The Charter Cruise/Resort Business 301: Pricing & Promotions
By Randle Roper
Price integrity is one of the cornerstones of our business. For each trip, we set the price for the various room types we have on the ship/at the property. Our goal with each trip is to sell every room in our inventory, and there are 3 basic sales benchmarks we’re looking to hit:
- The first threshold is when revenue covers the price of the charter/buyout.
- The second threshold is when revenue covers the price of all of our add-ons: entertainment, production, giveaways, etc.
- The final threshold is when revenue covers all the staffing, marketing, and sales costs associated with the trip.
Everything above that final trip-specific benchmark becomes part of our day-to-day operating capital and what’s left after that is our profit.
For each trip, those thresholds vary slightly, but typically we reach the first threshold around 60-65% sold, the second around 70-75% sold, and the final around 75-80%. Taking into consideration our day-to-day operating expenses, actual profit begins to come into play around 85% sold. So you can see how important it is for us to sell each and every room. Our true profit – the engine that allows us to shape a successful business – comes in the final 15-20% of the rooms sold.
We lay this out for you so you understand the foundational elements behind our pricing as they relate to promotions run by the major cruise lines for their standard non-charter cruise passengers.
Celebrity just recently announced a series of promotions that include everything from beverages, Wi-Fi, and excursions to onboard credits. On the surface, it seems like a seismic shift in their business model as they begin to return to service, but is it?
For those who’ve cruised for decades, you know there was a time when many of the elements mentioned above were included in the basic cruise fare, and in those days, cruising typically came at a premium price. But in the 90s, cruise lines began to shift their models. They started stripping out many of those inclusions. They came up with an a la carte model where cruisers could pick and choose the ancillary items they wanted most. This allowed the cruise lines to dramatically lower their base fares and put the onboard purchasing power squarely in the cruisers’ hands. Consumers who’d grown accustomed to having many of those items included in their fare saw this as “nickel and diming,” but ultimately by lowering their fares, cruise lines were able to speed up their growth dramatically as more and more travelers took advantage of these lower base fares. The cruise lines, of course, made a calculated decision that they’d make up the revenue they’d lost in the fare with the sale of onboard amenities. And for years, that’s been a very successful model for both the cruise lines and the consumer.
We are, however, starting to see a shift back to that prior model – higher fares with more inclusions. This model takes out some of the uncertainty cruise lines have about passengers spending money onboard. By locking that spend into the fare, that uncertainty disappears. Let us illustrate this concept in very basic terms (and we’ll keep the math simple):
Existing Model: A cruiser pays $1,000 for their fare, which gets them on the ship. Once onboard, they might spend $300 on drinks, $100 on Wi-Fi, and $100 on excursions. That’s $1,500 in total revenue for the cruise line – maybe.
New Model: A cruiser pays $1,500 for their fare, which gets them on the ship AND gets them many of the extras they’d otherwise be paying for a la carte. That’s still $1,500 in total revenue – the exact same number as the existing model, but without the uncertainty of “will they or won’t they” spend $300 on drinks, $100 on Wi-Fi, $100 on excursions. It’s all baked in.
With many of the new promotions you’re seeing out there, it’s imperative to keep in mind that nothing comes for free. To offset the various inclusions they’ve layered into their current promotions, cruise lines have raised their fares to account for that “loss” in revenue. Of course it’s not a loss. It’s simply a shift – from one revenue stream to another – one that has a long successful history in the world of cruising.
We’ve been asked, “Since Celebrity’s regular cruisers are getting this promotion, will we get this, too, for our charter cruise?”
The answer is no. And that’s not because we wouldn’t want you to have those extras, it’s because our contract was based on the existing model, not the new model. But… we do think that if this shift proves successful for them, our future contracts are likely to come at a higher price. But with that higher price, many elements you’ve previously paid for a la carte, will be included. Only time will tell how this will all eventually play out.
Of course we recognize that it’s easy to look at standard cruise pricing versus charter cruise pricing and think, “What gives? Why is it so different? Why is the charter cruise price higher?”
When asking that question, if you look at the Promotions model we laid out above, you’ll understand. Simply replace “beverages” with “entertainment” and “Wi-Fi” with “production” and you’ll start to have a deeper understanding of how all the VACAYA add-ons are “baked in” to our price. We’d never be able to produce the incredible events we pull together using the cruise line’s historical a la carte option. Many other companies have tried – charging for shows, activities, parties, etc. – and have failed. It’s not a sustainable model for what VACAYA does, but we are excited to see the cruise lines shaking up their models. This time off during the pandemic has allowed them to really re-think many of their core business principles. We’re hopeful that introspection will ultimately be good for both charter companies like VACAYA and consumers like you.