ARTICLE IN PRESS

Hospitality Management 22 (2003) 217–235

Making price decisions in tourism enterprises

Jukka Pellinen*
Faculty of Economics and Business Administration, University of Oulu, Oulu, Finland

Abstract

This paper reports on a field study of pricing practices and their relationship to cost
accounting in tourism enterprises located in Finnish Lapland. Qualitative interviews were
conducted in six tourism enterprises, which varied in size, age, location, line of tourism
business, and their ownership structure. The case-specific routines of decision-making were
grouped into three main categories, namely, the imitator, the customer enticer, and the strong
calculator. The results of the study suggest that only the companies with the strongest
competitive position are able to use absorption pricing. Furthermore, as the majority of the
studied enterprises take the prices from the leading enterprises, the actual importance of cost
accounting is rather limited. The paper also presents evidence to suggest that price decisions
are made in regional and inter-regional networks of tourism enterprises.
r 2003 Elsevier Science Ltd. All rights reserved.

Keywords: Pricing; Cost accounting; Decision-making; Networks; Hotels; Programme services

1. Introduction

Very little is yet known about management accounting and its use in tourism
enterprises. The researchers in management accounting have traditionally been,
above all, interested in the accounting systems of large manufacturing companies. In
addition to that, most accounting researchers interested in service production have
conducted their research in non-profit seeking, public-sector organisations (see, for
example, Olson et al., 1998). There is no question about the importance of the above-
mentioned research traditions in accounting, but the number of studies on the
management accounting practices of other profit seeking organisations than auditing
firms has remained very limited (see Brignall et al., 1991; Sharma, 2002).
Interestingly, however, there is also an active discussion in hospitality management

*Tel.:+358-8-553-2580; fax:+358-8-553-2906.
E-mail address: jukka.pellinen@oulu.fi (J. Pellinen).

0278-4319/03/$ - see front matter r 2003 Elsevier Science Ltd. All rights reserved.
doi:10.1016/S0278-4319(03)00019-7
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218 J. Pellinen / Hospitality Management 22 (2003) 217–235

research on management accounting practices of tourism enterprises (cf. Harris and

Brown, 1998).
The objective of this study is to understand decision-making practised in tourism
enterprises in their real-life contexts. The more specific research topic is the pricing of
tourism products, as pricing is one of the most central management tasks in which
cost information may be of use. The research task is formulated as questions of how
price decisions are made in tourism enterprises and why and how cost accounting is
related to pricing, if at all.
In this study, however, decision-making is not presumed to be necessarily rational
(cf. Simon, 1976; Weick, 1995). One starting point for this study is the knowledge
acquired on the limits of the rationality of decision-makers. The theoretical
framework is in accordance with the non-rational decision-making school in
organisation studies suggesting that organisational goals may be unclear or changing
(Cohen et al., 1972), search for alternative ways of action may be limited and local
(Cyert and March, 1963), the process of analysis and choice may be politically
motivated (Pfeffer, 1981), incremental in nature (Lindblom, 1959) and routinised by
the application of procedures (Cyert and March, 1963) or more incidental than
considered (March and Olsen, 1979). Because the aim of this study is to investigate
price decision-making and the possible use of cost accounting in everyday
organisational contexts, it belongs to the ‘‘naturalistic’’ research approach in
management accounting (Tomkins and Groves, 1983; Hopper et al., 1987).
The article comprises four main sections in addition to the introduction. The next
section reviews the previous research in the accounting practices of tourism
companies. The third section presents the alternative principles and objects of pricing
in tourism. The fourth section reports on a field study of the pricing practices of
tourism enterprises in Finnish Lapland. The purpose of the last section is to explain
the findings from the field.

2. Research of management accounting in tourism enterprises

Studies of management accounting in tourism enterprises have been conducted

both in tourism management research and accounting research. Studies exist of the
various lines of the tourism business, more precisely, of passenger transportation
(Dent, 1991; Rouse et al., 2002), restaurants (Ahrens and Chapman, 2002) and hotels
(Sharma, 2002). Apparently, however, most of the studies have focussed on hotels
(see, Harris and Brander Brown, 1998).
The topics of the previous research cover the whole field of management
accounting. There are inquiries into the change of management culture towards
being more profit-oriented in a railway company (Dent, 1991), the design of
performance indicators in an airline (Rouse et al., 2002) and the social construction
in a restaurant chain (Ahrens and Chapman, 2002). As regards hotels, there are
studies on strategic management accounting (Collier and Gregory, 1995), hotel size
and other contingent factors explaining budget system features (Sharma, 2002), the
structure of the cost accounting system (Brignall et al., 1991), the general and relative
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importance of the knowledge in accounting techniques in hotel management

(Damitio and Schmidgall, 1990), the use of accounting information (Downie, 1997;
Mia and Patiar, 2001), the causes and consequences of implementing yield
management (YM) (Jarvis et al., 1998; Donaghy et al., 1998; Edgar, 1998), the
activity-based modelling of customer profitability analysis (Noone and Griffin)
and the roles and participation of controllers in hotel management (Moore and
Stefanelli, 1989; Pickup, 1985; Burgess, 1996; Gibson, 1998, 2002). Because the most
relevant topics from the standpoint of this study are the studies into the structure of
product costing in hotels and the meaning of accounting information in hotel
management, let us next consider these studies more closely.
The research by Damitio and Schmidgall (1990) measured the attitudes of hotel
managers and controllers about the significance of technical know-how of
management accounting in hotel management. The questionnaire clarified the
relative importance of 18 different management accounting techniques. The study
was conducted as a postal survey. The sample consisted of 400 hotel managers and
400 hotel controllers in the USA. The results indicated that the knowledge in
accounting methods was generally considered of importance or great importance.
The techniques that were usually considered the most essential were budgeting,
variance analyses, income accounting, pricing and financial planning.
The study by Downie (1997) clarified how hotel managers actually used
accounting information in their decision-making on marketing. The study was
conducted in nine hotels. Unlike the earlier studies that dealt with the relationship
between marketing and management accounting, marketing and management
accounting were not distant tasks in the hotels. The management in the hotels
noted the perspectives of both management accounting and marketing in their
decision-making on marketing, and the tasks of management accounting and
marketing were not separated in the organisation of the hotels; on the contrary, it
was typical for several different people to have duties in both marketing and
management accounting. The most relevant techniques in management accounting
were found to be cost–volume analysis, YM, room value engineering, the
profitability analysis of the market segment, and pricing techniques. The more
significant developmental step was considered to be introducing a YM system.
Subsequently, Mia and Patiar (2001) have studied the use of accounting
information in the management of luxury hotels. The research was designed to
uncover the differences in the intensity of use and the availability of accounting
information (frequency and details) between general managers and department
managers. The study was based on a rather small survey. Only 35 managers
participated in the study. The results of the study suggest that both general managers
and department managers use accounting information to a great extent. The
significant difference between the groups, however, was not in the intensity of use but
in the satisfaction with the available accounting information. The general managers
were more content with the accounting reports and they valued financial information
more than the department managers.
The research by Edgar (1998) clarified whether there were differences in YM
between large and small hotel chains. The material was collected from 10 large and
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30 small hotels using a telephone questionnaire. Based on the initial results, the small
hotels considered that YM was related to a low-cost strategy and the large hotels
thought of it as a multidimensional strategy.
Brignall et al. (1991) studied service enterprises operating in different fields. The
product cost accounting practices of service enterprises was studied through the case
studies of five large service enterprises. One of these enterprises was a hotel chain.
The other enterprises operated in consultancy, investment, news, and transport.
Three main results were obtained regarding their product cost accounting practices:
(1) valuing stock had the least significance for the tasks of cost accounting,
(2) calculating a full margin was used less than calculating a contribution margin,
and (3) cost planning and cost control focussed on cost pools according to the
functions of the organisation, because the products were obviously not practical
points for cost analysis. The product cost accounting for the hotel chain in the study
was carried out separately; its cost monitoring was organised by department and
product group. Full margin product cost management accounting was not
considered meaningful because the potential costs of the hotel were large and their
allocation to products was not considered significant.
To sum up, the previous studies on product costing and the use of accounting
information in hotels suggest that the knowledge in accounting techniques is
essential in management, the interaction between accounting and marketing is active,
and cost–volume–profit analysis, YM, segment profit analysis and cost-based pricing
techniques were among the most relevant management accounting techniques. In
product costing, variable costing was used more often than full costing. Moreover, it
is claimed that the implementation of YM in small hotels is generally motivated by
the low-cost strategy.

3. Pricing of tourism products

Pricing always requires an object to which the price applies. In normative

literature pricing usually focusses on physical products. A tourism service, however,
is not such a clear-cut object for pricing. The product may be defined in many
slightly differing ways (Medlik and Middleton, 1975; Smith, 1994). According to the
definitions, a product may be a bundle of products purchased by the tourist. This
package may include the journey, accommodations, and activities at the tourist
destination (for example, a Christmas trip from London to Rovaniemi).
Alternatively, the product may be a single service offered by an individual producer,
or a service produced for individual customers or customer groups (for example,
hotel accommodations or dog-sleigh rides). The object for pricing can also be a
geographic area or place (for example, Kuusamo or Finland). Besides a physical
place, pricing can focus on a metaphysical point (for example, the nascent experience
of silence for the tourist). There are therefore many possibilities in defining the
concept of a product for the purposes of pricing.
Pricing is often presented as a set of alternative principles or techniques that may
be used in pricing (see, for example, Nagle, 1987or Monroe, 1990). In general, there
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are four main means of pricing. Pricing may be based on competition, customer
psychology, cost or time. If pricing is based on sales and market share growth
targets, a low price is a means of competing for the market share, often combined
with the low-cost strategy. Pricing may also be based on customer psychology. In
this case, a high or low price is seen as a message regarding the quality of the product
or is connected to a certain life-style. ‘‘Skimming’’ pricing is usually a possible means
with new products or selected segments, when the price is not important for the
customers. It enables quick profits, but the chance of doing this may not last for a
very long time. In the high-price strategies, there is also a risk of driving the
customers away and losing in sales volumes what is gained in high prices. Third way
of pricing is cost based. The variations of cost-based pricing are gross margin,
absorption cost and return of capital employed pricing. In hotel room pricing, there
are also some conventional means, namely the $1 per $1000 method and the Hubbart
formula (Gu, 1998). Time may be thought of as the fourth basis of pricing. The
target may be the best possible sales revenues, margin or profit during a certain given
period. This requires good knowledge of the cost–volume–profit relationship and the
price elasticity of demand. It is also one means of pricing to change prices according
to phases in demand, competition, the life span of the product, and in the case of
tourism, the season. Other often mentioned means of pricing are intuition or the trial
and error method (Gu, 1998).
Particular in the pricing of tourism products are the many choices in defining the
concept of the product. To some extent at least the question is relevant to all service
products, but what makes the tourism product a special case is the great importance
of the geographic area and the subjective experiences of the tourists (cf., for example,
Gummesson, 1994).

4. The study

4.1. Method and methodology

The purpose of this study is to describe and explain the decision models and
processes of pricing used in practice. The study is descriptive case study as it is about
the nature of pricing and cost accounting practices. But it is also explanatory case
study as the role of theory is to help in understanding and explaining the specific
findings. Methodologically, the research was based on phenomenology suggesting
that the interviewees’ subjective knowledge is valued when acquiring the data and ex
post theorising is used, following the logic of inductive research (Wagner, 1970;
Berger and Luckmann, 1988).
The research material was acquired by making interviews on the spot in companies
located in three tourist regions in the Finnish Lapland. Six enterprises of different
size, age, and types of service in these regions were selected as the cases for the
research. Based on these criteria, the objective in selecting different enterprises was to
enable large variations within the observations. The companies were first
approached by telephone to name the persons who were responsible for pricing in
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each case, and to arrange a time for interviews. A list of themes was prepared before
entering the field (see the list of themes in Appendix A). Altogether six interviews
were conducted. In two cases, there were two persons taking part in the interview
(see the list of interviews in Appendix B). To start with, the interviewees were given
general questions about the context of price decision-making. Then, the theme of
price decision-making was inquired through more open interviews. All the interviews
were tape-recorded and transcribed. The data of this study consists of 8 h of
transcribed interviews, which were supplemented by the observations made on the
spot and the data acquired from the Internet pages or company brochures.

4.2. Analysis

The results of the field study are first reported by analysing the enterprises one by
one. Firstly, each enterprise is introduced in brief, after which the specific way of
price decision-making is described. Even though the rich descriptions may have value
as such, in each case also the questions of how decisions are made and why are
answered. Section 4.3 presents a summary of the main findings and makes
comparisons between the cases. In the data analysis, Bloor’s approach to analytic
induction was applied and theorising was carried out by categorising variations in
the phenomenon (see, Gill and Johnson, 1997, pp. 122–123).

4.2.1. Tourism services agency, East Lapland

The tourism services agency was established at the beginning of 1999 but by the
time of the interview, it had been in operation for only just 3 months. It is a one-
person enterprise. The idea of the tourism services agency is to operate as a
reservation centre for the East Lapland region. The entrepreneur defined packaging
and acted as an agent for accommodation and programme services as the products
of the Tourism Services Agency. The agency can combine single products into a
package according to the customer’s wishes and then invoice the respective service
producers for their products at a fixed commission.
The entrepreneur tries to take the size of the commission earned as an agency
directly from the markets. The general level for a tourism product agency is a 20%
commission for a transmitted product. During the initial phase of the business, the
entrepreneur had agreed a commission of 15% with producing enterprises. The
entrepreneur planned that as soon as the company becomes firmly established, the
commission would rise to 20%. In principle, the commission is the same for all
products and all enterprises whose products are intermediated through the central
reservation office.
The entrepreneur alone determines the commission and the only influential factor
is the acquired knowledge of the commission taken by other central reservation
offices. During the initial stage of the company, however, the entrepreneur
considered it wise to agree on the commission with each producer enterprise in
confidential negotiations. As the company has just started, a low-price strategy is
used as a means of promoting sales volume and building up the local demand. The
price is not a significant means of competition for a tourism product agency, as there
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are no other agencies in the same region. Competition in tourism is between the
regions.

4.2.2. Sallatunturi ski centre, East Lapland

The hotel on the edge of the Sallatunturi Fell as well as the downhill skiing services
located on the Fell itself are owned by a Finnish investment company. The
investment company, which owns eight other tourism sites, has owned the
Sallatunturi Ski Centre since 1994. Sallatunturi is a small ski centre. During the
season, the company employs 40–50 people.
The Managing Director estimated that the price was only a significant competitive
factor for summer tourism and groups. From his point of view, the price for tourism
in Lapland was not the most crucial factor influencing the buying decision. In
principle, the price is set according to the product, but the most important factor in
setting the price is to take into consideration prices of other ski centres. The price
must not be much lower or more expensive because tourists to Lapland are well
aware of the prices. For selecting the destination, the most sensitive points for
pricing are half-board and accommodations. In principle, the prices for programme
services can differ more because they do not have such a large significance in
selecting the destination.
The logic in setting prices depends on the product in question. Setting the prices
for restaurant and accommodation products differs from setting the prices for slope
services. The prices in the restaurant are set exactly based on cost. A ‘‘portion card’’
is prepared for each item on the menu. This card includes the raw materials,
quantities, and the variable unit costs are exactly determined. A restaurant meal is
priced by multiplying the unit cost by a target margin percent. The prices are checked
when the costs for raw materials change. The starting point for planning the menu is
determining the target prices for the most expensive and cheapest meals. Following
this, the aim is to make the menu as tempting as possible, so that a high-sales volume
would be reached.
The pricing of accommodations is based on two factors. One is the general
price level and the other is the level of accommodations. The price for lift tickets
is the market price. According to the Managing Director, there is a maximum
5% range in the prices at ski centres. The lifts give a very good margin and costs
have no significance in setting prices. Customers come to the ski centre to go
downhill skiing and will buy ski lift tickets in any case. Since the price does not differ
from the general level, the price does not form an influential factor in the decision
to buy.
In addition, the Sallatunturi Ski Centre participates in the price decision-making
of the other enterprises in the area that provide services for the customers of the
centre. Because customers come to Salla for the activities it offers, it is important
that the prices for programme services do not differ from the price levels at other ski
centres. Especially when planning service packages for company groups, the prices
for programme services are important when customers make their decision to buy.
The entire organisation is included in the price decision-making process. Each
employee influences customer satisfaction through his or her activities and the
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feedback received by the employees is one influential factor in the decisions on

pricing.
The employees note everything [y] although only a few people decide prices,
pricing is linked to the entire organisation. Everyone has an influence without
even noticing it.
In particular, the MD emphasises the significance of the Shift Managers, because
they are in contact with the customers the most.
The decision-making on pricing is associated with setting objectives, which
especially takes place with the annual budgeting. Each year an attempt is made to
improve the contribution margin ratio either by raising the prices or reducing the
costs.
Price decision-making is also a never-ending process. The development of costs is
constantly monitored and an attempt is made to transfer the changes in costs to
prices. Offers for tourist packages have to be continually made to groups and there
are regular exceptions from the budgeted price for groups. Groups often set different
tourist destinations in competition with one another to try to force the price down.
Pricing decisions are formed through the interaction of several employees, and the
logic of decision-making varies by product. Whilst the pricing decisions of restaurant
products are based on cost accounting, the price decisions for downhill skiing
products are influenced by the pricing decisions of other ski centres, and the pricing
decisions for accommodation and half-board are influenced by the pricing decisions
of other hotels. Of the customer groups, the price for summer tourists and tourism
groups has the most significance, and price decision-making is an essential part of the
trade with these groups. The other important factors in the price decision-making of
the hotel manager are the price decision-makers at other hotels and ski centres,
summer tourists and tourist groups as well as the internal organisation, especially the
Shift Managers.

4.2.3. Reindeer park, East Lapland

The operation at Reindeer Park is organised as a co-operative. It was established
in 1996. The co-operative includes 22 shareholders, of which 10 are active
entrepreneurs. The shareholders offer their own special resources as marketable
products for sale through the co-operative. Three dog-sleigh entrepreneurs, one
restaurant employee, a clerk, a masseur, and five wilderness guides actively work in
the co-operative. From the perspective of tourism in Salla, the existence of Reindeer
Park has begun to be seen as an attraction for all enterprises in the region.
Prices have been considered an important influential sales factor at the Reindeer
Park. To speed up sales, it was decided to keep prices during the start-up phase
relatively low. The increase in the volume of activities was believed to grow with the
confidence of the customers in the ability of the entrepreneurs at the Reindeer Park
to produce programme services. It has proven difficult, however, to raise prices.
Since the outset, the idea of the Reindeer Park has been to offer quality services to
relatively few customers. In the opinion of those interviewed, the price is not a
significant factor if the customer can be satisfied. From the perspective of the quality
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of programme services, the problem is that the customers know the quality of service
only afterwards, while the price is always agreed in advance. It is hoped that a high
price will give the customer a message about the quality of service.
To some extent, the logic of price decision-making differs for each product. The
price for dog-sleigh rides is set based on the cost for equivalent services elsewhere in
Lapland. Initially, the reindeer product was priced quite low, but the prices have
been adjusted according to how the product has developed in operations. Journey
products are priced as elsewhere in Lapland, but this is done only when comparable
products only can be found.
The product costing is based on the use of agreed unit prices. An hourly rate has
been agreed with the guides and it is easy to clarify the costs of the materials used.
From the perspective of company finances, a wise target price is achieved by
multiplying the costs of time and the material used by the margin percentage
required covering company overheads and the desired profit.
A pricing ‘‘module’’ has been formed to simplify pricing for the services on sale. A
unit price, based on direct costs and the desired margin, has been calculated for each
‘‘module’’. It is easy to calculate the price of a product variation at any given time
using the unit prices. The guides’ salaries are the single largest cost.
Services are usually priced individually as participation fees. However, a minimum
number of participants have been set for some service products. A service is also
provided for smaller groups, but then a fixed group price is used.
A five-person group making the operational decisions was formed within the co-
operative. The members of the group were the clerk, the people responsible for the
dog-sleigh activities and the reindeer programmes and programme services, and the
person that runs the restaurant.
Other service producers and the hotel manager in the ski centre significantly
influence price decision-making. The notable factors in price decision-making are the
low volume of sales, the working of service products and cost accounting. Both the
margin and absorption costing are used in setting the target prices. A low-price
strategy is prompted by the small size of the local markets, the relatively young age
of the company, competition with other service producers in the area and the role of
the ski centre hotel manager as the services agent in the area.

.
4.2.4. Pyhatunturi ski centre, Central Lapland
Pyh.atunturi Ski Centre comprises seven ski lifts on the slopes as well as a
restaurant and hotel accommodations on the Pyh.a Fell. The Pyh.atunturi Ski Centre
was established in 1964. The increase in beds from 900 to 3000 at Pyh.atunturi
describes the growth in the area over the past 10 years. At the same time, the
company’s turnover has increase threefold. Despite its huge growth, Pyh.a is still a
relatively small ski centre. Based on the number of calculated days for skiing, a
further seven ski centres of a larger size than Pyh.atunturi can still fit into Finnish
Lapland.
The person interviewed is responsible for the company business operations. In his
opinion, the actual product of the company is experience. The experience desired by
each customer is formed from slightly different parts. The company aims to offer its
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customers the opportunity for their choices, so that everyone would finally have the
possibility for the experience that he or she desires. Downhill and cross-country
skiing are traditionally important products offered by the fell centre, but many other
forms of moving on the snow are on offer these days: telemark skiing,
snowboarding, snowmobiling, ice climbing, snowshoe walking, husky sleigh rides,
and reindeer driving. Customers have the possibility to buy services either singly or
once in an ‘‘experience package’’, which includes a range of the different activities
offered by the company.
The main principle guiding price decision-making at the Pyh.atunturi Ski Centre
was defined as the market price. The products for the holiday season are priced at
one time and sold at the prices defined in the price list. Prices are not adapted for the
sale of individual products.
Although information on costs does not have any direct influence on price
decision-making, it is utilised in the post-examination of the margin, which again is
significant in deciding prices. Because the company controls the hotel, restaurant,
and lift operations, product packaging is possible. If the package price is at the
market level, then this packaging, in some cases, may require adjusting of the
margins in line with the cost of lift tickets, for example. Here, the package offered to
a customer can be at the market level, even if the lift tickets, normally included in the
package, are not included. In planning package offers, it is also important to know
the costs of a product, which set the minimum target for pricing.
Direct costs are calculated exactly. For example, the average costs for the water,
electricity, heating, and cleaning related to accommodations are monitored per
accommodation day. The margin is added to the direct costs. The price proposal
based on costs becomes an interesting point of comparison with the market prices
taken from competitor price lists. In deciding the sales price, attention is paid to both
the market price and the price calculated on the basis of costs

The list price is the ceiling. And we know the absolute minimum. But then when
we think about real group sales, then there’s room to play. Then, when we know
that they eat long lunches and good dinners, and then they go up on the hill and
also rent equipmenty

The decisions on price lists are made once a year. The issues to be noted are the
average development of the number of customers during the previous year and
public holidays. The principle of dividing the ski season into normal and ‘‘ski cheap’’
seasons also relates to pricing.

When we know that this year Independence Day falls on a Thursday, then it
means we’ve got a good long weekend. But when it’s on a Saturday then welly

The final sales price is decided by the operations manager at Pyh.a. Two other
central people in the management of the company are involved in the pricing
decisions. The managing director, the marketing manager, and the operations
manager form a company management group that determines a certain margin for
prices. The margin determines the list price and the lower limit of the price, in other
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words the largest possible discount. The management group discusses the margin
continually.
Others influential in the price decision-making by the operational manager of the
ski centre are the managing director and the marketing director in Helsinki, other ski
centres in Lapland, the price decision-makers at the restaurants in the Helsinki
centre, and company customers. In price decision-making, the information is sought
from the price lists of other ski centres, the sales statistics, the calendar, and the
margin pricing for bundled products. For individual tourists, the pricing is mainly
psychology based, and not an important question as far as it does not differ from the
prices of other ski hotels in Lapland or the restaurant prices the most of the
customers coming from Helsinki region are used to. For groups, the low-cost
strategy is due to the relatively small size of the centre and competition between the
regions.

4.2.5. Programme services, Rovaniemi

The Programme Services enterprise in Rovaniemi organises active experiences in
nature. Besides Rovaniemi, the company also operates in Saariselk.a. Programme
Services was established in 1982. The company is the oldest programme service
business in Finland. Its capacity also makes it one of the biggest enterprises in the
field in Europe. Its annual number of customer service days is about 38,000 in
Rovaniemi and about 9000 in Saariselk.a.
The company products can be thought of based on their names—for example,
Reindeer Farm Safari 3 h. However, it is only a framework within which the guide
and the customer make the final product. The programme products produced by the
company divide into two main groups. One group is programmes that have been
ordered and the other group is the standard programmes included in a weekly
programme. The weekly programme includes safaris that are organised in advance
according to a planned programme. There are four to five programmes each day. A
fixed fee is charged for the weekly safaris and the programmes are arranged
independently of the number of participants.
In the winter, the most important products are snowmobiling and different
activities in the snow. The destinations vary from reindeer and dog farms to a
trapper’s cabin. The summer programmes often include dogs and reindeer, and the
animal programmes are realised through subcontractors. Jeeps, mountain bikes,
canoes, or boats are used to move through nature in the summer.
The costs of products are controlled and prices adjusted as any changes in costs
come up. The separate costs for each order are calculated and the overhead costs
allocated according to the planned capacity utilisation. The separate costs of an
order consist of the costs for purchased services and guides.
A model has been developed for pricing tailor-made products. Its final version was
introduced in the summer of 1999. The pricing model uses a spreadsheet, and
attempts to allocate the overheads of the organisation in ‘‘more and in more detail’’
to products.
The overheads include the maintenance costs for the existing properties under the
control of the company, which are directed to the products based on the number of
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customers. The capital, insurance, servicing, garage, and maintenance staff costs, as
well as the other costs for maintaining the snowmobiles, are divided on the basis of
the number of departures. Thus each snowmobile departure is a unit cost, to which is
added the operating costs for each product according to the number of hours spent.
In addition, the administrative and other overheads are focussed on products using a
special coefficient.
Pricing has been organised so that every one of the five sales persons in the
company can independently decide on tailor-made offers of up to 8 333h. Price
decisions regarding offers ranging from 8 333 to 16 666h have to be made in
consultation with another sales person, so in a way the offer has to be approved.
Offers in excess of 16 666h have to be approved by the sales manager. Offers
exceeding 33 333h have to be approved by the company management group. The
marketing manager approves price changes for list products. The list product prices
are checked only once each season.
One objective in the organisation of pricing and the use of the pricing model has
been for prices to remain the same, regardless of the person doing the pricing. When
the company was smaller, price decisions were made in the entrepreneurs’ heads,
without any systems. There are several people making price decisions in the
organisation, but they have to work together. The company owners, the Sales
Manager, and the company’s bookkeeper developed the pricing model.
Price decision-making has been defined as a formal system in which decisions are
based on absorption costing and the rights and means for making a decision have
been clearly defined. Besides the two entrepreneurs, the important influential factors
in price decision-making are the customers and the products. Price decisions are
based on the information produced by cost accounting, but often the relatively high
price has to be justified to the customers. In justifying the price, the important factors
are especially the technical features of the products. The psychological factors of the
products are seen as most important for justifying the price, but their use for this has
been problematic because the satisfaction is known only after first consuming the
service. The cost-based pricing is possible because of the size, age and strong
competitive position of the company.

4.2.6. Centre hotel, Rovaniemi

Centre Hotel is in the centre of Rovaniemi. The hotel lists about 100 employees.
The manager thinks the hotel product is a complete experience—from the
moment the customer steps into the hotel to the moment that he steps out of the
hotel.
A feature of hotel operations in the Rovaniemi tourism district is the hard price
competition between hotels. The hotel manager has taken the revenue management
system as a special focus of development. In principle, revenue management is an
attempt to get a maximum yield for each room at the time, each time. This is done by
noting the seasonal changes and pricing the rooms for each season, so that the prices
and the usage produce the optimal profit each time.
Sales statistics are used in a computer program to try to forecast the coming
occupancy rate of the hotel based on the reservations that have been made. Several
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J. Pellinen / Hospitality Management 22 (2003) 217–235 229

pricing categories are in use. These categories are considered open or will be closed
when the forecasted occupancy rate of the hotel exceeds a predetermined level.
Variations in demand take place within the year, month, or week. For this reason,
accommodation is priced differently on different days during the week. Forecasting
seasonal variations is based on sales statistics and on the continuing and systematic
monitoring of the reservation situation.
According to the hotel manager, pricing cannot, however, be mechanical; rather,
the decisions leading to profits must be made holistically. There must be ‘‘humanity,
creativity, and feeling’’, but the use of a formal system ensures that pointless
mistakes are avoided.
Many hotels in the hotel chain employ a revenue manager, whose main task is to
make active price decisions and to monitor the development of occupancy rates and
revenue. The revenue manager is high in the hotel hierarchy, and his authority is
often next to that of the managing director.
Product development and pricing for the restaurant is centralised in the hotel
chain. The planning and pricing for incentive journeys is given to the programme
service enterprise from which the programme services are obtained. The programme
service enterprise prices the programme package and incorporates the accommoda-
tion price provided by the hotel into the package.
Price decision-making differs for each product. The pricing for hotel rooms
is organised through a formal revenue management system. Other significant
parties affecting hotel room price decision-making include the managers of other
hotels in Rovaniemi and the decision-makers in the hotel chain. For restaurant
products, the hotel chain makes the pricing decisions. The rights of the hotel
manager to make price decisions is limited by the hotel chain. As far as the hotel
manager has the right for hotel room pricing it is based on the sales information
offered by a formal revenue management system mixed with trial and error methods
and intuition.

4.3. Summary of findings

According to the research, price decision-making in tourism enterprises, except in

the case of a one-person company, takes place in groups. In one of the ski centres,
decision-making took place through the interaction of the managing director, the
shift manager, and the other customer service staff. In the other ski centre, price
decision-making took place through the interaction of the operations manager, the
marketing manager, and the managing director. In the smaller programme service
enterprise, price decision-making is made in a group consisting of the clerk, the
person in charge of the restaurant and the three wilderness guides responsible for
different products. In the larger programme service company, there was a clear
hierarchy for price decision-making, and the people participating in the decision-
making varied according to the size of the offer. Routine-like pricing for offers took
place through a formal pricing model and clear decision rights. The sales manager,
marketing manager, managing director, and the bookkeeper controlled decision-
making by defining the pricing model and decision rights. Besides the hotel manager,
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230 J. Pellinen / Hospitality Management 22 (2003) 217–235

the hotel revenue manager and the decision-makers in the hotel chain’s head office
participated in the price decision-making for the hotel in the centre of Rovaniemi.
The pricing process, where target prices and margins are set, is mainly realised
once a year. In enterprises with a selection of products, a price list was drawn up
once a year and the unit costs were calculated for the price decision-making. The
price decision-making during the year took place within a certain pricing range that
was planned in advance. Pricing for offers was a continuing process for product
packages for tourist groups.
The pricing objects were primarily those concrete products that a company itself
produced. Price lists or several basic modules, the prices of which had already been
determined, were used in the daily pricing of different products. In addition, price
decision-making focussed on the product packages produced by a few companies in
the region and jointly offered to the tourist. That was the case especially in the
hotels.
In decision-making, the essential factors in pricing varied by the object and the
company in question (Table 1).
Cost accounting was used in a variable fashion. It was practised in companies but
the frequency and logics of costing and the significance given to cost information in
pricing varied greatly. In the one-person company cost accounting was used only for
identifying the minimum price. The use of cost accounting in the smaller programme
service enterprise was mainly limited to once a year when determining the variable
costs and target prices of product modules. In the ski centres, the hotel in the centre

Table 1
Pricing objects and basis of price decisions

Pricing object Decision basis

Agency service Bigger agencies decide

Accommodation Bigger hotels decide the basic level, which is adapted according to
the relative quality of the hotel, or revenue management
Downhill skiing ticket Bigger ski centres decide
Restaurant product Variable cost, or the Helsinki centre market price, or hotel chain
decides
Programme service Absorption cost, or bigger companies decide
Price list Revenue and profit targets, calendar, revenue statistics, variable and
fixed costs
Product name Recognition and image
Basic accommodation and skiing Bigger skiing centres decide
package
Week programme Absorption cost, season, revenue statistics
Ordered programme Absorption, or variable cost, competition
Company incentive travel Absorption cost and customer psychology
package
Destination Size as volume of customers, image, customer segment
Customer segment Product differentiation, speciality, variable cost and competition or
absorption cost and psychology
Customer experience Product name, expected quality of experience
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J. Pellinen / Hospitality Management 22 (2003) 217–235 231

of Rovaniemi, and the larger programme service enterprise, cost accounting was
more continuous, and costs were controlled even on a daily basis.
The product cost accounting of most companies can be characterised as variable
costing. Only the direct costs, the causes of which were possible to measure
objectively based on the consumption of physical resources, were usually allocated to
products. There was only one company in which absorption costing clearly was in
use.
To typify the practices of price decision-making, enterprises can be divided, on the
other hand, according to which object the decision-making is focussed on and, on the
other hand, according to the most important basis for the decision. The practices
differed with respect to the object in accordance with the degree that customers were
segmented and products differentiated. Cost accounting and the other decision-
makers in the market are the main grounds for price decisions.
In all cases, the respective approaches to price decision-making made sense, and it
also seemed that in most cases there was a shortage of sensible alternatives. At best,
the decision-making may be characterised as routine (cf. Cyert and March, 1963).
The routines of decision-making were maintained by the use of price lists, statistics
and spreadsheet applications, partnership agreements, cost and profit accounting by
customer segments and products, or by defining the decision rights or transferring
the decision-making to other enterprises. Based on the differences and similarities
between the cases, three main categories of price decision-making were formed: (1)
imitator; (2) customer enticer; and (3) strong calculator.
The imitator type allows the price decision-makers in other enterprises to decide
the price on his behalf. For the imitator, price decision-making has no great
meaning. The customer enticer also allows the price decision-makers in other
enterprises to decide the price on his behalf but in contrast with the imitator type,
price decision-making is seen as being of great importance for the success of the
business. In the price decision-making of the customer enticer, the objective is
actively to create a price image in the minds of the customers or potential customers.
Pricing is mainly based on competition and customer psychology, which are
intertwined in practice. The strong calculator was distinguished in the study as the
third type of price decision-maker. The strong calculator establishes price decisions
on cost accounting and creates an image of customer segments and products through
active use of cost accounting in his organisation. To some extent, the features of all
three types can be found in all enterprises. However, each individual company is
clearly closer to one of the three archetypes. As much as the pricing was found to be
routine, the research data suggests that nothing but intuition or trial and error would
be rather weak explanations for what was found in practice, even in the newly
founded micro-enterprise.

5. Conclusion

As the research in everyday management accounting practices has previously

uncovered, accounting may not always be as important as we think (Berry, 1984).
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232 J. Pellinen / Hospitality Management 22 (2003) 217–235

The data of this study suggests that the chances for cost-based pricing are markedly
limited, and in most of the cases prices are set on other grounds than cost. This
result may be considered conflicting with the results in the survey conducted
by Damitio and Schmidgall (1990), in which hotel managers let the researchers
know that accounting techniques, in general, are essential in hotel management.
The hotel managers in the USA and the small tourism enterprises in the Finnish
Lapland are, however, very different research objects, which may explain the
discrepancy of the results to some extent. Moreover, this study concentrated only on
cost accounting and its use in pricing, as the research object in Damitio and
Schmidgall’s study was much broader. Also the research approaches and settings
were different.
The study revealed significant differences in the pricing practices of the
tourism enterprises. Three categories were identified, namely, the imitator,
the customer enticer and the strong calculator, describing the differences in
the pricing practices. Low price as an essential competitive means was found
especially in the programme service enterprises of the small tourism regions,
which were also typical customer enticers. The skimming-of-the-milk method
is applied in the companies organising incentive journeys and during the high
season in hotels. The organising of incentive journeys is the most active in the
leading programme service enterprise that co-operates with the hotels. Also,
hotels mainly belong to the customer enticer category. Among the cases, only
the leading programme service enterprise belonged to the strong calculator
category. The research data suggests that only the companies with the strongest
competitive position are able to use absorption pricing. The prices change according
to the point of time, and in one hotel a revenue management system has been
developed to assist in active pricing. The development of YM, however, did not
come up in any of the cases, even though the pertinent single activities were generally
in use.
The differences in pricing practices may be explained from the theoretical
standpoints of contingency theory (see, Chapman, 1997). The purpose is now to
identify the features from the data that best explain the differences. The most
apparent finding is that the company age and size are related to the extent to which
cost information is used in pricing. In the youngest and also smallest companies, cost
accounting was mostly used only once a year in defining the target margins and
short-term minimum prices. The companies that had operated for a long time and
grown in size have better possibilities for absorption pricing. The leading programme
services enterprise was, however, the only one in which the allocation of overheads
was considered of such importance that some kind of activity-based costing has been
taken into use.
The study uncovered local networks within the studied regions, but also wider
inter-regional networks. Theories of industrial networks are applied next in order to
set the price decision-making of single enterprises in a wider context (see, for
example, Tikkanen, 1997). Industrial networks are examined as dyadic or multiple
relationships between the actors belonging to a network, which are understood as
outcomes of interaction processes. The qualities of networks may be analysed as
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J. Pellinen / Hospitality Management 22 (2003) 217–235 233

relationships, dependencies, connections and positions (Engwall and Johanson,

1990). The results of the study suggest that the biggest tourism enterprises in the
pricing networks decide the prices that several smaller enterprises are following.
The pricing situation in the small local programme service enterprises is the
tightest of the studied enterprises. The relationship between regional ski hotels and
programme service enterprises is based on a resource dependence, and the
market mechanism is sometimes replaced by hierarchy from the part of regional
ski hotels (cf. Buckley and Michie, 1996). The most crucial resource that came up in
the study, and which the small programme service enterprises have a shortage of and
the ski hotels have control over, are customer relations (cf., Ha( kansson and Snehota,
1995). The knowledge of the leading programme service enterprise in Finnish
Lapland and the local ski hotel manager’s interest for competitive pricing of the
tourism region are defining the pricing range for local programme service enterprises.
In the small tourism regions, profitable pricing entails a very careful balancing
between the sales price and the sales volume. But also the hotels in small and middle-
sized tourism regions take the prices from the biggest and most attractive skiing
resorts in Finnish Lapland. The prices in restaurants may even be taken from the
restaurants in the Helsinki centre, where most of the customers in ski hotels are
coming from.
The study contributed to what is known about accounting practices in service
companies, and especially in tourism enterprises. As Brignall et al. (1991) have
reported on the structure of costing in service enterprises, this study reported on the
use and non-use of cost information, especially in deciding the prices for tourism
products. The study also adds to our knowledge on the use of management
accounting and its limits, in general, particularly in the case of tourism enterprises,
programme service enterprises and hotels. (cf. Damitio and Schmidgall, 1990;
Downie, 1997; Mia and Patiar, 2001).

Acknowledgements

The author would like to thank the two anonymous reviewers, and the session
participants of the 22nd EAA Annual Congress in Munich (April 2000).

Appendix A. The list of themes

* Tourism region in general and other tourism companies in the region
* The company (size as cross sales, number of employees and customers, business
idea, organisation, facilities, business situation, How are you doing?)
* Product concept(s) and product development
* Pricing (how, who, issues that matter in pricing, pricing process, when and how
often)
* Cost accounting (objects, cost structure of the firm, the structure of product
costing, variable or absorption costing, cost centres)
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234 J. Pellinen / Hospitality Management 22 (2003) 217–235

Appendix B. The interviews

The interviews were conducted within the time span from 9 April 1999 to 24
September 1999.

Company The Interviewees Duration

Services agency Entrepreneur 1h
Ski centre, East Lapland Managing director 1.5 h
Reindeer park, East Lapland Administrative manager 1h
and operations manager
Ski centre, Central Lapland Operations manager 1h
Rovaniemi programme services Managing director and 2h
marketing manager
Rovaniemi centre hotel Hotel manager 1.5 h

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Jukka Pellinen is an acting professor of management accounting at the University of Oulu. He teaches in
the area of cost accounting and management control. His research interests lie in the management
accounting practices as part of organisational behaviour. He holds a Ph. D. in Economics (Accounting).