Economic Factors that Tour Operators Take Into Account in Setting the Price of their Package Holidays - Essay Example

Economic Factors that Tour Operators Take Into Account in Setting the Price of their Package Holidays The tourism sector is characterized by seasonality as most people choose to travel during school holidays as opposed to travelling during the term. During the high season and Holidays, tour operators charge high prices for their services which is also reflected in the prices in the destination place. The tourism industry uses the “time-based pricing” method. This implies that they charge higher prices during the holiday season and during special-event periods, commonly regarded as the peak season (Butler, 2001). During this time, the hotels and most tourist destinations are in high demand and they also charge more for their services. However, during the off-peak season, tour operators charge less as even the hotels and other tourist services charge only for the operational cost while waiting to make huge profits during the high season. As such, the tour operators pricing model uses the basic principle of pricing which is the ‘long run marginal cost (LRMC)’ (Begg &Ward, 2013). There are several economic factors which determine the price to be charged during holidays. These factors are external factors, basic services which are intertwined with tourist attractions, the levels of tourism market segmentation, tourism policy and product development and marketing (Aguilo, Alegre, & Riera, 2001). External factors are related to the change in demographic composition of the society as a result of many children being out of school after the term. School holidays cause population change in the segment with a lot of leisure time. This means that the demand for tour services will increase. During this times, the prices of the travel services increase as well as the hotelier business because they are aware of the fact that people must travel during this time. As such, people will be forced to pay a higher price for the services (Budeanu, 2005). Internal factors also affect the pricing of tour services due to changes in consumer preferences. This is attributed to the media and the internet which are used to advertise the many tourists destination that have entered the market. The images created by the media advances the popularity of some destination which then stimulates demand through increased interest in different destinations. As such, people are exposed to different destinations every holiday thereby increasing the chances of travelling during each holiday. This implies that the increase in demand will in turn lead to increase in prices of tour services (Becker, 2009). The prices of tour services are also influenced by the fact that it is a service that lacks substitutes. Substitutes affect the demand for goods and services as they compete for the same satisfaction. However, there is no good or service that offers the same satisfaction as travelling to different destinations. As such, the demand for such services is price inelastic as no matter how high the prices they charge for the service, people will have no other alternative to use and derive the same satisfaction compared to travelling (Crouch, 2011). Tour operators also take into consideration the prices of the complimentary services when setting their prices. The complimentary services include tourism suppliers such as attraction sites and products, entertainment, transport and hospitality services. For example, the prices set by tour businesses for a particular destination should be in alignment with the forms of accommodation being offered at the destination, the demand for the site should also matter and the popularity of the food offered. If the prices for such complimentary services fall, the demand for tour services will increase and therefore the price will go up (Crouch, 2011). Demand and supply fundamentals The law of demand and supply is identified as a principle that is used to explain the changes in price of goods and services in the market. According to Cooper et al. (1993), a tourism product has a direct demand curve which shows a relationship between two variables, which are the quality demanded and the price. Demand and supply fundamentals can be used to explain the trends in the highly volatile tour business. The demand and supply of a tourism product is characterized by unstable market conditions which then leads to price fluctuations (Ahas, et al., 2007). This explains the seasonal variations in price such that during the peak times, travelers pay a higher price which tour operators use to leverage the business during the off-peak time when the demand is low and therefore the prices low (Barros, & Alves, 2004). The demand curve for such a product is highly inelastic. This means that the volatile shifts in the demand and supply of the product results in very huge changes in price. This is regardless of the quantity of the demand. As such as the demand for the tourism product remains the same, the price will still fluctuate, getting very high during peak and very low during off-peak. The demand and supply curve can be illustrated by the diagram below. In this case, the rise in price for a tourism product increase in more than the proportionate level of quality demanded. This is because of the seasonality nature of tourism that allows the tour operators to apply the “time-based pricing” method to price the rates of the different package holidays (Sinclair, Blake & Sugiyarto, 2003). Finance and risk in the tour business The tourism and travel industry is international in nature. This results in international flow of currencies between countries. As such, the tour operators have very huge exposure to foreign exchange rates movements compared to a company of a similar size but operating in a different industry such as construction or manufacturing. The profitability of tour businesses is thus affected by the international nature of the industry due to changes in the rates of foreign exchange. There are three major types of risk exposure which is typical if the tourism sector; transactional exposure, translation exposure and economic exposure (Tribe, 2011). Transactional exposure results when a tour operator uses contracts for settlement of future payments in another country but the currency changes due to exchange rates. If a tour company has contracted to pay or receive a specific amount of money to suppliers such as hoteliers in the foreign country in a foreign currency at a future date, the company suffers the risk of the foreign currency changing with time. The real risk occurs due to fluctuations of the exchange rate between now and the time of actual payment or cash receipt. This fluctuation can either increase the amount of reduce it in which case one is prone to a huge loss in case of decrease in the amount receivable or increase in the amount payable. This risk can be reduced by using foreign exchange options or forward foreign exchange contract which allow the tour operators to pay or receive money in the exact rate at which they contracted at (Zhang & Jensen, 2007). Translational exposure is also known as accounting exposure and results from consolidation of profits, liabilities and assets which have denominations in foreign currency during preparation of consolidated accounts. This type of risk affects tour companies that have subsidiary companies in other countries. As such, their subsidiary companies use the assets, profits and liability figures in the denomination of the country in which the subsidiary operates in. every year, the balance sheet will be prepared, and the foreign currency will be converted into the local currency at the prevailing exchange rate. As such, the subsidiary company may provide wrong figures as it may actually be worth less or more than the reflected figures thereby giving a false impression. This type of risk can be dealt with by avoiding it altogether. As such, tour companies can choose to invest their subsidiaries in the domestic market (Zhang & Jensen, 2007). Economic exposure results when a tour company suffers from huge and adverse exchange rate fluctuations for their future cash flows in the absence of contractual arrangements on the payment or receipt of the money. This type of exposure is difficult to forecast accurately or quantify accurately as it is long term in nature. This can happen in countries that suffer political or environmental catastrophes such as violent replacement of the government like in Gambia or a tsunami in Haiti. The effect is that many people will cancel their visits to such places. The most effective solution to this exposure is to diversity the countries a company operates in, so as to leverage the risk suffered from one country (Zhang & Jensen, 2007). References Aguilo, E., Alegre, J., & Riera, A. (2001). Determinants of the price of German tourist packages on the island of Mallorca. Tourism Economics, 7(1), 59-74. Ahas, R., Aasa, A., Mark, U, Pae, T, & Kull, A. (2007). Seasonal tourism spaces in Estonia: Case study with mobile positioning data, Tourism Management, 28: 898-910. Ball, R.M. (1988). Seasonality: A Problem for Workers in the Tourism Labour Market. Service Industries Journal, 8(4): 501-513. Baloglu, S., & Mangaloglu, M. (2001). 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