Most tourism entrepreneurs, local historians and destination management pros are a little weak when it comes to financial issues. I'm being diplomatic.
If you’re a creative type, brainstorming ideas for new programs is exhilarating. If you’re the tactical sort, you like to lay out step-by-step plans to get new events up and running. Some of us love doing background research. Almost no one enjoys figuring out how much to charge. It makes us nervous, uncomfortable. We’re afraid we’ll make a mistake.
It’s easy to over-complicate the financial side of things. It’s where a lot of well-meaning people go off the rails. We aren’t going to do that. We are going to focus on the basic questions that will help you decide how much to charge for your new program, tour or event.
Income and Expenses? Ack!!
Every financial element related to your program must fall into one of two categories. It is either income or it’s an expense. Income minus expenses equals profit or loss. Income and profit are not synonymous.
For most of us the income side of the equation is fairly simple. It’s the total amount we collect from the people who take the tour or attend the event. The expense side is where things get complicated. The most common expense error is missing something.
Start by identifying your costs. The following list includes common expenses associated with tours and programs. It’s not one-size-fits-all, however. You may have costs that are not on the list and some items may not apply. For example, a self-employed person will have different expenses than someone developing tours as a salaried employee.
- Are you required to collect and remit state or local taxes on the money you take in for the program? At what rate?
- Do you need a license or permit? How much does that cost? Is it a one-time fee or a recurring expense?
- Did you purchase a sign or banners?
- Did you buy flyers, posters, tickets, handouts, or incur other printing expenses?
- How about advertising in newspapers, on the radio or on social platforms?
- Did you acquire costumes, props or equipment such as flashlights, mics and batteries?
- Any office supplies such as paper, ink, tape, etc.?
- Are you paying people to work at the event? Do you have to reimburse anyone for mileage, parking or lunch?
- Are you sharing profits or receipts with guides or other helpers?
- Is a guest expert or local celebrity speaking or coming along on the tour? Are you compensating that person? How much?
- Are you paying rent or commissions to venues or tour stops?
- Are you sharing receipts or profit with any other organizations?
- Do you need insurance?
- Are there credit/debit card processing fees?
Identifying and adding up your costs can be quite an eye-opener. Is the total astronomical? Don’t throw in the towel yet.
The Magic Number
Divide your costs into two categories: mandatory expenses and a wish list of things that can be deferred until later. Get as many costs off the mandatory list and onto the wish list as humanly possible.
Look at your total mandatory costs then do some basic math. If your costs are $1000 and you plan to run the tour once, you either need to attract a huge crowd or charge a premium price. One hundred people at $10 each, 40 people at $25 or 10 people at $100 will get you to breakeven. But how realistic are those scenarios?
This is where marketplace knowledge comes into play. How much do others in your area charge for similar programs? If you don’t know, get online or get on the phone and find out.
If there are no similar tours or events in your town, look at neighboring towns. You need a benchmark. Keep looking until you find something comparable even if it’s in a different state. If you discover the going rate for programs like yours is indeed $10, you need to think carefully about what you’re doing.
A $10 tour can be profitable, even with $1000 of costs, if you can run it often enough and attract enough customers. In this case, assuming you’ve identified all the costs and no new expenses pop up, you won’t make money until customer number 101. How do you feel about that?
Discounts and Sharing the Wealth
Decide whether you will offer discounts to kids, seniors or groups. I guarantee you'll be asked. Most people’s knee-jerk reaction is to agree. But you must think this through before you say yes. Having participants who are paying less than full price in the customer mix means you need to attract more people to reach the breakeven point.
If you are collaborating with another organization or tour operator and you are going to split the proceeds, make sure you spell out how this is going to be computed in advance and GET IT IN WRITING. Again, income does not equal profit.
Let’s say you are working with a local historical preservation group. They have agreed to promote your new program to their members for 25% of the receipts. You are charging $10 per person and twenty people show up. Your income is $200. You owe the preservation group 25% or $50. Any program costs you incurred must be covered out of your remaining $150. If you had $90 in printing and advertising costs, your final profit on the program is $60.
If your agreement with the historical preservation group was for 25% of the profit (as opposed to the receipts or income), the first thing you do is subtract your $90 cost from the $200 income which leaves a profit of $110. Now you owe the preservation group 25% of $110 or $27.50. Your final profit on the program is $82.50.
There’s something to be said for the simple approach of giving 25% off the top. Just understand what you’re agreeing to. Do the math first.
Delayed Gratification and a Beautiful Bottom Line
The payoff for deferring as many costs as possible is the bottom line looks rosier much sooner.
Let's return to our tour example and assume we can reduce mandatory upfront costs from $1000 to $200. That’s breakeven at only 20 people paying $10. You run the tour four times in July and 15 people show up each time. At the end of the month 60 people have participated. The total income is $600. With costs of $200 that yields a profit of $400 rather than the $400 loss you would have had with costs of $1000.
The people who took the tour in July really enjoyed themselves. They told their friends about it and you’re getting calls. People want to know when you’re going to offer it again.
This is when you raise your price.
You decide to run it on three more weekends in August and you raise the price to $15. You still get 15 people per weekend, but your income jumps to $675 even with one less tour session. You keep new costs down by making your own flyers and buying some basic posters for $25. Profit this time around is $650.
The best and most realistic way to look at this example is as a single two-month tour season. Total income was $1275. Total costs were $225. Total profit is $1050.
Now is the time to pull out your wish list of deferred costs and invest in a website, get a logo designed or order some nice business cards. You can afford it.
You don’t need to become a penny-pinching miser and you don’t want your promotional material to look cheap, but keeping your costs as low as you reasonably can in the beginning dramatically increases your chances of long-term success.
No one wants to make a pricing mistake. Charge too much and you’ll drive away potential customers. Charge too little and you’ll leave money on the table, maybe a lot of it.
Prices are flexible. Once you’ve identified your costs and researched comparable offerings in the marketplace, go with your best guess. Flip a coin if you have to. The public will let you know whether you’re charging too much, too little or you’ve hit the nail on the head.