Profit optimization for the travel industry: How to do it?

In good times or bad, it is important to optimize your ability to generate profit. The best way to do this is to take steps to increase your profit margins.

These steps include accurately measuring your margins, carefully calculating your total costs, considering the 80/20 rule, looking at your existing sales, plus upselling and creating profitable, dynamic packaging.

Profit optimization for OTAs, travel agencies and tour operators

Check your gross profit margins

In order to increase your profitability, first of all, make sure you are measuring it correctly. Check your gross profit margins frequently and understand how they differ across your different sales channels, products and customers.

You should have software or reporting capabilities to show how each individual sales channel is performing. This will enable you to intelligently allocate your ad spend and marketing budget.

Here’s how to calculate your gross profit margin:

Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue

For example, you sold a holiday package for $1,000 and the Cost of Goods Sold was $250. Your gross profit is $750, or your gross margin is 75%.

For a full list of useful key performance indicators for OTAs, travel agents and tour operators, visit our blog.

Calculate your true Cost of Goods Sold

To give you the most accurate picture of your business performance and your profitability, your COGS must take into account ALL of the costs associated with running your business.

Here is a checklist of applicable costs to include: rent, utilities, employee payroll, domain name and web hosting, cybersecurity, subscriptions to business services, petrol and travel, bank fees, office supplies and equipment, repairs, insurance, marketing and advertising.

You may have more to add. COGS lowers your business income, therefore lowering your taxes, so it is certainly in your interest to get it right.

Making savings where you can will improve your bottom line. Talk to your utility and business service suppliers about pricing and terms and conditions. Find out if there are special offers that you can take advantage of. But remember that removing some costs altogether could be dangerous. You still need to meet the essential requirements of running your business.

Consider the 80/20 rule

The 80/20 rule was created by Vilfredo Pareto, a 19th-century Italian economist who observed that 80% of Italy’s land was owned by 20% of the population. He then looked at other countries and found the same situation. The rule has since been applied to many areas of life.

In business, the rule suggests that 80% of your sales come from 20% of your clients. Of course, this may not be the exact case for your business but the principle holds true. Many businesses are dependent on their best or largest clients for the majority of their revenue.

Again, taking a rigorous look at your margins, identify your best clients or customer segments and aim to attract more of them.

The 80/20 rule also says that 80% of your complaints come from 20% of your customers so the rule may help you identify your most troublesome and non-profitable clients or customer segments.

The rule also suggests that 80% of your sales come from 20% of your products. Are you spreading yourself too thin? Do you offer too many products that take up more time and energy than they merit? Now could be a good time to fine-tune your portfolio and concentrate on the travel packages and products that give you the highest margins.

The rule also suggests that 80% of your sales come from 20% of your salespeople, so if you employ a team of agents, take a new look at their performance and see to what extent the 80/20 rule applies.

Unlock hidden profits from your existing bookings

Travel companies such as OTAs and tour operators tend to find prices for their customers and then make the reservations on their behalf. End of story? Unfortunately, yes, in most cases.

Yet the prices of airline tickets and hotel bookings will continue to move up and down from the time of booking up until the time to travel. If travel companies take no further action after making the reservation they are potentially leaving a lot of money on the table.

That’s why travel tech company Hotelmize has developed a unique post-booking profit solution that connects to the travel company’s back office, monitors existing hotel bookings and automatically re-shops them once they reach their lowest price point. Hotelmize’s AI-powered software increases profits on existing hotel bookings by 30%.

Wenrix, another travel tech player, applies the same principle to airline tickets allowing OTAs to delay the ticketing of a flight until the time when the airfare is at its lowest. Wenrix says that its system can boost profits on each airline reservation by 3%-12%.

Both of these examples show that a relatively modest investment in the very latest AI-driven technology will help you unlock extra profits from your existing bookings, significantly increasing your profitability over the long term.

Profit optimization for tour operators

Up-sell and create packages

It has never been easier for consumers to book their travel independently by using the services of an OTA. At the same time, the bewildering choice of booking options plays into the hands of niche tour operators and travel agents who sell specific services and expertise.

For many people, a holiday is still their biggest annual investment. Niche agents and tour operators who offer a personal service and a truly memorable experience will succeed in generating repeat business by fuelling the appetite for future travel.

Contrary to reports of its death, the package holiday is very much alive and kicking. UK residents, for example, took a near-record high of 18.2 million package holiday trips abroad in 2018, according to Statistica.

Selling travel packages can be an effective way of increasing profit margins because you are bundling a number of travel products together, each with their own margin, and selling them as a single item.

This method manages to hide the exact cost of each travel component and also the rate of discounts you obtained from the suppliers.

Alternatively, you can allow clients to select their chosen package from a range of components, again, each one having a carefully calibrated margin designed to increase your profitability.