Monsoon Discount at Annapurna Trails
Annapurna Trails, a Pokhara-based trekking agency, sells a fixed 11-day Annapurna Base Camp package. Its annual plan sheet records gross bookings, cancellations and the average revenue per trekker charged in each quarter: Q1 (Jan-Mar) 420 bookings, 30 cancellations, Rs 62,000; Q2 (Apr-Jun) 260 bookings, 18 cancellations, Rs 58,000; Q3 (Jul-Sep) 180 bookings, 12 cancellations, Rs 55,000; Q4 (Oct-Dec) 540 bookings, 45 cancellations, Rs 65,000. Cancelled bookings pay nothing. Each trekker costs the agency Rs 34,000 in permits, teahouse payments, transport and guide shares, all variable. Office and marketing fixed costs are Rs 1,05,00,000 a year.
The accountant built the revenue line by multiplying gross bookings by the average price. The marketing officer proposes a 10 percent discount in Q2, expecting a 25 percent rise in gross bookings with cancellations unchanged at 18. The operations head warns that guide and permit capacity is already tight in Q4, and that discounting in the monsoon may reset the price expectations of repeat customers.
1. Compute the year's net revenue and net contribution, quantify the error in the accountant's revenue line, and state the weighted average revenue per trekker.
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Net revenue by quarter
| Quarter | Gross | Cancelled | Net trekkers | Price (Rs) | Net revenue (Rs) |
|---|---|---|---|---|---|
| Q1 | 420 | 30 | 390 | 62,000 | 2,41,80,000 |
| Q2 | 260 | 18 | 242 | 58,000 | 1,40,36,000 |
| Q3 | 180 | 12 | 168 | 55,000 | 92,40,000 |
| Q4 | 540 | 45 | 495 | 65,000 | 3,21,75,000 |
| Year | 1,400 | 105 | 1,295 | - | 7,96,31,000 |
Accountant's method: 1,400 gross bookings priced by quarter = Rs 8,61,20,000. Overstatement = 8,61,20,000 - 7,96,31,000 = Rs 64,89,000, exactly the cancelled bookings priced at their quarter's rate (30x62,000 + 18x58,000 + 12x55,000 + 45x65,000). The sheet is not arithmetically wrong; it is counting people who never travelled.
Weighted average revenue per trekker = 7,96,31,000 / 1,295 = Rs 61,491. Note this is neither the simple average of the four prices (Rs 60,000) nor the gross-booking average, because Q4 carries both the highest price and the largest volume.
Contribution: 1,295 x Rs 34,000 = Rs 4,40,30,000 variable cost, so contribution is Rs 3,56,01,000; after Rs 1,05,00,000 of fixed costs, profit is Rs 2,51,01,000.
2. Evaluate the Q2 discount proposal on a contribution basis, including a break-even check on the volume increase needed.
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Revenue rises; contribution falls.
Proposed Q2: gross bookings 260 x 1.25 = 325; cancellations unchanged at 18, so 307 net trekkers. Price = 58,000 x 0.90 = Rs 52,200. Contribution per trekker = 52,200 - 34,000 = Rs 18,200.
- New Q2 contribution: 307 x 18,200 = Rs 55,87,400
- Current Q2 contribution: 242 x 24,000 = Rs 58,08,000
- Change: -Rs 2,20,600, about 3.8 percent down
Revenue, by contrast, rises from Rs 1,40,36,000 to Rs 1,60,25,400 (+14.2 percent). This gap is the whole lesson: each extra trekker now yields Rs 18,200 above variable cost instead of Rs 24,000, and 65 extra trekkers cannot recover Rs 6,000 given away on each of the 242 who would have come anyway.
Break-even check: holding contribution at Rs 58,08,000 at Rs 18,200 each requires 58,08,000 / 18,200 = 319.1, so 320 net trekkers, or 338 gross bookings - a 30 percent rise, more than the 25 percent forecast. The proposal fails even on its own optimistic assumption that cancellations stay flat, which is unlikely when a discount attracts more price-sensitive, less committed customers.
Recommendation: reject the straight 10 percent cut; test a smaller discount in Q3 only, or add value (free porter, better teahouse) instead of cutting the headline price.
3. The finance director says the discount still 'brings cash in the lean season'. What non-financial factors should decide the final call, and how would you structure a limited trial?
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Four factors that can overturn a spreadsheet.
- Price reference. Trekkers compare and talk. A published monsoon rate becomes the anchor for returning customers and for agents, so a temporary discount can become permanent. This is the marketing officer's risk, not the accountant's.
- Capacity, not just demand. The constraint is in Q4, where guides, permits and teahouses are already tight; filling Q2 does not relieve Q4, and if guides are reallocated to the monsoon, Q4 service quality falls. Capacity is where the marginal rupee is really earned.
- Safety and reputation. Monsoon trekking carries landslide and leech-season risk; a discount that attracts inexperienced trekkers into a risky window creates liabilities that dwarf Rs 2.2 lakh of contribution.
- Cost behaviour. Teahouse and transport rates may not be fixed during the monsoon, and guide shares may have to rise to attract staff in the off-season, which would shrink the Rs 18,200 further.
How to trial it: restrict to Q3 (weaker than Q2), cap the offer at 60 trekkers, quote a separate 'monsoon package' with its own inclusions so the standard price is not visibly cut, track cancellation rates and repeat bookings for 12 months, and set a walk-away contribution floor before launch. Measure on contribution and on the Q4 pipeline, not on headcount.