Do you know remember the game show where contestants had to guess how much something costs? Of course you do, it’s The Price is Right!
As an experience provider, your life might be just as entertaining as a live game show — especially when it comes to tour costing and pricing. And as you probably know, tour prices need to cover your costs — all of them.
This is why it’s key to take a strategic approach for how you price a tour package. Doing so means you’re factoring in both the operating costs and profitability of your tour business.
Many tour operators have made the error of evaluating the competition and setting prices just below or slightly above in order to get bookings. And while we can understand wanting to gain your fair share of the market, you want to base your pricing on information that makes sense for your tour business.
What goes into tour costing and pricing
We believe that you’ve built your tour business out of a passion. This means that with strategic tour costing and pricing, you’ll be able to deliver what you’re committed to, long term.
When website visitors looking at what you offer, the hope is that the price of your experience(s) aligns with a guest’s perceived value. How you price a tour package informs a guest of what they can expect to get out of the experience they’re booking.
While deciding on pricing may not be complicated, it is an art. Most people, myself included, consider themselves to be somewhere in the middle when evaluating prices. This means if they are presented with 3-4 options, they’ll gravitate towards the middle-range tour package options.
Be clear on what is included in the tour price. Do your best to address questions about the duration of the activity, meals and whether transportation is included in the tour description.
Future customers will expect to receive a worthy experience, which is where it’s key to know your numbers and charge accordingly.
Since many tour operators rely on OTA’s it’s helpful to know what margins you’re working with. Given that OTA’s typically take a commission of anywhere from 15-30% of the booking fee. Most importantly, this is why you need to know your numbers, charge enough to cover your costs and still come out ahead.
Why profit isn’t a dirty word
Building profit into your tour costing and pricing means you’re creating a contingency plan ahead of slower booking periods. And depending on whether you accept a deposit (usually anywhere from 25-50% of the tour price) or require full payment in order to reserve a booking, booking payment(s) may be spread out.
Let’s say you have funds flowing out of the business for overhead or wages for your tour guides, you need to be able to recoup the cost of doing business with your tour prices.
This is why cash flow is important as you’re building and growing your tour business. And why it’s in your best interests to build in profit from the beginning.
Profit margins might look like anywhere from 10-40% of your posted tour price, depending on your specific business model along with the season. Sure, businesses are designed to make money. The added benefit of running a profitable business is that it gives the power to determine when and how fast you scale.
Remember, you’re in the business of providing amazing, engaging and memorable experiences. If you’re in it for the long haul, tour costing and pricing should reflect what you offer to your guests.
Understanding how to price a tour package
Learning how to price a tour package is no small feat. And while having a fully booked season is wonderful, your goal is for it to be profitable. So, if you can create a sustainable pricing structure early on, you’ll be resilient in the long term.
Pricing impacts how guests feel about the experience they’re buying. If a booking is priced too low, it will seem cheap. On the other hand, if an experience is priced too high – it might be out of the budget for your target market.
You have a lot of elements to factor into the final prices you decide to set on your website. Here are a few questions to get you started:
- First, what type of activity or tour are you producing/selling
- How many people can you accommodate?
- How many tours per day will you be running?
- What operating expenses do you have. How many are fixed vs. variable costs?
Guests want you to inform them why it’s worthwhile to make a booking and why a tour is worth the price you’ve set. This is why you’ll want to invest in deciding on how you price a tour. So, how do you do this? With tour costing and pricing that delivers on the value you’re committed to providing to your guests.
What is tour costing
One method of tour costing and pricing involves a cost-plus pricing strategy where you input all of your expenses and anticipated revenue. From there, you’ll add in profit and revenue targets.
Packaged tours typically follow a structure with a designated amount of time for each activity. Some tour companies present lower prices designed to get potential customers in the door. For instance, even if a single booking may not be profitable, this strategy may generate enough volume to make it worthwhile.
When pricing tours and activities, you’ll usually hear something about setting objectives or knowing your bottom line. But, what does this even mean?
As Peter Syme says in his interview with Tourpreneur “many tourism business owners are guilty of underestimating their costs and undercharging as a result.”
We understand that competing can be tough, especially if you’re offering the same activity or similar type of tour. So when it comes to pricing a tour package, forecast how many bookings you need to break even and turn a profit to ensure you’re building a sustainable business.
How to price a tour package
When pricing a tour, you’ll want to evaluate your guest capacity, operating expenses and target profit margins to ensure you’re setting yourself up for success.
Using a method known as cost-plus pricing, you combine all of your anticipated expenses and add a profit margin on top. The basic principle of pricing a tour package involves fixed costs, variable costs and markup or profit margin.
You will look at calculating costs + expenses + profit + commission structure (which is usually a percentage based on the tour price including the total number of guests). Here are some questions to address when deciding how to price a tour:
- What are your costs per person?
- If you were to book as a group, ie 4+ people, how much can you charger per person?
- Let’s say you price the time slot as a fixed amount and add an additional fee per person on top of the minimum guest count
- You can also set a price for a private tour booking, regardless of the number of guests
Alter your profit or mark-up depending on the season and number of guests. Let’s say you need 4 guests to break even. And if you have 6 guests who book, the additional two people then make the tour profitable. This way your time is always being compensated and you’re not burning out by running tours that aren’t paying for themselves.
To help guide the process, you’ll want to experiment and account for some flexibility when it comes to pricing tours and activities.
1. Tour type
Perhaps you’re in the business of food or walking tours where all your guests have to do is show up and be entertained. On the other hand, you might be a kayaking guide or provide guests with bicycle rentals and have additional costs as a result of the tour type you’re offering customers.
Looking at your local competitors, similar companies and OTA’s will help you get a sense of market rates. Sure, it’s helpful to get a sense of benchmarks for your tour prices — but don’t let it define your pricing objectives. Ultimately, your approach to tour costing and pricing needs to cover costs and ideally retain a profit margin — even if it’s only 10-15%.
If you’re already in your busy season, you might find yourself stretched thin with what you can do independent of additional staff. If you can operate multiple tours daily, you’ll need to have the staff to support the additional guests.
Are planning to offer group tours or stick to private tours? This decision factors into the tour or activity type — and what you can charge for it.
Guests should be able to tell what is included in the tour price with ease. An added perk of private tours is in alleviating concerns of not meeting minimum guest requirements. This means you can run tours with fewer people and still be profitable.
Thankfully, the benefits are there for both guests and tour businesses alike. For guests exploring whether to book a private tour, the expectation is that they’ll pay more in exchange for a higher quality experience.
Are you taking guests on 1-2 hour tours or multi-day expeditions? The duration and frequency of your tours will be dependant on how the amount of staff you have available. Longer tours have the potential of increased profits provided you correctly evaluate all fixed and variable costs.
When creating travel packages, consider what your guests want and whether they’ll pay more if you make their travel plans even easier. Perhaps you can increase your tour price by adding in a meal or transportation option as part of specific tours.
As you look to create added value travel, you’ll see more guests share and rave about you on review platforms. One way to look at this is to view every booking as an opportunity to provide guests with more value than they’ve paid for, especially if the activity the experience is a once-in-a-lifetime opportunity.
Do you find yourself with an insane summer season or is the wintertime busy with bookings? Depending on your tour business model, certain expenses, like staff wages can significantly increase your costs depending on the season.
As part of your seasonal marketing strategy, you’ll find a different approach might work better. One option might be to offer early bird pricing deals in the Winter ahead of the Spring season. Your tiered pricing strategy might be encouraging smaller groups to book together. With different tactics that speak to your customer’s needs, you can incentivize guests to book and stay longer depending on your pricing objectives.
Sure, seasonality may mean dramatic fluctuations in your pricing. And while the tipping point might be 20-30% lower than what you could charge for the same experience in your busy months.
6. Operating expenses
Administrative, rental and staff wages can play a massive role in your tour business margins. At the same time, it pays to know your overall operating expenses, one of the benefits of a booking system subscription model is knowing some of your costs every month.
This way, you can account for costs and estimated bookings or your sales forecast when pricing your tour. Plus, once you determine your break-even point, you’ll have more knowledge available to help you decide how to price a tour package.
Example fixed costs for your tour business:
- Administrative costs (2-5%)
- Booking software (5-10%)
- Business Insurance (10-20%)
- Employee wages (20-25%)
- Equipment depreciation (10-30%)
- Leasing and/or rental costs (20-30%)
- Phone and Internet bills (2-5%)
- Utilities (5-10%)
Sample variable costs:
- Gas and maintenance costs (5-10%)
- Hourly guide wages (depends)
- OTA commissions (10-30% of the booking price)
What goes into pricing private tours
Given what the past year has done to group tours in many parts of the world, private tours have grown increasingly popular. Tour costing and pricing will be different if you choose to focus on offering smaller or private tours.
In addition, your capacity for multiple tours will be limited if you focus on private tours which is why pricing for these types of tours is typically higher. You might not have to pay as much in staff wages, as part of your variable costs, but you still need to account for fixed costs with your tour pricing
Let’s say you have a couple who prefers to tour at their own pace. Perhaps they find group tours exhausting or they would rather have the flexibility to explore hidden gems. If you were to book this private tour, you need to account for not being able to charge more for each individual person who joins the tour. So, where does this leave you?
You need to charge accordingly for your time. Does this mean it will be more expensive for the two people booking a private tour? Yes — most likely.
Since private tours are considered more of a luxury offering, costing and pricing a private tour package typically commands a higher fee. For guests, a one-on-one experience can be incredibly personal and valuable knowledge that their preferences will be factored into the tour offer.
How to reduce expenses and increase margins
Every tour business has to account for fixed and variable costs which can fluctuate between the seasons. With inflation and operating costs rising each year, it’s worth reviewing pricing on a yearly or even seasonal basis.
Tour costing and pricing should include a marketing budget as well.
Explore marketing distribution by using a few different channels, like OTA’s as-needed to help increase bookings as it makes sense for your business. As a result, investing some of your revenue into promoting your business can help to increase direct bookings and allow you to keep more in your pocket.
Sure, some guests are willing to pay more for the convenience of peak tour time or specific meeting location as it suits their needs. And according to this Tourpreneur article on pricing private tours, you need to distinguish how they differ from your group pricing in marketing efforts.
Your bottom line refers to the amount remaining on a balance sheet displaying a company’s financials. Another term for this is net profit, or what’s leftover after commissions, expenses and salaries are factored in.
As an added bonus, looking at your sales forecast can also help you in determining what type of booking software to invest in. Generally, you’ll have the option of either a fixed monthly subscription or a commission fee. Other reservation technology providers take a percentage of bookings with fees running anywhere from 5-6% depending on the provider you choose.
Pricing is worth revisiting before diving into and after every busy season. This way you can evaluate the data from previous bookings. With this insight, you can create even better, and more profitable, packages going forward.
Always look at what gets guests in the door. Is it your superior service? Is it your consistency and reliability? Are you a master at personalizing private tours or is your seasonal pricing strategy right on the money?
People are much more inclined to buy from companies they know and trust. Feel free to look at upselling opportunities to increase revenue and provide added value for your guests.
Look ahead and set some goals for where you want to be. Continue to lean into your pricing strategy so you have solid momentum to build and scale your business to meet the pent-up demand for remarkable travel experiences.