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DEMAND FOR TOURISM 1 Contents 1. Nature of Demand 2. Travel and Tourism Products 3. Buyer Objectives 4. Types of Variables Influencing and Constraining.

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Presentation on theme: "DEMAND FOR TOURISM 1 Contents 1. Nature of Demand 2. Travel and Tourism Products 3. Buyer Objectives 4. Types of Variables Influencing and Constraining."— Presentation transcript:

1 DEMAND FOR TOURISM 1 Contents 1. Nature of Demand 2. Travel and Tourism Products 3. Buyer Objectives 4. Types of Variables Influencing and Constraining Tourism Demand 5. Levels of Choice in tourism industry Demand 6. Constraints on Tourism Demand

2 Definitions of tourism demand 2 Definitions of demand vary according to the subject perspective of the author. For example, economists consider demand to be schedule of the amount of any product or service that people are willing and able to buy at each specific price in a set possible prices during a specified period of time.

3 3 In contrast psychologists view demand from the perspective of motivation and behavior. Geographers, on the other hand define tourist demand as: the total number of persons who travel, or wish to travel to use tourist facilities and services at places away from their places of work and residence.

4 Definitions of tourism demand 4 Each approach is useful. The economic approach The economic approach introduces the idea of elasticity – which describes the relationship between demand and price, or other variable. The geographers The geographers definition implies a wide range of influences, in addition to price, as determinants of demand and includes not only those who actually participate in tourism, but also those who wish to, but for some reason do not. the psychologist On the other hand, the psychologist scratches underneath the skin of the tourist to examine the interaction of personality, environment and demand for tourism.

5 Concepts of Tourism Demand 5 The demand for tourism consists of a number of components that make up the total demand for tourism: 1. Effective or actual demand is the actual number of participants in tourism or those who are traveling, i.e. de facto tourists. This is the component of demand most commonly and easily measured and the bulk of tourism statistics refer to effective demand. 2. Suppressed demand is made up of that section of the population who do not travel for some reason.

6 Concepts of tourism demand 6 Two elements of suppressed demand can be distinguished. Firstly, potential demand refers to those who will travel at some future date if they experience a change in their circumstances. For example, their purchasing power may increase, or they may receive more paid holiday entitlements, and they therefore have the potential to move into the effective demand category.

7 Concepts of tourism demand 7 Deferred demand is a demand postponed because of a problem in the supply environment, such as a lack of capacity in accommodations or maybe terrorists activity. Again this implies that when the supply conditions are more favorable, those in the deferred demand category will convert to effective demand at some future date. 3. Finally, there will always be those who simply do not wish to travel, constituting a category of no demand

8 Concepts of tourism demand 8 We can also consider other ways in which demand for tourism may be viewed. For example, substitution of demand refers to the case when demand for one activity (a self-catering holiday) is substituted by another (staying at a serviced accommodation). Spain A similar concept is redirection of demand where the geographical location of demand is changed – a trip to Spain is redirected to Greece because of over-booking of accommodation.

9 Concepts of tourism demand 9 Finally the opening of new tourism supply - say a resort attraction or accommodation - will: redirect demand from similar facilities in the area; new demand substitute demand from other facilities; and generate new demand.

10 Concepts of tourism demand 10 displacement effect Economists refer to the first two of these as the displacement effect – in other words, demand from other facilities is displaced to the new one and no extra demand is generated. new tourism projects. This can be a problem in tourism and is an important consideration when appraising the worth of new tourism projects.

11 The Nature of Tourism Demand 11 Aggregate Demand Aggregate Demand: the quantities of a product that buyers collectively are willing and able to buy at any potential price over some specified period of time. Specifically a definition of effective demand. A behavioral approach to demand analysis is important in tourism industry since the products are complex and the needs and levels of product knowledge of intending tourists are many and varied.

12 Travel and Tourism Products 12 Different views on tourism industry products: 1. As a total package or set of complementary products which buyer views as a single purchase, considered for example as the dream experience – reflects tourist purchasing behavior in the repurchase stage 2. As an individual product, which are complements, certainly but are considered separately by tourists in making their purchase decisions – reflects routinized buying of, for example car rental services and meals by a business person in the course of a trip.

13 TOURISM DEMAND Buyer Objectives ( ) 13 The overall objective of a tourist (or by implication market segment) may be expressed as a functional relationship Maximize U i = U i ( z J ) U: U: utility z: z: a vector (j=1 to m) quantities of characteristics, of a tourist trip, desirable to the buyer

14 TOURISM DEMAND Variables Influencing and Constraining Tourism Demand Generating Area Economic Variables (Group A) Destination Economic Variables (Group B) Link Variables (Group C) Personal disposable income levels General price levelComparative prices between generator and destination Distribution of incomesDegree of supply competition Promotional effort by destination in generating area Holiday entitlementsQuality of tourism products Exchange rate Value of currencyEconomic regulation of tourists Time/cost of travel Tax policy and controls on tourist spending 14

15 Levels of Choice in Tourism Demand 15 In considering the demand for a simple good, individual consumers have to make two decisions: 1. Whether or not to purchase that generic type of good 2. Which particular good to choose from the range of substitutes available In tourism, there are several levels of choice: (a) the overall type of tourism required (b) destination (c) travel mode (d) accommodation and attraction visiting (e) purchasing method or distribution channel.

16 TOURISM DEMAND 5. Levels of Choice in Tourism Demand 16 A. Type of tourism required A. Type of tourism required: For many cases, there is no-choice situation. i.e., a business sales trip, pilgrimage, sports event attendance or invitation to a family wedding. The degree of obligation fixes the decision. In other cases, there may be choices such as a beach or touring vacation, winter cruise, taking a post convention tour.

17 TOURISM DEMAND 5. Levels of Choice in Tourism Demand 17 B. Destination B. Destination: A destination may be a single location, a set of locations as part of tour, or even a moving destination such as a cruise. Individual demand depends on the group B and C variables and the consumption technology of the destination Relative prices is the most significant variable in international destination choice

18 TOURISM DEMAND 5. Levels of Choice in Tourism Demand 18. Destination (contd.): B. Destination (contd.): The degree of substitution between destinations will depend on the similarity of the characteristic set Choice is frequently restricted by imperfections in consumer knowledge about, and perceptions in destinations.

19 TOURISM DEMAND 5. Levels of Choice in Tourism Demand 19 C. Travel Mode C. Travel Mode: Frequently, type of trip and destination dictate a particular travel mode There may be desired levels of speed, convenience, comfort, safety and so on The principal constraints could be price and the length of time available

20 TOURISM DEMAND 5. Levels of Choice in Tourism Demand 20 C. Travel Mode (contd.): C. Travel Mode (contd.): For some market segments travel itself may have a high positive utility and for others all time and money spent on travel is a cost The travel mode may include more than one type of carriage

21 TOURISM DEMAND 5. Levels of Choice in Tourism Demand 21 D. Accommodation and attractions: D. Accommodation and attractions: the choice may become fixed in the light of other tourism decisions. the lodging product includes a large bundle of intangible and service characteristics accommodation costs are likely to be the largest element of total destination (group B variable) costs relative price of lodging can often influence destination perceptions and destination demand.

22 TOURISM DEMAND 5. Levels of Choice in Tourism Demand 22 D. Accommodation and attractions D. Accommodation and attractions (cont.) an intrinsic an intrinsic (essential) part of the tourist trip; demand is price-sensitive a motivation in its own right; a motivation in its own right; i.e., non-tradable public products, free resource-based attractions. Price: user-pays İ t is an optional discretionary extra; İ t is an optional discretionary extra; Demand is influenced by either the absolute (in-destination) price or the price of the product relative to that in generating areas.

23 TOURISM DEMAND 5. Levels of Choice in Tourism Demand 23 E. Purchasing method: what type of retail outlet to use: the choices are a) Whether to buy an inclusive package (IT) or separate services b) Whether to buy direct from suppliers, such as airlines or hotels or use an agent c) Which tour wholesaler or operator, or agent to use.

24 TOURISM DEMAND TOURISM DEMAND 6. Constraints on Tourism Demand 24 Money Money; disposable income, business cash flow or stock of liquid assets such as savings Political controls; Political controls; passport and visa systems, price and fare regulation and travel and tourism taxes Time; Time; work and public holiday allowance, school and college vacation periods, time limits on conducting business trips

25 TOURISM DEMAND 6. Constraints on Tourism Demand 25 Constraints such as time and money can be represented for individual tourists : Y >= p k x k V >= t k x k Y: Y: disposable income allocated to tourism V: free time similarly allocate p k : is a column vector of prices of x elements t k : is a column vector of the time involvement necessary for each of those elements The model could be expanded to allow for non-economic constraints such as restricted personal mobility or simple lack of travel opportunity.

26 Indicators of tourism demand 26 Travel propensity travel propensity (inclination) One of the most useful indicators of effective demand in any particular population is travel propensity (inclination). This measure simply considers the penetration of tourism trips in a population. two forms of travel propensity There are two forms of travel propensity:

27 Travel propensity 27 Net travel propensity Net travel propensity refers to the percentage of the population that takes at least one tourism trip in a given period of time. In other words it is a measure of the penetration of travel among individuals in the population.

28 Travel propensity 28 Gross Travel Propensity Gross Travel Propensity gives the total number of tourism trips taken as a percentage of the population. This is a measure of the penetration of trips not individual travelers.

29 Travel propensity 29 Clearly then as second and third holidays increase in importance, so gross travel propensity becomes more relevant. Gross travel propensity can exceed 100 % and often approaches 200 % in some Western European countries where those participating in tourism may take more than one trip away from home per annum

30 Income and price effects on tourism demand 30 Analysis of tourism demand is hindered by the fact that in practice we normally only see the equilibrium of supply and demand in tourism markets and that change represents a shift from one equilibrium position to another. Thus we are properly examining tourism consumption rather than tourism demand. Nevertheless, sufficient market research and comparative studies exist to build reasonably accurate analyses of the effects on tourism demand of independent variables.

31 Effects of Income 31 The income or stock of monetary assets available to the tourism buyer is a group A variable - it relates to all potential buyers of a generating area regardless of their preferred tourism destination. A great deal of research measuring the effect of income changes on total tourism demand from a generator has been carried out. The strength of the effect that income change has on demand can be measured by income-elasticity of demand, defined as the following ratio:

32 Effects of Income 32 % change in tourism demand Ex = % change in disposable income between two time periods or two groups of buyers. It is normal to expect income-elasticity of demand to be positive for most goods and services; the demand for basic goods and services should be income-inelastic (Ey 1).

33 33 Many empirical studies have been done on income-elasticity of demand for tourism. In general demand has been found to be relatively income-elastic, if demand is measured by tourism expenditure, but less elastic if the measure is total tourist nights or numbers. Effects of Income

34 34 different income elasticities The following figure demonstrates the effect on tourism demand of different income elasticities. If income in a generator rises from Y o to Y 1 expenditure on tourism changes from Q o to each of the different levels Q 1 to Q 5. inferior The example of a tourism destination whose income elasticity of demand is negative argues that within some markets certain tourism products may be regarded as inferior products.

35 35 This is difficult to prove empirically without research to isolate changes in demand for a destination from one particular generator or a particular market segment and to monitor those changes with respect to that segments income. Overall tourism demand at that destination may meanwhile be increasing, as other market segments expand. Effects of Income

36 Figure : Income Elasticity of demand for different type of tourism 36 Business Income Meeting VFR Holiday Secondary Vacations Y 1 Y 0 0 Q0 Q1 Q2 Q3 Q4 Q5 Quantity Demanded

37 Effects of Price 37 The effects of price changes are far more complex in tourism than are effects of changes in income. Two particular price conditions are of note: Although the product element of a tourism package are complementary in terms of characteristics offered, they may well be substitutes in terms of price effects if they are competing for the same slice of tourist spending.

38 38 Relative prices Relative prices are important between destinations and generating areas, not just prices at destinations. In other words, consumer is not simply faced with the set of prices in one geographical market but with the relative prices. Effects of Price

39 39 In international tourism exchange rate variations are usually the major contributor to relative price differences. Over recent years, for example, exchange rate variations have made Switzerland and Japan expensive destinations, but most of medditeranean countries are cheap. However, relatively high inflation may have wiped out these price advantages. Effects of Price

40 40 As with income changes, the effects of price changes on demand can be measured with elasticities - in this case price - elasticity of demand through the formula: % change in quantity of tourism product demanded EP = % change in tourism product price

41 41 The standard Law of Demand in economics holds that for most products EP will be negative- that is there is an inverse relationship between a products price and the demand for that product. An EP figure numerically greater than –1 indicates elastic demand and an EP figure numerically less than –1 indicates price in elasticity or relatively unresponsive demand. Price elasticities are also unlikely to remain constant for any one product, varying between short term and long term and according to the size of price changes. Effects of Price

42 Price Effects 42 The demand for tourism products runs the whole range of possible price elasticities. In general the greater the degree of competition hence substitutability, amongst products, the higher the price- elasticity of demand is likely to be as price-conscious tourist search for cheaper alternatives. Once again price elasticities have been found to be higher for recreational tourism than for business or VFR tourism, reflecting the discretionary nature of the one against the obligations of the other.

43 Effects of Price 43 The choice of competitive destinations for vacation tourism appears especially responsive to price change. Long term (i.e. 6 years) price elasticity of demand for important destinations from major generating countries has been shown to vary from around – 4 for a small cost change (2.5 %) to around –1.5 for a large cost change (40%). demand schedule The resulting demand schedule for average destination country x is portrayed in the following figure:

44 Estimated demand responses to holiday price changes to destinations 44 Price A P 1 B P 0 C P 2 Demand Q2Q2Q2Q2 Q1Q1Q1Q1 Q0Q0Q0Q0 D 0

45 Effects of Price 45 Two cautions are necessary in interpreting this data. Firstly, tourism demand is here expressed in relative rather than absolute amounts, which may alter values from those found by a normal elasticity measure. aggregate data Secondly aggregate data may hide the fact that for an individual consumer a small price change may trigger no change at all demand, if that change is considered insignificant or below the perceptual price-change threshold of the consumer.

46 Effects of Price 46 An aggregate analysis also hides the extent to which the prices of individual elements of the tourism product influence overall demand; the cost of carriage is one major variable and that the overall cost of destination items, especially accommodation, is another, but the cost and value to a consumer of particular elements of tourism experience is not always well identified.

47 Effects of Price 47 For specific individual products within tourism the picture is clearer. Demand for budget accommodation and competitive passenger carriage services, for example, has been found to be highly price-elastic. If cross-price elastic is defined as: % change in demand for product A E cp = % change in price of product B then where A and B are close substitutes we might expect E cp to be positive and may be >1. This is frequently found in, for example:

48 Effects of Price 48 Budget motel or hotel choice in major destinations Selection of operator for local day excursion Souvenir purchasing and duty-free shopping Choice of busline or airline where these compete over the same routes.

49 49 In these cases the products may be viewed as nearly or completely identical, and E cp values are high. Some tourists find utility from shopping around for best buys as part of their tourism experience, or haggling in bazaars for a souvenir purchase - perhaps the closest a tourist can get to the overt display of an equilibrium market. Effects of Price

50 50 There may be in tourism cases of products exhibiting the Veblen effect. This is an abnormal price elasticity of demand where the E p value may be positive over a certain range of prices for a product. That is demand may actually increase at a higher price.

51 Effects of Price 51 It is argued that wealthy art collectors would not demand a cheap masterpiece, because it might not be a masterpiece at all, and because only an expensive work of an art would provide the prestige cachet (seal) which is part of the utility in such a purchase.

52 52 In the same way, some consumers need to demonstrate wealth and prestige through a demand for luxury tourism products such as the highest priced staterooms on expensive cruiseships, or the most expensive restaurant in which to entertain clients on sales trips. Effects of Price

53 Other special variables in tourism demand 53 There is a number of economic and socio- economic variables rather than prices and incomes which have been noted to have a special influence on the demand for tourism. Some of the major ones will be discussed here:

54 54 Fashion Tourism products, especially destinations are often subject to fashion life - cycles. Whilst most products exhibit demand life-cycles, in which the opinion leadership of those who first buy them (early adopters) forms fashion-stimulating demand, in tourism it is usually possible to identify exactly the market segments through which trends in demand are passing.

55 55 Taxation of business expenses Corporations meet the as an expense against corporate cost of tourism income. Government policy on the extent to which these expenses may be allowed against tax may alter the effective prices of tourism products and hence demand.

56 Taxation of business expenses 56 For example, suppose that the marginal corporate tax rate is 50 % and government introduces full tax deductibility (decrease) for tourism expenses. Following Figure shows the effect on demand.

57 Figure: Change in tax deductibility of business tourism expenses 57 Price S 1 P 1 S 2 P 2 P t D 0 Q 1 Q 2 Quantity

58 Taxation of business expenses 58 With an initial equilibrium market price of OP 1, businesses are purchasing the quantity OQ 1 of business tourism. Introduction of full tax deductibility reduces effective prices by the marginal tax rate of 50 %, thus effectively shifting supply from S 1 to S 2.

59 Taxation of business expenses 59 The tax deductible price of business travel falls immediately to P 0, and market movements may produce a new equilibrium at price OP 2 and tourism demand OQ 2. The increase OQ 1 - OQ 2 is possibly rather small because of the inelastic nature of business travel demand. In practice governments use tax deductibility far more selectively.

60 Negative characteristics of tourism products 60 In studies of motivation in the workplace, it has been found that while some variables positively motivate employees to work harder, others may merely grievance avoidance or hygiene factors, a pleasant working environment for example, might not take people to work harder, but its absence may cause grievances

61 Negative characteristics of tourism products 61 Various studies have suggested that a similar situation may exist in tourism demand, that is, some characteristics of tourism products may be positive motivators to their purchase, whilst the absence of others may discourage demand.

62 Time entitlements 62 In the same way that is possible to calculate the income elasticity of demand for tourism, we can examine the effect of changes in time entitlements such as the number of public holidays, amount of vacation leave and business trip constraints. Generally such entitlements are increasing worldwide as part of industrialization and automations replacement of labor with capital, and with social pushes for more formal leisure time.

63 Time entitlements 63 However as with income, there are global variations. In some European countries (for example, West Germany, Italy) standard vacation may exceed 28 days in a year, in addition to eight or nine public holidays, but in Japan 10 days leave a year is normal. Where time, and not money, is the effective constraint on tourism demand, any increase in entitlements has a very high positive time elasticity of demand.

64 64 Two particular cases are notable: Extra time allows trips to temporally more remote destinations and tourists are therefore likely to substitute remote destinations for closer ones Extra time often encourages longer stays in destinations thus increasing spending at the destination.

65 Seasonality 65 Tourism has one of the most seasonal patterns of demand for any product, with less variation than demand for Christmas cards or air conditioners, but more than nearly all high-value individual purchases. Several factors contribute to seasonality- principally climate, festivals, and school vacations which all primarily affect recreational tourism.

66 66 The outcome is that in reality, tourists and suppliers alike face more than one equilibrium position each year. Given that seasonality is largely institutionalized or directly affects major characteristics of the product (to do with the climate), many bounds (obligations) on demand are not variable by price or marketing inducements. Seasonality

67 67

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