The Hidden Truth of Tourism Product Numbers!

Article published, in Portuguese, at A?oriano Oriental , on October 20th, 2024

Recently, I overheard a conversation that caught my attention: "Look at these people coming in. It’s just about making money." One of the gentlemen was making simplistic calculations: "That’s x people, at y per person, so that’s xy in value." I interrupted, suggesting they consider fixed and variable costs and explained what rack price, net price and average ticket are, along with the contribution margin.

They asked, "But is it enough to pay for everything and invest?" I said yes, but not as easily as it seemed. We laughed and went our separate ways, but with a clear perception that we need to explain the reality of tourism numbers better.

When selling tourism products, it’s essential to understand some fundamental concepts to assess a business's profitability. Many business owners either ignore or miscalculate these figures, distorting their analysis and negatively affecting the development of the Azorean tourism market. Additionally, most people judge reality incorrectly due to a lack of technical knowledge.

It is important to know these concepts

The contribution margin is the amount left from each sale after paying direct costs, such as transportation or commissions. If we sell a tourism product for 100 euros and spend 60 euros on direct costs, the contribution margin will be 40 euros. This amount covers other business costs, such as rent and salaries, and can still generate profit.

The rack price is the value a customer pays when booking a service. The net price, on the other hand, is the lower amount that agencies or tour operators pay to the provider before adding their profit margin. These concepts are essential for correctly assessing the profit of each transaction.

The average ticket reflects the average amount spent per customer. To calculate it, divide the total revenue by the number of sales. For example, if a company sells 100 products and earns 50,000 euros, the average ticket will be 500 euros. This indicator helps adjust sales strategies and understand the profile of customers.

In tourism, sales can be B2C (business to consumer), where the company sells directly to the end consumer, or B2B (business to business), where sales occur between companies, such as a tour operator selling packages to an agency that then resells to the final customer.

These are merely examples of basic technical concepts, but they highlight the complexity in a company's financial and operational management.

Disappearing Profits

Recently, when analyzing a tour to Furnas sold for 67 euros, which included a guide, transportation, lunch, and entrance fees, I realized how costs can erode the profit margin. After deducting a 15% commission (10.05€), 20€ for entrance fees, 15€ for lunch, and 10€ for fuel, only 11.95€ per person remains. With an average of 5 participants, this amounts to 59.75€ per day. And there are still taxes and other costs, such as salaries, vehicle maintenance, and insurance, to be covered.

This example clearly shows that "x people at y per person" can be misleading. The final margin is often much smaller than it appears, compromising the business's profitability.

Conclusion: The Truth Numbers Reveal

Tourism is a fascinating sector, but full of financial complexities. The idea that filling a tour or hotel automatically means profit is a dangerous illusion. The various concepts discussed in this article demonstrate just how delicate this balance is.

A tour that seems profitable may be operating on minimal margins that barely cover operational costs. To ensure sustainable growth, more than just selling products is required. It’s necessary to understand where the money comes from and where it goes.

Effectively managing a tourism business requires a careful and realistic analysis of the numbers. Profits do not come from sales volume alone but from intelligent and well-informed management, where every euro is maximized to ensure the business's sustainability.

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