CHAPTER 5

DETERMINING A
TOUR’S COST AND PRICE
 ESTABLISHING A BUDGET
What is a budget?

 The term ‘budget’ comes from the

French word bougette – meaning
“bag” or “wallet”

 Suggest to think of the budgets

primarily as bags full of money and
spend to purchase, hire, pay charges
and so on.

 It is a financial plan
 ESTABLISHING A BUDGET
Why prepare a budget?

 A budget sets a target / goal to be achieved

(Sales, costs, profit)

 A budget is a plan set by management for

the development of the business.

 A means to compare actual results on an

ongoing basis to the budget (Monitor)

 Provides a check on progress towards the

desired goal (Measurement)
 ESTABLISHING A BUDGET
Negotiating with Suppliers

 Dealing with suppliers and their sales

representatives can be both fun and
frustrating.

 On the other hand, suppliers can balk at

your budgetary constraints or, through
inefficiency, delay your costing process.

 Each type of supplier presents its own set

of costing concern.
 ESTABLISHING A BUDGET
Motorcoach Operator

 Motorcoach operator and local sightseeing

companies are very obliging. They’re often
informal, family-like operations and usually are
eager to give tour companies a sensible bid.

 Bus companies usually quote daily rates,

although some may base charges on mileage or a
combination of time and miles.

 Typically, local sightseeing companies charge per

half day or full day.
 ESTABLISHING A BUDGET
Motorcoach Operator (cont)

 Make sure determine what kind and size of bus

equipment the bid is for.

 Request specific drivers.

 Always reconfirm everything with motorcoach

operators and sightseeing companies.
 ESTABLISHING A BUDGET
Railroads

 Public railroads, such as Amtrak, are quite

predictable: expect 10% discount but no more.

Ground Operators

 The arrangement with a ground operator calls for

specialized personnel and services, such as
guides or receptive representative at the airport,
and airport baggage handling.
 ESTABLISHING A BUDGET
Miscellaneous Suppliers

 Step-on guides are dealt with informally; often

the guide works independently; compensated
on an hourly, daily or per-tour-member basis.
Tour companies usually find out about step-on
guides through tourist bureaus, chambers of
commerce, or the tour operators’ grapevine.

 Attractions almost always provide discounted

admission prices for groups and free admission
for the tour manager.
 COSTING AND PRICING PROCESS
Completing the Budget

 Once all quotations have been assembled, it’s

time to ascertain the cost of operating the tour
and determine what your selling price will be.

 If the tour is a complex one, it might be

appropriate to assign the task to a bookkeeper
or an accountant.
 COSTING AND PRICING PROCESS
Completing the Budget (cont)

Fixed vs Variable Cost

 A fixed cost is one that never changes, no

matter how many people are on your tour.

 E.g. a particularly motorcoach cost $500 a day,

no matter if twenty people or forty people are
on it, daily salary, etc.
 COSTING AND PRICING PROCESS
Completing the Budget (cont)

 A variable cost is one that changes according

to how many people take your tour.

 E.g. airline ticket, hotel rooms, and meals.

 In other words, because of variable costs, the

overall cost to operate your tour increases as
the number of passengers increases.
 COSTING AND PRICING PROCESS
Completing the Budget (cont)

The reasonable Number

 Estimate a reasonable number of passengers for your

tour and budget your tour on a per-person basis, it will
help you determine the per-client cost of your tour.

 35 would be an acceptable number of tour passengers

 44 would be great but you can’t count on that

 25 is minimum or you lose money

 COSTING AND PRICING PROCESS
Completing the Budget

Be wary of making the following errors when

calculating cost:

 Confusing fixed and variable costs

 Forgetting to divide the room cost by two

(Tours are always costed on a double-
occupancy basis)

 Forgetting that a five-day tour spends only four

nights in hotels
 COSTING AND PRICING PROCESS
Completing the Budget

Be wary of making the following errors when

calculating cost (cont):

 Forgetting that luggage moves twice at any

hotel

 Forgetting to factor in the fixed cost of the tour

manager’s salary and expenses

 Forgetting taxes on various services

 COSTING AND PRICING PROCESS
Determining the Sales Price

 Determine what you’d like your profit to be

 20 or 30 percent is common for public tours

 30 – 40 percent for special, individually planned

departures
 COSTING AND PRICING PROCESS
Determining the Sales Price
 Determine what you’d like your profit to be
 20 or 30 percent is common for public tours
 30 – 40 percent for special, individually planned
departures
 You may add a few percentage points as a safety
margin to cover errors, inflationary increases,
foreign currency fluctuations and minor
unanticipated costs
 Use this simple equation:
Final per-person tour cost ÷ (1.00 – profit margin,
expressed as decimal) = Sales Price
E.g.
RM200 (cost) ÷ [1.00 – 0,3 (30% profit margin)]
RM200 ÷ 0.7 = RM285.71
 COSTING AND PRICING PROCESS
Pricing Strategies

What strategies can be used in setting final price

for tour?

1. Skimming

2. Penetration

3. Psychological

4. Cost-Plus

5. Loss Leader, etc

 THE BREAK-EVEN POINT

 Definition: The point in business where

the sales equal the expenses. There is no
profit and no loss.

Formula:
Break-Even Point ($) = Fixed Costs ÷ Gross
Margin Percentage

 Also Known As: Breakeven Analysis

Source: http://retail.about.com/od/glossary/g/breakeven.htm
 THE BREAK-EVEN POINT

 Examples: A package tour cost is $200

perpax, marks them up and sells them for
$300. Our monthly expenses (fixed costs)
are $20,000. This means our breakeven
point would be $30,000 or 100 packages.

$20,000 ÷ (200/300) = $30,000

$30,000 ÷ $300 = 100 packages

Source: http://retail.about.com/od/glossary/g/breakeven.htm
 THE BREAK-EVEN POINT

An increase in the fixed expenses of

any enterprise will increase its
break-even point. In a travel
agency, more clients must be
served before the fixed expenses
are covered by the agency's service
fees.
TOUR COST & PRICE (REVISION)
 Total for operating cost of a 3 days tour is RM15,400 (excluding
accommodation, escort’s salary and farewell dinner)
 The hotel rate is RM100 per night (double occupancy)
 Farewell dinner is RM20 per pax.
 Escort’s salary is RM220 per diem.
 In terms of the reasonable number, you are optimistic to get full tour capacity
although you know that you can’t count on that figure.
 Profit margin required is 20 percent. No adjustment made for the selling
price.

i. Which is the fixed cost?

ii. Which are the variable costs?
iii. What is the reasonable number?
TOUR COST & PRICE (REVISION)
 Total for operating cost of a 3 days tour is RM15,400 (excluding
accommodation, escort’s salary and farewell dinner)
 The hotel rate is RM100 per night (double occupancy)
 Farewell dinner is RM20 per pax.
 Escort’s salary is RM220 per diem.
 In terms of the reasonable number, you are optimistic to get full
tour capacity although you know that you can’t count on that figure.
 Profit margin required is 20 percent. No adjustment made for the
selling price.

i. How much is the sales price based on the profit

margin required?
TOUR COST & PRICE (REVISION)
i. How much is the sales price based on the profit margin
required?

REASONABLE NUMBER = 44
Total tour cost : RM15,400 ÷ 44 = RM350 Hotel
(2 nights) : RM100 ÷ 2 pax × 2 nights= RM100
+ Farewell Dinner : per pax = RM20
+ Escort’s Salary : RM220 × 3 days ÷ 44 = RM15
Subtotal per person cost = RM485

Subtotal ÷ (1.00 – profit margin) = Selling Price

RM485 ÷ (1.00 – 0.20) = RM 606.25 (Cost-plus Pricing Strategy)
TOUR COST & PRICE (REVISION)
PRICING STRATEGY
(Final price adjustment made based on organization’s financial
objectives)

1.Cost-Plus = RM606 (based on 20% profit margin)

2.Skimming = RM750 (brand value, quality, unique)

3.Penetration = RM650 (new in the market, many

competitions, make customers familiar)

4.Psychological = RM599 (make it sounds cheaper)

5.Loss Leader = RM480 (to encourage clients to make purchase

and make enquiry about other products in the agency / limited
to first 10 customers)
BREAK EVEN ANALYSIS (REVISION)
 Tour’s cost: RM485
 Sales Price: RM606
 Monthly Expenses (Fixed Costs): RM35,000

What/How much is the break-even point?

Formula:
Break-Even Point (RM) =
Fixed Costs ÷ Gross Margin Percentage
BREAK EVEN ANALYSIS (REVISION)
 Tour’s cost: RM485
 Sales Price: RM606
 Monthly Expenses (Fixed Costs): RM35,000

What/How much is the break-even point?

Formula:
Break-Even Point ($) = RM35,000 ÷ (RM485/RM606)
= RM35,000 ÷ 0.8
= RM43,750

Break-even Tour Sales Target = RM43,750 ÷ RM606

= 72 packages