The Challenge Of Setting A Price For Wellness Getaways

The Challenge of Setting a Price Wellness Getaways, Inc. packages cruises to Caribbean islands such as Martinique and the Bahamas

Hello, I need it done by 3 hours from know. Wellness Getaways Inc. offers cruise packages to Caribbean destinations like Martinique and the Bahamas, designed to be fun and promote healthier habits such as quitting smoking or overeating. The Miami-based company was founded by Susan Isom, an innovator with experience in behavior modification. She identified that many people interested in developing healthier habits could benefit from a pleasant, socially supportive environment, leading to the creation of Wellness Getaways, Inc. She hired psychologists and health specialists to design the program and chartered a ship. Initial capital contributions from associates exceeded $600,000, funded primarily through advertising, administrative expenses, and ship rental and crew costs.

One of the participants, Mary Porter, a schoolteacher from Denver, signed up for a 10-day cruise to Nassau, departing December 19. The average paid by participants is $3,000, with the most desirable cabins costing $4,400. Mary found out about the cruise through advertisements published on October 16, by Pittsford and LaRue Advertising Agency. Initially, it was estimated that 300 people would sign up, but by November 14, only 200 had registered. This discrepancy prompted Susan Isom to consider options to ensure the cruise's financial viability. The costs incurred for the cruise are around $400 per passenger, primarily for food, with total costs exceeding half a million dollars so far.

To increase passengers, Pittsford and LaRue proposed two advertising campaigns: a limited one costing $12,000 expected to bring 20 additional passengers, and a more aggressive campaign costing $30,000 projected to attract at least 40 additional passengers. The decision hinges on whether to proceed with these advertising efforts and whether it is financially justifiable to spend more on advertising to fill the remaining ship capacity amid tight funds and investor concerns.

Paper For Above instruction

The scenario faced by Wellness Getaways Inc. exemplifies the complex decision-making process involved in setting prices and advertising budgets in the hospitality and travel industry, especially when introducing innovative and health-oriented vacation packages. The key considerations include understanding the breakeven point, evaluating current commitments, and assessing the effectiveness and financial implications of additional advertising expenditures. This analysis will explore these dimensions comprehensively to aid optimal decision-making.

Introduction

Pricing strategy and advertising expenditures are critical in the hospitality and travel sectors, particularly for new ventures offering niche products like health-oriented cruises. Wellness Getaways Inc. is at a pivotal point in its promotional campaign, needing to determine whether to invest further in advertising to attract additional passengers while assessing its current financial standing and potential profitability. This paper evaluates whether the company should proceed with the cruise based on current bookings, identifies the breakeven point, and assesses the cost-effectiveness of plans for further advertising efforts.

Calculating the Breakeven Point

The first step in assessing the viability of the cruise involves calculating the minimum number of passengers needed to break even. The total fixed costs, primarily the ship rental and crew (amounting to $440,000), as well as initial advertising (already spent), and variable costs per passenger must be considered.

The fixed costs are: $440,000 for ship rental and crew plus the initial advertising ($130,000), which totals $570,000. However, since the initial advertising expenditure has been incurred regardless of future advertising, only additional costs are relevant for the breakeven analysis. The variable cost per passenger primarily includes food and other expenses, roughly estimated at $400 per passenger.

At present, $400 per passenger is the most significant variable expense. The revenue per passenger averages $3,000, with higher-paying cabins at $4,400. For simplicity, the calculation assumes the average fare of $3,000 applies uniformly to the breakeven analysis, though the higher-class cabins could influence total revenue margin if occupancy increases.

Thus, the contribution margin per passenger is:

• Revenue per passenger = $3,000
• Variable cost per passenger = $400
• Contribution margin = $3,000 - $400 = $2,600

The breakeven number of passengers (B) is obtained by dividing the fixed costs by the contribution margin:

B = Total Fixed Costs / Contribution Margin per Passenger = $570,000 / $2,600 ≈ 219

This indicates that approximately 219 passengers are needed to cover all fixed and variable costs, assuming all pay the average fare of $3,000.

Given the initial booking of 200 passengers, Wellness Getaways barely falls short of this threshold, indicating the cruise is marginally below the breakeven point and needs approximately 19 more passengers to become profitable.

Assessment of Current Bookings: 200 Passengers

With 200 reservations, the company is close to its breakeven point but still at a potential loss zone, especially considering that any additional unanticipated costs or lower-than-expected revenue margins could push the operation into unprofitability. Given that the total costs are already substantial, this situation necessitates strategic decision-making regarding further advertising and promotional effort to fill remaining capacity and ensure profitability.

Economic Justification for Additional Advertising

The advertising campaigns under consideration are aimed at increasing passenger numbers to reach breakeven or better. The first campaign costs $12,000 and is estimated to bring in 20 additional passengers, while the more aggressive campaign costs $30,000 and forecasts at least 40 additional passengers.

Analyzing whether to proceed depends on the incremental additional contribution margin these advertising efforts are likely to generate. A cost-benefit analysis indicates that:

• For the $12,000 campaign, the additional contribution margin is:

20 passengers × $2,600 contribution margin = $52,000

The net benefit of this campaign is:

• Net benefit = Additional contribution margin - Campaign cost = $52,000 - $12,000 = $40,000

Similarly, for the $30,000 campaign, assuming it attracts 40 passengers:

40 passengers × $2,600 = $104,000

Net benefit = $104,000 - $30,000 = $74,000

This suggests that, from a purely financial perspective, investing in either campaign is justified as they eventually increase revenue more than the cost of advertising, provided the estimated passenger increase materializes.

However, underlying uncertainties must be considered, such as the accuracy of customer response estimates, the potential for diminishing returns, and the risk of overestimating how many additional passengers will book after the campaigns.

Realism of the Passenger Estimates

Carolyn Sukhan's estimates of 20 additional passengers for the $12,000 campaign and 40 for the $30,000 campaign are both optimistic yet plausible. They are based on the assumption that another advertising push would shift the response rate due to the novelty of the offering and the delayed effect of persuasive advertising. Yet, these estimates may be overly optimistic if the initial response was weak, and market interest remains limited.

Data from promotional campaigns suggest that the target response rates are typical among similar initiatives, with response elasticity influenced by factors such as advertising reach, message resonance, and market readiness. Given that only 200 reservations have been made so far, and the initial marketing effort had limited success, skepticism about achieving the higher passenger count remains justified.

Overall, the estimates are plausible but should be approached cautiously, considering potential market saturation and demand elasticity.

Should Prices Be Cut?

Considering the current situation, a significant reduction in prices might increase passenger counts and reduce the risk of losses. Price cuts could make the cruise more attractive, especially if many potential customers perceive the current price point as a barrier. However, price reductions could also diminish perceived value and impact revenue per passenger, possibly reducing overall profitability.

Furthermore, with fixed costs already high, lowering prices might result in additional passenger volume but at reduced margins, leading to marginal or negative profitability if capacity is not fully filled. Therefore, whether to cut prices depends on the competitive landscape, customer price sensitivity, and the company's capacity to absorb decreased margins while increasing occupancy.

Alternative strategies could include offering promotional packages or discounts for early bookings, which might stimulate demand without substantially diluting perceived value. Overall, a targeted and strategic price adjustment could be beneficial if supported by thorough market analysis and consumer behavior insights.

Conclusion and Recommendations

In conclusion, the breakeven analysis reveals that Wellness Getaways needs approximately 219 passengers to cover its costs. With 200 reservations currently, an additional push through advertising seems justified, especially considering the positive net benefits from the proposed campaigns. The $12,000 campaign appears sufficient to cover the critical gap, offering a relatively low-risk opportunity to increase bookings, while the $30,000 campaign offers a more substantial boost but at higher cost and risk.

Given the estimated passenger responses and market dynamics, it is recommended that Wellness Getaways proceed with the more aggressive advertising campaign, contingent upon careful monitoring of initial response rates. Additionally, exploring nuanced pricing strategies—such as early-bird discounts or bundled packages—may help attract hesitant customers. Ultimately, successful marketing, price management, and an understanding of customer demand elasticity will be pivotal in ensuring the cruise's financial success.

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