 for arranging inclusions all the services
under package tour, the cost of tour package from travel agency’s (seller) perspective will be
Rs. 50,000. However upon adding the profit mark up, the same package is sold to a tourist for
Rs. 55,000. So from the tourist’s (buyer) perspective, the cost of the package will be Rs.
55,000.

Economics – In economic sense, cost refers to the measure of alternative

opportunities forgone in pursuit of one specific activity taking precedence over others. Here,
cost does not refer to the monetary outlay only, rather it takes into account the implications
and consequences of the activities or opportunities foregone while undertaking one set of
activities.

9.3 VARIOUS TYPES OF COSTS

As we have seen that cost takes different meanings in different contexts, let us discuss some
important types of cost, which will help you further strengthen our understanding of the
concept of cost.
Costs can be classified on the basis of –
 Nature of expenses
 Relation to cost object
 Business Functions
 Behaviour
 Purpose of decision making

Let us discuss the above classifications in a detailed manner.

Nature of Expenses
In case of a business organization, there can be various types of expenses to be incurred in
order to produce desired goods or services, making them available to the sale and realising
the sale to proceed into cash for keeping the business in operation. On the basis of the nature
of expenses, the various costs can be material cost, labour cost, overhead costs, etc.

In case of a travel agency expenses related to supply side of the tour package i.e. the expenses
related to hotel accommodation, flight/train/ship/taxi etc., ancillary services assistance
during check in check out, activities at the destination etc., are parts of the material cost.

The expenses related to employees i.e. with regard to recruitment, selection, training,
development and retention of employees, etc. form the labour cost.

Other expenses not directly related to tour packages being sold by a travel agency include the
expense on office rent, furniture & fixtures, internet, electricity, stationery items and other
administrative aspects as the overhead cost.

Relation to Cost Object

On the basis of whether the cost object has any direct relation with regard to goods or
services being produced by a business, cost can be classified into direct and indirect cost.

Direct Cost – Expenses which are directly related to the production of a specific good or
service are known as direct costs. For example in case of a tour package, the costs of
elements mentioned in package inclusions like the hotel, flight tickets, VISA charges,
activities etc. are called as direct costs. Direct costs are linked with the production of specific
product or service. For example, in case of a restaurant, costs related with raw food materials
are all direct costs and as the production goes up, the direct costs will also go up.

Indirect Cost – Expenses which are not directly related to production of specific product or
service but are necessary to keep the business operations going on are known as indirect
costs. For example, in case of a restaurant, expenses on the furniture & fixtures, electricity,
air conditioning etc. are indirect cost, which do not have a direct relation with production of
the specific service, but necessary for the business operations.

Business Functions
In every business organization, there are various functions/activities that are needed to be
performed in order to keep the business running. For example, basic business functions
include Production, Administration, Finance, Sales & Marketing, Research & Development
and Quality Control, etc. In order to effectively perform each of these functions, certain
expanses need to be incurred by organization. All such expenses related to a particular
function can be attributed as the functional costs. For example, in case of a tour operator there
may be a research & development department to look for new destinations/attractions and
designing new travel products, so the cost so associated can be the research & development
costs of tour operator.

Behaviour –
Different types of costs behave differently with respect to production volume. For example,
some costs may change proportionately with changes in production, some may not show any
changes until there are significant changes in production or some costs have a mediocre effect
of production volume i.e. changes in production results in changing costs but not in similar
proportions and directions. On the basis of their behaviours in relation to production volumes,
the costs can be classified as fixed, variable and semi-variable costs.

Fix Cost – These are the costs which do not change with changes in production in the short
term. For example the office rent is a fixed cost which does not change with change in
production in short term, but if the production levels are increased exponentially then there
may be requirement of a bigger office or another office thus increasing the office rent cost.
So, the fixed cost should not be assumed to remain constant always, rather it remains constant
in short term only and with limited changes in production activity.

Variable Cost – These are the costs which depend on the level of production. With increase
in level of production, these costs increase and vice versa. For example, in case of a
restaurant the more the food/dishes are produced more will be the raw material costs. In case
of a tour operator, the more the number of packages operated, the more will be the hotel, and
transportation costs.

Semi Variable Cost - These are the costs which lie between fixed cost and variable cost or
which contain the elements of both fixed and variable cost. For example, the costs associated
with repairs, mobile, internet expenses, salary of sales persons, etc. are some of the semi
variable costs.

Purpose of Decision Making –

There are various cost concepts that help the management in better decision making in the
wake of uncertainties and risks. Some main costs associated with managerial decision making
are opportunity cost, marginal cost, sunk cost, etc.

Opportunity Cost – This is the cost of second best alternative or the cost of the option
foregone in order to pursue a specific set of action. For example, in case of an airline which
has option to open its office in either Delhi or Mumbai, then either of the cities chosen will
have the opportunity cost of losing on the opportunities in the ‘city not chosen.’

Marginal Cost – This is cost associated with per unit increase in production and mostly used
in the manufacturing organizations. In case of airlines, it can be the cost of increasing one
more seat/ passenger in their commercial flight operations.

Sunk Cost – These are the costs which once incurred, cannot be recovered, for example
advertisement cost, publicity cost, etc. Management needs to be extra cautious with regard to
these costs.

Check Your Progress A

1. What is ‘Cost’ in economic sense?

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2. What is ‘Cost’ in business and accounts perspective?

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3. What are the various backgrounds for classification of costs?

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4. Explain ‘Cost’ as a noun as well as a verb?

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5. Specify the classification basis for the below mentioned cost types.

i) Fix Cost ............................................................................

ii) Material Cost ............................................................................

iii) Opportunity Cost ............................................................................

iv) Sunk Cost ............................................................................

v) Overhead Cost ............................................................................

vi) Marginal Cost ............................................................................

 vii) Labour Cost ............................................................................

viii) Direct Cost ............................................................................

9.4 TOUR PACKAGE & ITS TYPES

Every business organization deals in some sort of product or service which it offers to its
prospective customers for a price, which is inclusive of profit for the business
owners/promoters/shareholders. ‘Tour Package’ is the product-cum-service that is prepared
by travel business organizations and offered to prospective tourists.

Tour Package is an amalgamation of various travel related services, which is

prepared by combining one or more travel components together. It is primarily
aimed at providing a seamless and hassle free experience to the tourists. Generally,
it is a pre-arranged, pre-booked, and pre-paid holiday. However, with the passage
of time ‘tour package’ has also evolved itself from being a rigid travel plan with
fixed inclusions to a flexible and tourist oriented service.

Tour packages can be classified on the basis of degree of flexibility, nature and types of
services, number of persons travelling together, theme of destinations covered/activities
undertaken, place of origin and destination.

Degree of Flexibility – On the basis of degree of flexibility, tour package can be named as

Inclusive Tour Package – In this case, a tour itinerary with fixed route and inclusions is
prepared and printed in the form of brochures. Customers can have an instant view of the
entire travel plan with inclusions and exclusions. This type of package leaves very less room
for individual customer choices, but brochure tour packages are comparatively low priced.

Adhoc Tour Package – This type of package is tailor made as per the customer
requirements. In this case specific requests from the customer are taken in advance and then
the package is formed as per customer’s choice of inclusions and exclusions.

Based on Services- On the basis of nature and type of services, package tours can be
designed and offered to the tourists/customers. For example, there can be hotel rooms and car
services as two important components of package tour. This is otherwise understood as felxi
package tour with inclusion of select component of services.

Based on Number of Persons Travelling – On the basis of number of persons travelling, the
tour package can be group tour package or individual tour package. In case of group tour
package, more than 15 persons must travel together, though the definition of group varies
from supplier to supplier. In case of less number of persons travelling together, it can be
individual tour package.

Based on place of origin and destination, tour packages can be of three types –
Inbound Tour Packages – These tour packages are prepared to cater the travel needs of
foreign tourists visiting a country. For example, a group of tourists from Italy, intending to
visit India will be requiring a group inbound tour package.

Outbound Tour Packages – These tour packages cater to the needs of tourists intending to
visit a foreign country. For example, a honeymoon couple from India desirous of visiting
USA will be requiring an outbound tour package.

Domestic Tour Package – Domestic tour packages are prepared to cater for the needs of
tourists visiting within their own country. For example, a group of school students from Delhi
will require domestic tour package to visit the hill stations of Himachal.

9.4.1 Cost Components in Case of Tour Package

In order to have an idea of cost components in a tour package, let us have a look at some
sample package inclusions.

Sample A – Package Includes.

 Accommodation on twin sharing basis.
 Daily buffet breakfast at the hotel.
 Transportation as per itinerary from arrival till departure using AC Vehicle.
 Assistance during check in and check out at hotels.
 Train tickets of AC 2 Tier Class from place A to place B.
 Entrance tickets to monuments as per itinerary
 Economy class domestic flight tickets from place C to place D.
 Services of English speaking local guide for sightseeing as per itinerary.
 All presently applicable taxes.

Sample B – Package Includes.

 Return International flights ex. City A in economy class
 Accommodation on twin sharing basis.
 Daily buffet breakfast at the hotel.
 Transportation as per itinerary from arrival till departure using AC Vehicle.
 Assistance during check in and check out at hotels.
 Train tickets of AC 2 Tier Class from place A to place B.
 Entrance tickets to monuments as per itinerary.
 Economy class domestic flight tickets from place C to place D.
 Services of English speaking local guide for sightseeing as per itinerary.
 Presently applicable VISA Charges
 Travel Insurance
 Currency exchange assistance
 All presently applicable taxes.

After having a glance at the above sample package inclusions, one can safely deduce that the
inclusions in sample package A indicates domestic/inbound package and sample package B is
most likely to be an outbound tour package.
After studying the above inclusions we can broadly classify the cost components of a tour
package under the following heads.

Accommodation - This is one of the major cost components in a tour package, generally it
accounts for the largest share in overall package cost. Accommodation cost depends on
various factors like choice of accommodation in terms of facilities and star categorisation,
sharing type (Single, Double, Triple or more). Better the facilities demanded and lesser the
sharing type, higher will be the accommodation cost in the package. In most cases
accommodation accounts for around 50 per cent of the overall cost.

Transportation – After accommodation, this is another major cost component of tour

package. Transportation cost also depends on the level of comfort demanded and mode of
travel chosen by the customers. For example, air travel will be costlier than train/road travel.
In case of air travel charter flights will be costlier than schedule flights. Transportation costs
generally factors for around 30 per cent of the total package cost.

Ancillary Services – Apart from accommodation and transportation, other ancillary services
such as meet & greet/assistance during check in/check outs, guide/escort services, monument
entrance tickets, meals, travel insurance, VISA charges, applicable taxes and any specific
activities at a destination or monument (such as camel ride on sand dunes in Jaisalmer or
rickshaw ride in old Delhi or Jungle safari in Ranthambore) form the remaining cost part of
the overall package cost. These are called ancillary service as they are not the part of standard
package inclusions and depend on the choice of destinations as well as on personal choice of
the customers.

9.4.2 Costing in case of various types of tour packages, similarities and differences

In order to have a better understanding of costing of tour packages, let us take an example of
a short package.

Itinerary –
Day 1 – Arrival at Delhi international airport and transfer to hotel. Overnight at the hotel.
Day 2 – Full-day sightseeing of Delhi with visits to Red Fort, Qutub Minar, Humayun Tomb
etc. Overnight at the hotel.
Day 3 – Drive to Agra with enroute visit to Sikandra. Overnight at the hotel.
Day 4 – Full-day sightseeing of Agra with visits to Taj Mahal, Agra Fort and Fatehpur Sikri.
Overnight at the hotel.
Day 5 – Drive to Delhi international airport to board return flight.
Inclusions -
 Accommodation on twin sharing basis.
 Daily buffet breakfast at the hotel.
 Transportation as per itinerary from arrival till departure using AC Vehicle.
 Assistance during check in and check out at hotels.
 Entrance tickets to monuments as per itinerary
 Services of English speaking local guide for sightseeing.
 All presently applicable taxes.

Table 9.1 presents the cost sheet for illustration purpose.

Table-9.1: Cost Sheet
Day / Itinerary Hotel Room Transportation Guide Entrance Any
Date SGL/DBL Fee Other
1 Arrival 5000/5500 1000 --- -- --
2 Sightseeing 5000/5500 1500 1000 800 500
in Delhi (02 Lunch)
3 Drive to 3000/35000 2500 ---- ---- 500
Agra Enroute
Lunch for
02
4 Sightseeing 3000/3500 1500 1500 1200 1500
in Agra Photo
shoot at
Taj Mahal
for 02
5 Drive back ----- 2500 --- ---- 500
to Delhi Assistance
at airport.
Total 16000/18000 9000 2500 2000 3000
(****cost calculation for per person, based on 2 persons travelling together as per above
itinerary and deciding to share one hotel room, entrances mentioned are for one person)

In the above example, we have assumed that there are two persons travelling together and
they are staying on sharing basis using 01 room at the hotels. Most important factor in tour
package costing is to decide the correct dividing factor for each of the cost components.

Let us calculate the per person cost on the basis of above example.

Accommodation / Hotel Cost – Rs. 16,000/- for SGL Room and Rs. 18,000/- for double
room, now since we have assumed stay in 01 room on sharing basis, the cost for
accommodation per person will be 18,000/-/2 i.e. Rs. 9,000/- per person.

Transportation & Guide Cost – Rs. 9,000/- + Rs. 2,500/- = Rs. 11,500/-, since the
transportation and guide is shared by both tourists, so per person transportation & guide cost
will be Rs.11,500/2 i.e. Rs. 5,750/- Per Person.

Entrances – Since the entrance fees are taken on per person basis in the cost sheet, the same
will be taken as it is @ Rs. 2000/- per person.

Lunch & Assistance – Lunch cost has been specified for 2 persons and assistance is also
shared by both tourists, hence the per person cost will be Rs.3000-/2 i.e. Rs. 1500/- per
person.

So the total cost per person will be Rs. 9000/- + Rs. 5750/- + Rs. 2000/- + Rs. 1500/- = Rs.
18250/- on twin sharing basis for the package mentioned above.

Similarities and differences in costing for various types of tour packages -

Now, since we have already discussed various types of tour packages and the basic costing
process of a sample tour package as well as the various cost components of a tour package, it
will be easier to understand the similarities and differences in case of costing for various
kinds of tour packages.

Any tour package irrespective of its type is most likely to have the same cost components i.e.
accommodation, transportation and ancillary services. There may be some differences in case
of ancillary service based on type of package being for inbound or outbound travel. Like, in
case of outbound travel, services like VISA, travel insurance, forex, etc. also make a big
difference in cost. In case of brochure tour packages with pre-fixed departure dates, on
account of advance contracting with suppliers, the cost for various elements may get reduced
substantially. Though, in this case, in absence of actual number of persons travelling,
deciding the dividing factor for common cost components like transportation, guide,
assistance, etc., this becomes difficult to compute cost in the beginning. In case of adhoc tour
packages, the service inclusions depend totally on customer preferences as well as no
bookings etc. are made in advance. Therefore, making the service delivery depends on the
availability. Also in case of adhoc tour packages, with exact number of travellers known in
advance, the dividing factor for common cost components can be chosen exactly. A good tour
consultant should carefully do the costing of tour package after duly factoring in the type of
package and should ensure that every chargeable service is included in the cost sheet and
correct dividing factor for common services is used.

9.4.3 Single Room Supplement, Triple Room Reduction & other cost supplements

Let us go back again to the sample package discussed above. In the costing, we have assumed
that there are two persons travelling together and they are sharing the same room. But what if
they don’t want to share the same room and want to stay in separate rooms. There will be
additional cost that needs to be paid by each of them. How much will be the cost and how to
calculate the same.

Single Room Supplement (SRS) – It is the additional cost that needs to be paid by each
person in case the accommodation is not shared and everyone stays in separate single room
throughout the tour.

Single Room Supplement = Cost of Single Room – Cost of double room/2 (Half of the cost
of double room.

In the sample package above, Single Room Supplement will be = Rs.16000- – Rs.18000/-/2
i.e. Rs.16000/- – Rs.9000/- = Rs. 7000/-

So, if both the travellers want to stay in single room instead of sharing the double room, they
need to pay Rs. 7000/- per person extra over and above the package cost.

Triple Room Reduction –

In the same example, what if one of the friends of the tourists also wants to join them and all
three are willing to share the same double room with provision of extra bed in it. Will there
be any increase in cost or will there be any reduction.
Let us assume the cost of extra bed during the duration of entire tour is Rs. 5000/- (Rs. 1000
x 5 nights)

Triple Room Reduction = Cost of Double room/2 – (cost of double room + extra bed)/3
= Rs.18000/-/2 – (Rs.18000/-+Rs.5000/-)/3
= Rs.9000/- – Rs.7600/- = Rs. 1400/-

Therefore, in case there are 3 persons staying in double room with extra bed then each of
them will get a reduction of Rs. 1400/- over the package cost on double sharing basis.

In addition to Single Room Supplement, there can be supplementary costs for full board (for
including all three meals in package cost) for accompanying escort from arrival till departure
(instead of local guides in each city) or for any other additional service like jungle safari,
special dinner etc. The basic costing mechanism will remain the same i.e. to identify the
additional cost of service sought and divide the same with suitable dividing factor to arrive at
per person additional/supplementary cost.

Check Your Progress B

1 What is a tour package?

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2 What are various parameters for classification of tour packages?

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3 Explain various types of packages based on place of destination/origin?

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4 What are various cost components of a tour package?

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5 What are the points to remember for costing of a tour package?

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6 What is Single Room Supplement? How is it calculated?

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7 What is Triple Room Reduction? How is it calculated?

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8 Based on the given information, please find out the cost per person on twin sharing
basis with single room supplement and triple room reduction.
Cost of accommodation – Rs. 25000/-/Rs.30000/- (SGL/DBL), Extra Bed – Rs.
8000/-
Cost of transportation – Rs. 15000/-
Cost of entrances per person – Rs. 2000/-
Cost of local guides – Rs. 5000-
Cost of meals as per inclusions – Rs. 1200/-
 Cost of assistance services – Rs. 2000/-
Cost of train ticket as per itinerary – Rs. 2500/- per person.
*** Assume the number of persons travelling as 02.

9.5 CONTROLLABLE AND NON-CONTROLLABLE COSTS IN TOUR

PACKAGES

In addition to various cost classifications discussed in previous pages, we have another

important classification i.e. the degree of control that management can have over the costs.
On the basis of “degree of control that management can have” costs can be classified as
controllable and non-controllable costs.

Controllable Costs – Controllable costs are the costs over which the organization has full
control or can have maximum possible control. These are the costs which can be regulated by
the manager concerned. For example direct cost of materials, labour, marketing cost, etc.

Non controllable Costs – On the contrary, non-controllable costs are those cost which are
beyond control of company or the manager concerned. Office rent, insurance costs etc. are
some of the examples of the non-controllable costs.

Tour package by its very nature is an amalgamation of services from various vendors, on
which the management of travel agency has little or no control at all. Major cost components
of a tour package i.e. accommodation, transportation and ancillary services are from various
vendors on whom the travel agency management has no control. This peculiar nature of costs
in case of a tour package makes the cost of tour package quite unpredictable and prone to
fluctuations. So, we can say that unlike the other product/services wherein raw material costs
are controllable to an extent, in case of tour packages the cost of its components is largely
uncontrollable. Costs like office rent, insurance, govt. taxes etc. remain uncontrollable in case
of tour packages too. Like other products/services, cost like marketing and distribution etc.
remain controllable in case of tour packages also.

9.6 BASICS OF PRICING IN CASE OF TOUR PACKAGES

After doing the costing part, another important aspect is to fix the price of tour package. The
word ‘Price’ too has its own meaning in different contexts.

Price (as a noun) – is the amount of money expected, required or given in payment for
something.

Price (as a verb) – is to decide the amount required as payment for something (offered for
sale)

Price can be defined as the amount of payment or quantum of compensation given by one
party to another in exchange for one unit of goods or services. It can also be defined as the
amount of money that a customer needs to pay in exchange of the product or service being
offered.

Pricing on the other hand is the process of determining the price.

In case of tour package, once we have all the cost components and arrived at the final cost,
next step is to “Price” the package i.e. to decide the amount required to be paid by
prospective tourist in order to avail the services mentioned in package. There can be various
“Pricing” strategies that can be employed by travel organizations to arrive at tour package
price. Some of the important pricing strategies are –

A) Skimming Pricing – As the name indicates the focus in this strategy is to attract high
paying customers of market by highlighting the unique and innovative features of the
product or service. In this strategy, the initial price of the product or service is kept
high and the same is reduced gradually over time. For example, a restaurant coming
up with a new innovative dish or a new variant of an existing dish may keep the prices
on higher side during the initial days and later it can reduce the prices gradually.

B) Penetration Pricing – Contrary to the “Skimming Pricing” in case of penetration

pricing, the initial price of the product/service is kept low in order to achieve the
largest possible market share. Reliance Jio’s pricing is one of the classic example of
penetration pricing, which has disrupted the entire telecomm market with its free
calling and data services. A newly opened hotel or transport operator or airline can
use the penetration pricing for capturing the largest possible market share in the initial
days of launching their product/service.

C) Cost Plus Pricing – This is the simplest form of pricing. The final price is arrived at
by simply adding the required profit margin in final cost. However, to decide on the
required profit margin best suiting the requirements of business can be bit tricky, as
business may have different requirements like that of expansion, survival etc., each
requiring separate profit considerations.

D) Competitive Pricing – As the name indicates, setting the price as per the
competitor’s price is known as competitive pricing. This is used in case of intense
competition in the market and when the product/service is not much differentiated by
the ones being offered by competitors.

E) Value Based Pricing – In this strategy, the price of product/service is set on the basis
of how much is the customer’s perceived value of the product or service on offer. This
kind of pricing can be used in case of pilgrimage tour packages, honeymoon or MICE
packages. Here the focus lies on improving the customer’s perceived value of the
product or service and accordingly price is fixed.

Check Your Progress C

1. When do you mean by controllable costs?

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2. What is the meaning of uncontrollable costs?

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3. What are various controllable and uncontrollable costs in case of a tour package?

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4. What is Price?

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5. What is pricing and how does it different from price?

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6. State some of the pricing strategies that can be used in case of tour packages?

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9.7 LET US SUM UP

Cost can be defined in various ways, depending on the context, it can take the form of a verb
or noun. Further, it can be defined as economic cost as well as accounting cost. Let us discuss
some important types of cost, which will help us further strengthen our understanding of the
concept of cost. Costs can be classified on the basis of –
 Nature of expenses
 Relation to cost object
 Business Functions
 Behaviour
 Purpose of decision making

Tour Package is an amalgamation of various travel related services, which is prepared by

combining one or more travel components together. It is primarily aimed at providing a
seamless and hassle free experience to the tourists. Generally, it is a pre-arranged, pre-booked
and pre-paid holiday. However, with the passage of time ‘tour package’ has also evolved
itself from being a rigid travel plan with fixed inclusions to a flexible and tourist oriented
service.
Cost components of a tour package can be classified under the heads such as
Accommodation,
Transportation, and Ancillary Services.

Price can be defined as the amount of payment or quantum of compensation given by one
party to another in exchange for one unit of goods or services. It can also be defined as the
amount of money that a customer needs to pay in exchange of the product or service being
offered. Pricing on the other hand is the process of determining the price. Pricing strategies
include Skimming Pricing, Penetration Pricing, Cost Plus Pricing, Competitive and Value
Based Pricing

9.8 KEY WORDS

Inclusive Tour Package – Customers can have an instant view of the entire travel plan
with inclusions and exclusions. This type of package leaves very less room for individual
customer choices, but brochure tour packages are comparatively low priced.

Adhoc Tour Package – This type of package is tailor made as per the customer
requirements. In this case specific requests from the customer are taken in advance and then
the package is formed as per customer’s choice of inclusions and exclusions.
Single Room Supplement (SRS) – It is the additional cost that needs to be paid by each
person in case the accommodation is not shared and everyone stays in separate single room
throughout the tour.

Skimming Pricing – As the name indicates the focus in this strategy is to attract high paying
customers of market by highlighting the unique and innovative features of the product or
service. In this strategy the initial price of the product or service is kept high and same is
reduced gradually over time.

Penetration Pricing – Contrary to the “Skimming Pricing” in case of penetration pricing, the
initial price of the product/service is kept low in order to achieve the largest possible market
share.

Cost Plus Pricing – This is the simplest form of pricing. The final price is arrived at by
simply adding the required profit margin in final cost. However, to decide on the required
profit margin best suiting the requirements of business can be bit tricky, as business may have
different requirements like that of expansion, survival etc., each requiring separate profit
considerations.

Competitive Pricing – As the name indicates, setting the price as per the competitor’s price
is known as competitive pricing. This is used in case of intense competition in the market and
when the product/service is not much differentiated by the ones being offered by competitors.

Value Based Pricing – In this strategy, the price of product/service is set on the basis of how
much is the customer’s perceived value of the product or service on offer. This kind of
pricing can be used in case of pilgrimage tour packages, honeymoon or MICE packages.

9.9 SOME USEFUL BOOKS

 Foster, D., the Business of Travel Agency, Pitman, 1990.

 Aggarwal, Surrender, Travel Agency Management (Communication India, 1983).
 Geo, Chack, Professional Travel Agency Management: (Prentice Hall, London,
1990).
 Mohinder Chand , Travel Agency Management – An Introductory Text, Anmol
Publications, New Delhi, 2006
 IATA, IATO, TAAI manuals
 Jag Mohan, Negi, Travel Agency and tour operation, Kanishka Publication
New Delhi, 1990.

9.10 ANSWERS TO CHECK YOUR PROGRESS ‘EXERCISES’

Check Your Progress A

1. Refer to Sec 9.2.1
2. Refer to Sec 9.2.1
3. Refer to Sec 9.3
4. Refer to Sec 9.2.1

5. i) Fix Cost (Behaviour)

ii) Material Cost (Nature of expenses)
 iii) Opportunity Cost (Purpose of Decision making)
iv) Sunk Cost (Purpose of Decision making)
v) Overhead Cost (Nature of expenses)
vi) Marginal Cost (Purpose of Decision making)
vii) Labour Cost (Nature of expenses)
viii) Direct Cost (Relation to cost object)

Check Your Progress B

1. Refer to text box in Sec 9.4

2. Refer to Sec 9.4
3. Refer to Sec 9.4
4. Refer to Sec 9.4.1
5. Refer to Sec 9.4.2
6. Refer to Sec 9.4.3
7. Refer to Sec 9.4.3
8. Cost per person on DBL Sharing = Rs. 31,700/-
Triple Room Reduction = Rs. 2,000/-
Single Room Supplement = Rs. 10,000/-

Check Your Progress C

1. Refer to Sec 9.5

2. Refer to Sec 9.5
3. Refer to Sec 9.5
4. Refer to Sec 9.6
5. Refer to Sec 9.6
6. Refer to Sec 9.6

9.11 TERMINAL QUESTIONS

1. What do you mean by cost? explain its various types with suitable examples.

2. What is a tour package? What are its various types?

3. Explain various cost components of a tour package. How does it affect the costing of
package?

4. Write a brief note on controllable and non-controllable costs of tour package.

5. What is the difference between Price and Pricing?

6. Explain various pricing strategies that can be used in case of tour package pricing.