Tour operators: Flexible pricing to boost your bottom line
Pricing. It’s a touchy subject.
It’s not easy to attach a dollar value to your work, especially when the product in question is an experience rather than a tangible object.
But your tour business’s existence depends on your ability to find the pricing sweet spot: the point where your supply meets your customers’ demand.
Sure you could play blind, deaf, and dumb and set an arbitrary price for your tours and never look back. The longer you ignore it, however, the more you could imperil your business.
On the other hand, you could stop leaving money on the table and make savvy pricing decisions that will protect you from the competition. If this sounds like the better plan for your business, keep reading.
This article will walk you through three pricing scenarios. You’ll learn how to strategically experiment with your pricing to maximize profits, as well as how to avoid common pricing pitfalls that will leave you in the red.
ACME Escape Room
To really grasp these pricing tips, we’ll follow an example tour company for the remainder of this article.
Introducing ACME Escape Room. Let’s pretend you started this new business in a city with a metro-population of 3 million. There are two other escape rooms in town, and the market is still growing. Tourists will occasionally pay you a visit, but you mainly work with locals across a wide age range: teenagers; young adults; families; and seniors.
You’ve been in business for a year and things are looking up! Every Saturday you’re completely sold out, but weekday games are usually tougher sells. You gross $100k in annual revenue and 90% of your bookings come through your website.
Finally, because you like the live-action puzzle of an escape room and not the puzzle of taking reservations by hand, you depend on booking software to help streamline everything behind the scenes.
Profit Maximizing 101
As you know, there are two ways to influence profit. Your revenue needs to increase at a greater rate than your costs, or your costs need to decrease at a greater rate than your revenue.
Follow along with these next three scenarios as we watch these economic principles in action.
Scenario #1: Earn more for popular tours
As it pertains to pricing, your ears may have perked up when you heard that Saturdays sell out while weekdays are slower for ACME Escape Room.
You got it, you business-savvy reader, you––this is where we should start to maximize our revenue while holding our costs stable.
Not every day is created equal, especially when it comes to consuming entertainment. Your customers are much more likely to book an activity like an escape room on a weekend, without worrying about work or school the next day.
This is common sense for most tour and activity businesses.
What’s not always common sense, though, is that you should charge more on more popular days, or even times of day, than others.
Fortunately for you, your booking software allows ACME Escape Room to easily charge more on weekends than weekdays.
So now you run a month-long experiment where you charge $10 more on Fridays and Saturdays than on the other days of the week. Your expenses stay exactly the same.
If you still sell out just like you did before the increase, you keep that price. In this case, your revenue is growing at a greater rate than your costs, and voilà! There’s your profit.
Scenario #2: Lose less on your weekday tours
For an escape room, (as well as many other tours like zip lines, boats, distilleries, and pedal taverns, just to name a few) your goal is to at least recover your fixed operating costs on every tour. Those fixed costs include the wages that you pay staff members, rent every month, keeping the lights on, etc.
ACME Escape Room will break even if four people book on every single game. Above that, it makes a profit. Below that, it loses money.
Therefore, you want to ensure that at least four people show up at every game. And if fewer than four book, you want to cancel that game.
There are actually two ways you can price your escape room game to achieve this:
- Charge per person but set up “game minimums”
- Charge a flat rate for the room equal to your fixed costs
Cipher Escape Rooms in Houston, TX charges $25 per person on the weekends but charges a flat rate of $250 for any reservation on a weekday.
Charging a flat rate is pretty straightforward, but you might be wondering, what’s a game minimum?
I’ll show you.
For your tour company at home, there’s that magic number of guests that you need to average per outing to break even. You’ll recall that for ACME Escape Room, that’s four people.
So all we do is set the tour minimum to four. Parties that book with fewer than 4 people can still reserve a game, but their place won’t be confirmed unless at least one more person joins.
With your booking software, you can also set up an alert before the game is scheduled to begin. Minutes, hours, or days before the game, the software will tell you how many people are currently booked. That way you can take a final tally of your participants and decide whether to cancel the game in advance.
Moreover, ACME’s booking software has an “Early Cutoff Time” feature that also allows you to prevent bookings too close to the start time. That way you don’t run the risk of someone tipping the 4-person threshold at the last minute and not having enough time to prepare the game.
Whether you decide to charge a flat rate or to set up game minimums, these pricing tactics will help you cut costs and stabilize your revenue on games where you would be losing money otherwise.
Scenario #3: Booking fees
There’s one final way to price your tours to make bigger profit. Disclaimer: it can be controversial.
That’s right, I’m talking about consumer booking fees.
Every booking software that processes credit cards will have a credit card processing fee, usually around 2% or 3% per credit card transaction.
But a consumer booking fee is different. With some booking softwares, it’s mandatory to charge a fee on top of the credit card processing fee, while other softwares offer a flat subscription model.
If the booking software does charge a consumer fee, it’s either as percentage of the overall purchase (sometimes almost 10%), or it’s a per person or per booking flat fee.
Whether you applaud or despise them as a business owner, there’s one thing that’s not ambiguous about consumer fees: there’s a right way to levy these charges and a wrong way.
A lot of tour operators fall into this dangerous trap. They’ll charge their customers more through consumer fees and not make any more profit.
To explain how this is possible, I want to hand the mic off to a real escape room owner himself.
When Bane Srdjevic of Lock Chicago was shopping around for escape room booking software, he talked to different companies that paid themselves by taking a percentage cut off of every online booking he sold.
“[The software company] would charge the customer between 6% and 10% that they would take directly in their pocket without you being able to customize it.”
What does that mean for ACME Escape Room? We know that ACME Escape Room makes $100k a year and gets 90% of its bookings online, which equals $90,000 in online revenue. Of the consumer fee (6%-10%), two percent goes to standard credit card processing charges. Four to 8% of ACME’s online revenue, therefore, goes straight to the booking software company.
On the low end, that means you pay $3,600 a year for software on the low end and $7,200 a year on the high end!
How much extra revenue do you get? Zilch.
You could raise the consumer fees to 15% so you take the extra 5% on top of the booking software’s 10% payment, but a couple things would happen:
- You risk over-pricing the escape room
- You’re still paying up to $7,200 a year for booking software
Our escape room friend thinks there’s a better way to price escape room games. Srdjevic continues, “If you’re comfortable with charging your customers 6%-10% in service charges, why wouldn’t you take that money for yourself?”
That’s certainly an interesting idea…what would that look like?
Well, say ACME pays a monthly subscription for booking software instead of a percentage per booking. The subscription costs $99 per month, or $1,188 a year. The escape room still makes 100k per year and gets 90% of bookings online, where it charges a 10% booking fee on reservations. Two percent of that consumer fee covers the company’s credit card processing charges, and the other 8% goes into ACME’s books.
Under these circumstances, instead of paying $7,200 for software and not making a penny from consumer booking fees, ACME is paying less than $2,000 a year for software and putting an extra $5k in the bank.
Now that’s some math you can get behind.
Moral of the story, if you’re happy to raise your prices with consumer fees, you should collect that money, not your booking software company. What could your business do with 10% more revenue every year?
Tour Pricing: The long and short of it
Whether you create custom pricing for weekends over weekdays, set guest minimums to recoup your costs, or levy consumer fees that go back into your pocket, there’s one theme to successful tour pricing:
The more flexible your tour business can be on the ever-important topic of pricing, the more you can maximize your profits and stay ahead of your competition.
Go forth and prosper my friends!