Written By: Tom Ogg
Decades ago when I was the RSM for Aloha Airlines in Los Angeles ASTA put on a series of workshops for travel agents. One of the workshops was entitled “Group Costing” and since my job was selling neighbor island air to travel agents that moved groups to Hawaii, I signed up for the seminar.
It proved to be a very worthwhile investment of time as I was able to forge an understanding on how our participation in a group itinerary fit in and how we could best reach out to group promoters in a language that they understood and with realistic expectations of the market itself.
Fast forward to when Joanie and I started a tour company specializing in arranging FITs and groups to Hawaii for travel professionals throughout the west coast. Our system of costing complex itineraries gave us an edge up on our competitors who where going out of business right and left.
The bottom line is that every travel professional that enters the special group market needs to have an excellent understanding of group costing. There are numerous benefits derived from understanding group costing and here are just a few.
Lock in Your Profit: Since the reason to do groups is to generate profits, the very first item on your costing needs to be the profit you expect to make on the group. This should be consistent with your overall business plan. To many agents try to generate their profit as something that will be left over when the group is liquidated. Your profit should be the number one item in your costing.
Protect Your Profit: The only thing that is consistent with groups is that there is going to be something that goes wrong. Every costing should have a “Slush Fund” that exists for the express purpose of protecting your profit. When something unexpected happens to your group you shouldn’t have to reach into your own pocket (profit) to resolve it. There should be funds in your group “Slush Fund” for such situations.
Understand Your True Costs: One of the biggest mistakes agents new to costing make is costing as if the group will completely sell out. Your costing needs to protect you and your profit no matter what happens. Since this is a huge topic, we will just go into some of the key elements is a good group costing.
Group Costing Math: Here are a couple of mathematical concepts that you should become familiar with.
- To Net a commissionable element out simply multiply the element price by the commission apercentage. ($1,000 @ 15% = $150 commission. $1,000 – $150 = $850 net price.)
- To build a commission into a net price divide the net price by the percentage of the total commissionable amount. To find the gross price with a 15% commission of a $850 net price divide by (100 – 15 = .85) $850 decided by .85 = $1,000.
- To amortize costs over a number of rooms, cabins or passengers simply divide the expense by the appropriate number of rooms, cabins or passengers.
Key Components in Your Group Costing: The first challenge of group costing is to net out all of the group’s various key elements. The task is to identify all of the costs that are going to be associated with the group and break them down into their “Net” cost. In some cases this is quite easy to do and in others, not so much.
The Main Group Costing Components: Here are many of the main items that will appear in your group costing and tips on how to handle them.
Your Profit: The very first item in your group costing is going to be your profit. You never want to be in a situation where you must accept less profit on a group to make it work. Your profit is why you are doing the group in the first place, so make sure that it is protected at all times.
Air: Air is a challenge as there is basically no commission in it for agents, yet it plays a huge part in the group arrangements unless you are promoting motor coach tours instead. Here is how to handle air.
- Net the air out to its real net cost.
- Add an “Air Processing Fee” that is consistent with your actual cost of handling the group air. This will protect your profit.
Motor Coach: Most groups will involve some motor coach travel whether used for transfers or sightseeing..
- Always amortize the entire cost of the motor coach over the first 50% of your group. Let’s say your group is going to be a total of 40 passengers, amortize the cost of the motor coach over the first 20.
Hotels and Resorts: Since the group’s accommodations will be a major part of the movement much attention should be paid to the quality of the accommodations to make sure that they satisfy each and every group member. Here are some tips to consider.
- Net out the accommodations
- Always include porterage in and out of the property
- Always include an “incentive” for the Bell Captain.
- Category rooms are always a better choice than “Run-of-House” room rates. While the ROH rates may be less, if you have group members in different category accommodations, you will have some complaints.
Decades ago I was helping to check in a large group from New York into the Sheraton Waikiki. The group had contracted the ROH rates. Unfortunately one of the group members with a loud mouth got a high floor ocean front room and about half the group members ended up in the Manor Wing of the Sheraton Waikiki.
The manor wing was the first structure built on the property and was used to house Pan Am flight crews. The rooms have no views, 2-twin beds bolted to the floor and look like a cheap 1950s style of motel room. They are horrible. I manned the group desk for the week they were in Hawaii and it was miserable.
People in the Manor Wing threatened to sue the operator (Hawaiian Holidays) especially since some of there group members got ocean view, or ocean front rooms. I learned early on that ROH room rates are not worth the savings.
Sightseeing: and Special Events: Most niche groups may use both special events and regular sightseeing tours. The unique value-add created by special events specifically for your niche group members is how your group travel becomes difficult to shop. Here are some tips.
- If you are using a DMC make sure you cost the item based on the necessary minimum number of group members.
- Always ask for net rates and group size minimums for the rates.
- Don’t forget to cost in gratuities for service providers (motor coach drivers, guides, servers and such)
Variable Marketing Costs: You should identify your specific variable marketing costs associated with the group and amortize it over the first 50% of the group. This is done in case the Pied Piper falls short on filing the group capacity. Since the variable package cost and marketing cost are amortized over the first half of the group you then have the opportunity to engage another Pied Piper to complete the group and fund it from the embedded funds.
Pied Piper Incentives: While some Pied Pipers will take on putting a group together for just a free trip, many times more successful Pied Pipers will want additional incentives to go to work promoting the group. Items like free accommodations, air, transfers, sightseeing and such need to be identified and amortized over the first 50% of the group.
The way to determine what kinds of incentives are necessary is to understand the nature of Pied Pipers in your specific niche. In the case of famous speakers, authors, experts and such that are capable of filling a large group, the incentive might be first class air, a suite, limo transfers and an “entertainment” budget of $2,500. Don’t worry about the cost, as a motivated Pied Piper is what you are after.
Entertainment Budget: Depending on the kind of group you may want to cost in a budget for entertainment for your group members. Nothing can eat into your profit faster than picking up the tab for cocktails and such. By establishing a per-person entertainment budget will not only enable you to take advantage of opportunities to secure relationships, but will make the group itself more cohesive.
Your Slush Fund: No matter how well your group is planned there are always going to be issues that arise that may require money to fix. This is exactly what your slush fund is for. Your slush fund should have enough money in it to solve potential problems and it will depend on the kind of group you are moving and also the destination.
Every group member contributes to the fund and it is only used in case of emergencies. If you do not spend the slush fund on the group then you will roll it over to the next, but every group member on every group contributes to the fund. Your profit is already in your costing, so the slush fund never becomes profit, it exists to protect your profit and rolls over for every group until it is needed on a specific group to solve problems.
Pricing: Once you have your costing completed it is time to establish a selling price. The best strategy for pricing is to round up to the most logical price. Pricing that ends in the number 7 is the most favorable for consumers. As an example $589 seems more expensive than 597. Also, try tiered pricing for groups by having different categories within the accommodations.
For cruises try offering an inside, ocean view and a balcony price. For resorts, go with a city view, ocean view and ocean front category. Because your profit is a fixed amount and all the costs have been amortized on a per unit basis, the increase in pricing will not reflect the true difference in cost and the higher end will appear to be a bargain for your group members.
Also, by amortizing the variable costs over the first 50% of the group you have created the reality that the group can operate successfully with only 50% of the target group members. If your Pied Piper falls short filling the group he or she can still travel for free and the group can also operate since all mass-transportation items have been funded by the first half. of the group.
You can choose to find a second Pied Piper to fill the group space up at no cost to you as they will be funded by the embedded amortization. Or, you can use the extra money to motivate the existing Pied Piper by offering incentives that might work.
You can see the advantages of costing the exact same group movement a number of times. It becomes much easier to operate and reduces the task from packaging to marketing. And, it reduces the task of operations and focuses on managing your group leaders and pied pipers.
While there is much more to consider when costing groups, these elements are ones that you will need to deal with. The trick is to marginalize the aspects of the tour that can be priced and shopped in favor of the unique events that are included and the main reason people will join your groups.