It’s that time of year again when your distribution partners are asking you for your updated tourism rates and comissions. It’s a time-consuming task many tour operators and attraction providers dread - and where it can be tempting to take shortcuts.

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.

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 breakeven 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 breakeven point, you need to answer the following questions:

• What was your total number of customers for 2014/15 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 breakeven.

For example, if  you had 65,000 customers last financial year and your expenses were $3million. $3,000,000 / 65,000 = $46.15. You’d have to charge $46.15 per passenger to breakeven.

Step 2: Do you have enough margin to cover your costs?
Now you know your breakeven 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 breakeven 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 breakeven 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:

In our example, your expenses are $3,000,000. This means your estimated profit is $530,000. Is there any way to increase this slightly?

Maybe you have some larger expenses this year because you bought a new vehicle or upgraded infrastructure. A 5% increase in retail rate would result in the below with an extra $176,500 in estimated profit.

Keep in mind this is forecast is based on customer numbers staying the same as in the year prior. 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.

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 start contracting with your partners. Remember the earlier you get your rates out, the easier it is for your distribution partners to package, brochure and promote your product.

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.