Before you know it, you will have your distribution partners are asking you for your updated tourism rates and commissions and with events such as the Australian Tourism Exchange (ATE) coming up, you are on the front foot and can test them with your distribution partners there.
It’s a time-consuming task many tour operators and attraction providers dread and it can be tempting to take shortcuts, however we have devised 3 simple steps for you to take to make sure your rates are working for you the best they can.
Some simply add CPI onto last year’s rates. Others won’t even bother with that and hold their rates from last year. It seems easier that way, right? Unfortunately, these strategies can have a serious negative effect on your bottom line so it's always worthwhile to take the time for a rate review.
We want to help make it easier for you and less time consuming! Once this is set up, you can use the same spreadsheet each year and adjust accordingly. It doesn't have to be that hard!
While rate setting can be a tricky task, there are three steps you can take to set rates at the right level and ensure that your business is profitable.
Step 1: What is your break-even point?
Finding out how much money needs to be coming in to avoid a loss is the first step to setting your rates at the right level. To figure out your break-even point, you need to answer the following questions:
- What was your total number of customers for 2017/18 and total revenue?
- What were your total expenses (operations and sales/marketing) for the year?
Now go ahead and divide your total expenses by your total customers. The result is the minimum price you have to charge in order to break-even for that amount of customers.
For example, if you had 65,000 customers last financial year and your expenses were $3 million. $3,000,000 / 65,000 = $46.15. You’d have to charge $46.15 per passenger to break-even. Pretty simple right?
Step 2: Do you have enough margin to cover your costs?
Now you know your break-even price you can look at your rates structure and see whether you have enough margins in your different rate levels to cover your costs.
Take a look at how many rates you have issued that differ from your retail price. Can you refine these in any way? Remember the industry standard is to have:
1. Inbound: 25 – 30% off retail rate
2. Wholesale: 20 – 25% off retail rate
If you are an attraction and work with day tour operators, you can add another level of 30 – 35% in there in order for them to contract with inbound tour operators. Once you’ve subtracted these percentages from your retail rate, are you still charging enough to make a profit? If not, you may have to put up your retail prices.
If you are offering a product that has large volume distribution partners, you may also want to add a ‘volume’ rate level in your pricing tiers or a market specific rate level (e.g China rates). However, try not to have more than four different rate levels in the market. This makes it easier for you to contract rates and ensure that your trade partners are issued rates that are relevant to them.
There will be some distribution partners that you wish to offer specifically negotiated rates. Try to keep these to a minimum and only for your best performing partners.
Step 3: Figure out your profit margin
Now that you’ve gotten your break-even point and set your rate levels you can figure out what your profit margin based on the number of customers from the previous year.
Let’s say your break-even price is $46.15 and your lowest contract rate is $80.
Enter these numbers in a table along with your customer numbers per segment. This step will help you figuring out your revenue. For instance:
| Current Rates and previous years pax numbers. | ||||||
| Adult | Nett % | Pax no's | Total Revenue | Nett Revenue | Profit | |
| Retail | $100 | 100% | 15,000 | $1,500,000 | $692,250 | $807,750 |
| Tour Operator | $65 | 35% | 20,000 | $1,300,000 | $923,000 | $377,000 |
| ITO | $70 | 30% | 12,000 | $840,000 | $553,000 | $286,200 |
| Wholesale 2 | $75 | 25% | 10,000 | $750,000 | $461,500 | $288,500 |
| Wholesale 1 | $80 | 20% | 8,000 | $640,000 | $369,200 | $270,800 |
| TOTAL | 65,000 | $5,030,000 | $2,999,750 | $2,030,250 | ||
The above table should show your expected profit is $2,030,250 for the previous year at your current rates with your actual passenger (pax) numbers.
Now we put in the potential rate increase (5%) into the same table (see below).
| Next Rate Years rates and previous years pax numbers. | ||||||
| Adult | Nett % | Pax no's | Total Revenue | Nett Revenue | Profit | |
| Retail | $105 | 100% | 15,000 | $1,575,000 | $692,250 | $882,750 |
| Tour Operator | $68.25 | 35% | 20,000 | $1,365,000 | $923,000 | $442,000 |
| ITO | $73.50 | 30% | 12,000 | $882,000 | $553,000 | $328,200 |
| Wholesale 2 | $78.75 | 25% | 10,000 | $787,500 | $461,500 | $326,000 |
| Wholesale 1 | $84 | 20% | 8,000 | $672,000 | $369,200 | $302,800 |
| TOTAL | 65,000 | $5,281,500 | $2,999,750 | $2,281,750 | ||
With the 5% increase you will make an additional $251,500 in profit from the previous year. Now remember this is a very basic forecast as it doesn't include variables such as increased expenses nor whether your pax numbers may increase or decrease. If the market is in a growth stage, you can expect a bigger profit margin. If the market is predicted to decline, review your estimates quarterly to ensure you aren’t caught out. This is why it is a good idea to keep regular contact with your distribution partners who work in your key markets so you should be able to more accurately forecast pax numbers, and thus revenue.
Remember: Any increase in rates needs to be justified to your distribution partners. Reasons for an increase could be new features, increased service or - if your increase is only 3% - then CPI can be cited.
Now that you have a plan, you can take your rates to trade (either at events such as the Australian Tourism Exchange or sales calls) and start chatting to them about these proposed rates. If you get a lot of push back, then you have time to review your rates again before contracting season.
If you are unsure about your calculations, it can be worthwhile to sometimes ask a consultant to review them (such as a Business Analyst), this way you can be sure that your calculations are indeed, correct.
Remember the earlier you get your rates out, the easier it is for your distribution partners to package, brochure and promote your product.
Don't forget to load them into your ticketing and booking management system as soon as they are confirmed so you can take bookings immediately.
Get your business administration sorted on the first go with amazing guidance from our downloadable template: Contracts - The Ultimate Template for Tour Operators.
Booking Boss is an online booking system for tour operators and attraction providers. Trusted by many in the tourism industry, Booking Boss is about getting you out of the spreadsheets and into the sun. We provide free education resources for operators like you, to make your business the best it can possibly be.
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