What is Tour Cost?
Tour cost means the total cost incurred or attributed to a tour product or service. It is the sum total of costs incurred to create or formulate a tour package. Since tour is an assembled product, its costing involves bulk purchase.
Therefore the cost of the tour packages is determined according to the client requirement or company strategy. As the quality of the product /service and the price of that product go side by side, hence in travel trade the cost unit is a package tour because a company sells a large number of packages.
The identification of cost unit will help to cost manager to separate the cost into smaller sub-divisions attributable to the tourism industry. A tour package is a combination of various tourism services/ goods like transport, accommodation and other facilities en route and at the destination.
However, in reality, it has only two basic components;
- Travel services
- Ground services.
Components of Tour Cost
The cost of a tour package includes:
Research and Development Cost
It is the cost incurred when planning a tour package. It includes the cost of the tour planner, manager and staff of the company who are involved in tour planning. The main activities in the research and planning phase are:
- Study the economic factors influencing the future development of package tours.
- Identification of likely selection of destinations.
- Make an in-depth comparison of alternative destinations.
These phases require in-depth research work and hence this requires a good amount of money. The tour planner, marketing researchers etc have to work rigorously for the tour planning activities. The main activities in the tour development are:
The decision to develop and formulate a new package is a multi-stage process that involves various steps. Normally, the idea for a new product comes either from the tour executive within the company due to a review of the questionnaire completed by the previous tour members or because of the political, social and economic developments in a particular area.
When a tour planner sees that a large number of clients are interested in taking a trip to particular destinations, naturally, those destinations become the nucleus of a new tour concept. Moreover, the forecasting of future development is affected by changing circumstances in the market.
Some of these circumstances are:
- Change in tourist patterns
- Transportation cost
- Accommodation and other cost
- Exchange rate prevailing
- Inflationary conditions
- Competitive environment
- Extent and support from airlines serving the routes
- Support from national / regional tourist office of the destination
- Political stability of the country
- Attribute to and state’s control over mass tourism within the country
- The relation between the host and tourist generating countries
Since tour package is a complete tourism product, obviously, before formulating this product, market research should be done and the data to be analyzed and assessed in a systematic manner. Market research provides us the answer to the following questions.
- What is the size of tourism market?
- Who are the existing clients?
- Who will be the potential buyers?
- Who are the competitors’ – their area and strategy?
- What price will the customer accept?
- What facilities are available and required?
- What are the constraints? (License, permission, taxes, finance, restrictions, taxes etc)
Once we know the basic components of a package tour, distribution channels, market conditions, constraints etc., we can develop a marketing strategy. It also enables the smooth functioning of the tour company and also offers a clear picture of the tour programme.
The planning stage also includes the cost of the Familiarization Tour (FAM) and any other costs incurred to develop a new or old package tour. Generally, a tour planner works on several tour packages. The allocation of cost is based on two methods
- Long term
- Short term
Both the methods are important. Long-term cost deals with the tour planning and development and the second deals with initial tour development. So for determining research and development costs, the tour management must project this cost at first. Secondly, the company should divide the tour into a minimum of 10 or 12 tours. This figure is added to the total cost of the package sold.
This cost includes the cost of travel in different modes like air, road, rail, land etc. In other words, it is the total cost incurred for travel from a point of origin to a point of destination through any mode of travel. A commercial air ticket sold on a regularly scheduled flight is a simple pricing procedure. The prices quoted include all the applicable charges.
Tour operators have to worry about airport transfers too. Pricing charter flights is little more complicated. Frequently, modes of transport are combined or used sequentially to achieve the objectives of the tour.
For example, there are fly/drive tours that use a combination of aeroplanes and rental cars. Some tours offer fly/cruise packages, wherein the travellers fly to a port of embarkation and then board a cruise ship for most of the tour.
Other commonly identified types of tours feature the name of the dominant mode of transport. For example, a rail tour uses train as the mode of transportation. Perhaps the most widely recognized form of touring is motor coach tour, which as the name implies, utilizes buses or motor coaches to move the participants from destination to destination and to visit sightseeing attractions along the way. Most motor coaches have 46 to 48 seats.
Virtually all package tours that are longer than a single day include some type of accommodation. Accommodations range from a simple tent to luxurious hotels and resorts and as such can be tailored to fit to any tour member’s budget. Typically participants choose accommodation from different price ranges. It is the price paid to acquire a stay in any accommodation unit.
The accommodation costs depend on the negotiation between the hotel management and the tour manager/ planner, and other elements of hotel products like, food, beverage and amenities etc. Once the cost is finalized, it is added to the total cost of the package tours. Hotels, motels resorts, tribal huts, homestays etc provide accommodation facilities for the guests and tariffs vary considerably depending upon the type, standards, services, facilities, location etc.
Transfer cost Transfers are any mode of transport that shuttles participants from their point of arrival, frequently an airport, to their first accommodation, typically a hotel. It is incurred for transferring the client from the airport to the hotel or vice versa.
The cost is according to the contract with transport companies on mileage or duration basis. Virtually any type of transfer is possible, such as a shuttle bus between a railway station and a cruise ship. The transfer is an important component in the tour cost when the destinations are distant from one another.
Food and Beverage Cost
Lodging meal plans are also important among the tour cost components. Wide ranges of meal plans are available on package tours. The level and type of plan is one of the factors that significantly affect the cost of a tour.
- With American plan, tour participants receive all three daily meals as part of their tour package. The American Plan (AP) is common in cruise packages that visit more remote or isolated destinations.
- Tour participants, under the Modified American Pan (MAP), receive breakfast and one other main meal, usually dinner.
- Dinner can be either the mid-day meal or the evening meal depending on the country and tour. The room plus a continental breakfast is called a Continental Plan (CP). With this type of plan, tour participants receive a daily light breakfast such as bread, jams, fruits, cereal, coffee and tea.
Continental plans vary from country to country, however, in certain countries; a more extensive menu is available and may include meats, cheeses and even boiled eggs.
- European plan does not include any meals and present a significant saving to the tour operator. Under this type of plan, tour participants are required to pay for all of their own meals. Lodging properties that use meal plan pricing quote prices per person, not per room.
- In Bermuda Plan (BP), tour participants receive a full cooked breakfast, but no other meals are provided.
It is important to note that one way of saving money is by reducing or eliminating meals that are included as part of the tour. The type of meal is also an important consideration in tour cost. For example, a tour operator who offers five lunches and five dinners as part of the package is offering more than an operator who offers ten breakfasts.
Similarly, a tour operator who allows participants’ unlimited menu choices at a destination is more than one who restricts the participants to a selection of three main dishes or a set menu. It is important to pay attention to theses details when costing the food and beverage component.
Sightseeing and Activity Cost
This constitutes a major portion of the tour cost which makes the clients satisfactory or unsatisfactory. Usually, this cost is calculated per person. Generally, a package tour includes sightseeing as an important component.
For Example, a 2 Nights and 3 days package to Sri Lanka will definitely include a half-day or full day sightseeing as a compulsory part of the package. This component takes a major fraction of the package cost and again varies with the mode of transportation used. The destination vendors offer these activities less expensively to a group.
In this world of globalization, no organization can withstand without marketing. Proper marketing should be done for the success of any product. Tourism products are not different from this. Package tours and ancillary products have to be marketed properly, which constitutes a major fraction of the company’s budget.
The marketing budget of the company should be allocated in such a way that it reaches the audience more deeply and effectively. Promotional activities include advertisement, sales promotion activities, public relation, telemarketing, direct marketing etc. All marketing effort should be based on AIDA principle, i.e., it should create attraction, generate interest, arouse desire and initiate action. For this, cost should not be a constraint.
The administrative department plays a vital role in a tour company, which handles all the background paperwork and office functions including:
- Looking after telephones, faxes, telexes, personal; computers etc.
- Handling the post
- Dispatching documents to clients.
- Sending paper print outs (tickets, rooming lists, etc) to the concerned departments.
- Looking after office maintenance, cleaning etc.
- Staffing the reception and switchboard.
Handling of the above administrative functions requires a good fraction of the cost. Administrative cost is the expenditure incurred by the tour company in formulating the policy and strategy for directing the organization and controlling the operations.
Administrative costs and incidentals include things like brochure printing, postage, charge for telephone charges, baggage, nametags, flight bags, etc. In the era of competition and revolutionary developments in information technology, potential clients have to be contacted and served. So mobile phones to the executives, Internet, events and cultural galas for the industry people like travel agents, travel executives, travel writers etc are indispensable.
These costs are incurred in the general and financial management of travel business such as office expenses, salary to staff, audit, insurance/legal expenses etc are also important. These are fixed costs and the allocation of these expenses to a particular tour or service may be too much as there are many tours/ services that a company can offer at a particular time. Usually, it occupies 15-20 % of the cost of sale.
The miscellaneous costs vary from organization to organization. These costs include portage at airports, tips at airports, hotels etc, entrance fees, insurance premeuims, literature and other materials, and gifts given to tour members at the beginning and end of a tour, welcome drink, welcoming event/ reception etc. These costs are determined by adding up the per-person cost of each item.
However, the percentage of each cost to total tour cost is different for a new tour company as compared to an old tour company. In the case of a new tour/ travel company, that has not developed its reputation; the miscellaneous expenses figure should be between 10 to 15 per cent of the total tour cost. In case of an established tour company, this figure should be one to two per cent of the total cost.
Types of Tour Costs
The tour cost can be classified into two categories depending upon how it affects total cost structure of a tour.
Direct costs are those, which are incurred and conveniently identified with a particular package tour such as accommodation costs, travel costs, food and beverage costs, sightseeing costs etc. These costs are readily traceable to a specific tour.
For example, the cost of a guest’s food and accommodation will directly reflect in his tour cost. The price differs when he undertakes his travel by car, flight, motor coach etc. Suppose a guest opts for Modified American Plan during his stay in a five-star hotel, the total package cost will be less compared to the package cost of a guest who opts for American plan.
Indirect tour costs
There are many costs involved in making and marketing tours that are not so readily identifiable as the direct tours costs. Indirect tour costs are those costs which are incurred for the benefit of a number of tours that are offered by a travel company during a year or a particular period but cannot be conveniently identified with particular tour costs such as marketing costs, tour planner’s costs, financial and legal costs, administrative expenses, FAM tour costs, medical expenses, insurances and so forth.
The total tour package will be based on a fraction of all these indirect costs but are not able to easily identify with a particular tour.
Fixed costs are those, which are incurred even when one is selling or not selling any tour package. Maintaining a motor coach would add to fixed cost since some expenses are incurred whether or not one or all seats are occupied.
When a tourist/ client or a group of people go on a tour, one has to incur some expenses such as FAM tour, cost of a tour bus, research and development expenditures, marketing expenses, tour manager’s and tour planner’s salary etc. These are all included in fixed costs. These costs are constant in total amount, but fluctuate per person/ per package as the level changes.
Fixed cost is also known as period cost because it is dependent on time rather than on output. The management of a tour company can control these costs. Fixed costs are those costs that remain stable regardless of how many tours are sold or how much revenue enters the business.
Rent, interest on mortgage, insurance and costs associated with minimal staffing levels (including the owner’s draw or salary) are the primarily fixed costs of a tour operator. If a tour operator is unable to pay fixed costs, the door must close.
In contrast to fixed tour costs, some tour costs tend to vary in direct proportion to the level of sales or number of tour participants. Costs, which are incurred only if a passenger actually uses the service, are variable costs. Tour variable costs are those, which vary with the number of tourists participating in the tour. Examples of tour variable costs include admissions to attractions, hotel rooms, and meals. For example, food and beverage costs, the cost of the gifts, brochures, tourist taxes, entrance fees, room costs etc. play an important role in making a tour costly or cheap. The cost is also known as product cost because it is based on product rather than on time.
Air transport would be a variable cost. This service would not be paid for unless the seat was occupied, except when certain fares are used which cannot be refunded to the passenger, e.g., for group travel when the minimum group size is specified.
Or when a tourist /client or a group of people go on a tour, one has to bear some expenses such as ‘FAM tour, cost of a tour bus, research and development expenditure, marketing expenses, tour manager’s and tour planner’s salary etc. These are all included in fixed costs. These fixed tour costs are constant in total amount but fluctuate per person /per package as the level changes.