The Tourism and Travel Industry - Case Study Example

Part I A company doing business in the marketplace must choose a pricing model in order to determine the price of the goods or services the company will charge to its customers. The price established by a firm depends on the composition of the industry and the type of competition within the particular industry as well as the particular pricing company of the enterprise. The tourism and travel industry generated worldwide $2.97 trillion in revenues in 2006 (Plunkett Research, 2007). Typical businesses in this industry such as airlines and hotels have high fixed costs and its revenue stream come from the ability of the company to fill the capacity of hotel rooms or plane seats in an airplane. Competition in the industry is intense and the laws of supply and demand affect a lot the pricing structure utilized by the companies. The industry is seasonal and prices change a lot depending on the time of the year. Hotels know that during the summer season people travel a lot, thus they increase their prices during these times since the demand is higher than the supply. There are different pricing models a company in the travel & tourism industry may utilize. One method that may be utilized by a company to set prices for its products or service is cost plus markups. The company determines its overall cost of doing business and adds a fixed markup percentage to the cost of the unit in order to determine the price. A company dedicated to offering short boating trips to tourist can effectively utilized this pricing model for its business. The company owner determines their overall costs of doing business including overhead costs per trip considering the average capacity of tourist per trip to then place a markup percentage on the cost to arrive at a price per ticket. Since there is a minimum of tourist that must buy tickets before going on a trip this pricing strategy may work effectively for the boating tours company. A second pricing model that may be utilized by a player in this industry is a fluctuating pricing model that considers the law of supply and demand in order to set prices based on availability and seasonal fluctuations. An airline is a perfect example of this time sensitive model. The plane has a certain capacity and the airline know it typically does not have full capacity flights. Since the airline has tremendous information regarding its metrics it may offer special discounts on the days it knows sales are weak to push extra sales of idle seats on the flight that would have been lost income anyhow. The reservation system is good example of how the pricing changes in the airline industry subject to supply and demand forces. A few months before a flight air tickets are much cheaper than a few weeks or days before the flight because the supply of seats is going down for the flight, thus as the seats go down the price goes up simultaneously. The airline industry offers much lower fares during the off-season due to the overall lower demand which forces prices down to entice flyers to get back on the planes (Netmba, 2007). A third pricing model is called target return pricing. This model is utilized in projects in which the product or service is directly associated or linked to recently developed project or investment made by the individual or company. For example a small entrepreneur dedicated to selling antiques may rent a space in a antique show. The pricing set for this event is associated with a price point in which the entrepreneur prices the item in accordance with the investment made to rent out the space for the show. The businessperson wants to obtain a return on investment for the show the person just entered. In the tourism industry this model is not suited because a hotel or airline is a business in a mature business life cycle state whose pricing has nothing to do with return on investment of the company. Another pricing model is called psychological model pricing. The prices in such a model are set based on the perceived value a customer might have for an item or product. For example an artist who paints may price his art based on a psychological pricing model. In the tourism industry the services and products are established based on a hard tangible product or service which is not aligned with the psychological pricing model. Part II In order to evaluate the different elements associated with creating a precise price offer for a holiday package deal a brochure was chosen of a vacation holiday spot in the European nation of Turkey. The holiday spot chosen is called Lara Beach. Lara Beach is located alongside the Mediterranean coastline of Turkey. The location of Lara Beach is tremendous since this holiday spot is in the beach alongside great tourism attractions. For example Lara Beach is near the world’s largest moving floating night club in the world, Antalya (Thompson, 2007). The brochure specifies things in the package that affect the pricing of the deal. The Lara Beach typical package includes three meals with the price. Lara Beach offers more than ten different sporting activities that can be realized in its complex including tennis, basketball, billiard, surfing, and other water sports in the beach or swimming in one of the four indoor or outdoor pools. There are other night life entertainment included in the deal such as entertainment programme, nightly music event, lounge and bar. These things add value to the holiday proposition and the added benefits are included in the price. Lara Beach has a second package advertised which includes all things mentioned and other added benefits. This deal is more expensive and is referred to in the marketing brochure as the all inclusive option. The all inclusive option raises the price of the package holiday deal because it also includes all alcoholic and non-drink a person may desire, a sporting tour with canoe, a kid’s club, access to additional pools, all you can eat ice cream among other benefits. The pricing set for a holiday is dependent as seen in the Lara Beach resort option in the things that the complex provides to its customer that provide value and add benefits to its customers. A hotel near a beach has more value that one located in the middle of a city for example since there are extra leisure activities associated with such an option. Part III The information below shows a numerical analysis that shows the best case scenario for which room the Chiltern Hotel should rent to optimize its earnings and what is the net income for the company. Total rooms 200 200 200 Price 80 60 42 labor time 2 1.5 1 Related costs 20 12 8 Maximum hr usage 200 266.6667 400 Room profit 12000 9600 6800 Optimal strategy: The optimal strategy is a rent out maximum capacity for the luxury rooms Day profit 3500 Week profit 24500 Month profit 106085 Year profit 1277500 Fixed cost are $8500 This is pre-tax income There were a total of 600 equally divided among luxury, medium and economy rooms. The hotel has labor constraint that limits the amount of business they can generate due to the availability of workers for maintenance for the hotel. The maximum amount of labor hours available right now is 400 hrs per day. The expensive rooms take two hours to clean; the medium rooms take an hour and half to clean, while the economy rooms take one hour to clean. There other cost associated with daily laundry and consumables for each room. The best case scenario for optimum profits is to only rent premium rooms that generate £80 of revenue per day. The cost associated with the premium rooms are £20 per day. All the available labor hours are used up with 100% usage of premium rooms and the gross room profit after room expenses is £12,000 a day. The fixed daily expenses of the hotel are £8,500 meaning that the daily profit equals £3,500. If the hotel operates everyday of the year under the current labor constraints the profit for Chiltern Hotel is £1,277,500. The problem with this strategy is that it both limits the amount of total rooms potentially rented and it is not likely since the hotel has other types of clients which may not desire a luxury room. This strategy is optimal at achieving the highest profit margins, but not the highest total profit. Since the hotel offers more than one kind of room and it would be practically impossible for all customers to only buy luxury rooms a more realistic profit scenario considering labor constraints and the rent of all types of rooms is illustrated in appendix A. In this scenario the sales of rooms is distributed according to an equal distribution of the 400 labor hours among each type of room. The analysis shows that by breaking up the 400 total hours among the different types of rooms a total of 288 rooms are rented instead of 200 premium rooms. The total profits after deducting variable expenses is $12,766 a day instead of $12,000. In terms of daily net earnings they increased from $3500 to $4266 which represents a net profits increase of 22%. References Netmba.com (2007). Pricing Strategy. Available from [Accessed 3 January 2007]. Plunkett Research (2007). Tourism Industry Trends. Available from [Accessed 3 January 2008] Thompson.co.uk (2007). Hotel Lara Beach. Available from [Accessed 3 January 2008]. Appendix A: Mix room sale strategy Total Hours budget 134 133 133 400 labor time 2 1.5 1 Rooms rented 67 88.00 133 288 price 80 60 42 revenue 5360 5280 5586 16226 related costs 1340 1056 1064 3460 room profit 4020 4224 4522 12766 Fixed Expenses 8500 4266 Read More