How to set nett rates for tours, attractions and activitiesApr 06, 2023
Contracting time is around the corner, and if you are planning to attend any upcoming trade shows, then this is the best time to market test your 2024/25 rates season. If you are a tour operator, attraction or activities provider who is thinking about working with distributors and need to review your rates to ensure that commissions/netts are built in and not sure how to do it, then this article will provide a great framework for you to follow.
What is the difference between a nett rate and a commissionable rate?
A commissionable rate is your retail rate that you have agreed to pay a specific commission on. For example, your local travel agent sells your tickets and you pay them 10% commission for each ticket sold. Your tickets are $100 each - so after the guest has travelled, you pay them the 10% (which in this instance, is $10) commission.
A nett rate is the rate with the ‘commission’ already taken out.
Your retail rate is $100 per ticket/seat.
25% of this is $25
$100 - $25 = $75.
The nett rate is $75.
You contract to the relevant trade partner to sell your ticket /seat at $75 per ticket. This rate is a confidential rate. They will still sell your ticket at $100 to the customer directly and pay you the $75 and hold onto the $25. So essentially, they mark up their nett rate by 25% to align it with the retail rate (RRP).
Where does the 25% go?
If you are working with offline trade (inbound tour operators/receptives/wholesalers) then this is passed along the chain of distribution.
Inbound Tour Operator (keeps 7-10%)>>>>Wholesaler (keeps 7-10%>>>>Travel Agent (receives 7-10%)
Everyone is paid for their portion of making the sale.
For Online Travel Agents (OTAs), this is also passed along into their affiliate programs and travel agent programs. For any of their direct bookings, they keep the full amount and often invest this back into marketing campaigns and technology.
Working with trade partners allows your business further reach into international markets than what your website can ever do - if you are working with an ITO/Receptive - they contract multiple wholesalers in overseas markets who then sell via their network of travel agencies. In addition to this, working with OTAs/ITOs/Receptives mean that they do a LOT of marketing to your target customer in-market. They translate your products and itineraries into language and they can include you in multi-million marketing campaigns in your source markets.
The greatest thing about this is that you only pay the sales/marketing fee when you get the booking. The main thing to remember here, that if you were to pay for a marketing campaign upfront for boosting direct business, then you pay the marketing fee upfront and then wait for the bookings to come in (which you need to calculate your Cost Per Acquisition) as opposed to paying it after the fact when working through distribution. Distribution is a lower risk opportunity for entering into a new market.
How to set nett rates
You take your retail rate (the rate that you sell to the public with) and from that work out the % from this determining what part of the distribution that you are wanting to work with. If you are starting to work with Inbound Tour Operators/Receptives, then you would start with taking 25%-30% from your retail rate. If you work with Wholesalers direct, then this is 20-25%.
Remember that everyone down the chain has to receive their ‘piece of the pie’ for the sale.
To keep within this percentage framework is the Travel Industry Best Practice and we highly recommend that you set this up from the beginning.
Inbound Tour Operators/Receptive: 25-30%
Travel Agents: 10-15%
If you are an attraction who also works with Tour Operators who also distribute via Inbound Tour Operators, then you will need to contract them between 30-35% as they will receive between 5-10% after they pay their own netts to the ITOs.
Keeping within this framework also ensures that you have all your contracts in bands and not contracting ‘any old rate’ to any partner which is then very hard for your team to keep on top of and can lead to multiple errors.
Remember that any rate you contract out is confidential and ensure this is included in your contract. Some drivers for tour operators work for multiple companies and often know these rates, however be clear that rates a re confidential and not to be discussed.
Calculating your nett rates
Now you know the Best Practice on setting nett rates, you can start reviewing your current rate structure and see how this works for your business. Always remember, revenue is not profit.
1. What is your break-even point?
Finding out how much money needs to be coming in to cover costs is the first step. To figure out your break-even point, you need to answer the following questions:
- What was your total number of customers for the previous rate year and total revenue?
- What were your total expenses (operations and sales/marketing) for the year?
Now go ahead and divide your total expenses by your total customers. The result is the minimum price you have to charge in order to break-even for that amount of customers.
For example, if you had 1,000 customers last financial year and your expenses were $150,000, then calculate $150,000 / 1,000 = $150. You’d have to charge $150 per passenger to break-even. Pretty simple right?
2: Do you have enough margin to cover your costs and make a profit?
Now you know your break-even price you can look at your rates structure and see whether you have enough margins in your different rate levels to cover your costs.
Take a look at how many rates you have issued that differ from your retail price.
If you are a tour operator who wants to work in inbound, with a breakeven of $150, then if you add on a $50 mark up to be $200 per seat, then what does the highest nett (30%) look like?
$200 x 0.7 = $140
Can you see the problem here? It doesn't cover your breakeven to operate so this rate would see you potentially losing money through trade.
$250 x 0.7 = $175
With a rate of $250, you would get $25 profit.
Now understanding that trade doesn't account for all of your business, this rate could work, however in order to protect your profit margin, then it is recommended that your rate be lifted again to $299.
$299 x 0.7 = $209.30
Your profit margin is $59.30 per seat which is a safer option.
It is recommended to review your competitors to see where the rate sits within your competitor set, also how it positions your product in the market before finalising any rate.
If you are offering a product that has large volume distribution partners, you may also want to add a ‘volume’ rate level in your pricing tiers or a market specific rate level (e.g Korea rates). However, try not to have more than four different rate levels in the market. This makes it easier for you to contract rates and ensure that your trade partners are issued rates that are relevant to them.
There will be some distribution partners that you wish to offer specifically negotiated rates. Try to keep these to a minimum and only for your highest performing partners.
3: Figure out your profit margin
Now that you’ve gotten your break-even point and set your rate levels, you can figure out what your profit margin is based on the number of customers from the previous year.
Let’s say your break-even price is $150 and your lowest contract rate is $209.30 (30%).
Enter these numbers in a table along with your customer numbers per segment. This step will help you figuring out your revenue. For instance:
|Current Rates and previous years pax numbers.|
|Adult||Nett %||Pax no's||Total Revenue||Operating Costs||Profit|
The above table should show your expected profit is $107,887.50 for the previous year at your current rates with your actual passenger (pax) numbers.
You can use this table to adjust each year as we know that operating expenses will change over time, and you use it to adjust your rate to determine your forecasted revenue and profit.
Now remember this is a very basic forecast as it doesn't include variables such as increased expenses nor whether your pax numbers may increase or decrease nor multiple ticket/seat prices such as child or concession. If the market is in a growth stage, you can expect a bigger profit margin. If the market is predicted to decline, review your estimates to ensure you aren’t caught out. You can set this table up to be monthly so you can tweak as you go through the year. It becomes a very handy tool to help forecast your numbers.
Now that you have built rates that incorporate distribution, it's time to start meeting with distribution partners and contracting them. If you need help with contracting, be sure to download our contract template.
Make sure all your nett rates are loaded in your booking system and ready to go. If you plan to grow your distribution partners then be sure to look for a booking system that can easily manage these rate. A tip is to look for a system that has the rates loaded via agent not product. You will thank us for this in the long run.
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