Harvard Case - Zero-Fee Tours: An Irresistible Bargain or a Sinkhole?
"Zero-Fee Tours: An Irresistible Bargain or a Sinkhole?" Harvard business case study is written by Wen Zhou, Penelope Chan. It deals with the challenges in the field of General Management. The case study is 27 page(s) long and it was first published on : Jun 12, 2012
At Fern Fort University, we recommend that Free Tours by Foot (FTBF) adopt a hybrid business model, incorporating a tiered pricing structure with both free and paid tour options. This strategy will allow FTBF to address the growing demand for premium experiences while retaining the core values of accessibility and inclusivity that have made it successful.
2. Background
This case study focuses on Free Tours by Foot (FTBF), a global tour operator offering free walking tours in major cities. Founded in 2008, FTBF has grown rapidly, relying on a unique business model where tour guides are compensated solely through tips. This model has attracted a large customer base, particularly budget-conscious travelers. However, FTBF faces challenges related to financial sustainability, tour guide quality, and competition from paid tour operators offering more specialized experiences.
The main protagonists of the case study are:
- Paul: FTBF's founder, passionate about providing accessible and engaging tours.
- Sarah: A tour guide struggling to make a living solely on tips, considering alternative employment.
- John: A potential investor interested in FTBF's growth potential but concerned about its financial model.
3. Analysis of the Case Study
Strategic Analysis:
- SWOT Analysis:
- Strengths: Strong brand recognition, global reach, passionate tour guides, low operating costs, high customer satisfaction.
- Weaknesses: Financial instability, reliance on tips, inconsistent tour guide quality, limited scalability.
- Opportunities: Expansion into new markets, development of premium tour offerings, partnerships with local businesses, leveraging technology for tour management and marketing.
- Threats: Competition from paid tour operators, economic downturns, negative customer reviews, regulatory changes.
- Porter's Five Forces:
- Threat of new entrants: High, due to low barriers to entry.
- Bargaining power of buyers: High, as customers have numerous tour options.
- Bargaining power of suppliers: Low, as tour guides are independent contractors.
- Threat of substitute products: High, from other tourist activities and self-guided tours.
- Rivalry among existing competitors: High, with numerous free and paid tour operators.
Financial Analysis:
- FTBF's current business model relies heavily on tips, leading to inconsistent income for tour guides and financial instability for the company.
- The introduction of paid tours could provide a more stable revenue stream and allow for investment in quality control and expansion.
Marketing Analysis:
- FTBF has a strong brand based on accessibility and authenticity.
- A tiered pricing structure could attract a wider customer base, including those willing to pay for premium experiences.
- Marketing efforts should focus on highlighting the unique value proposition of each tour tier.
Operational Analysis:
- FTBF needs to implement robust quality control measures to ensure consistent tour guide performance and customer satisfaction.
- A hybrid business model would require adjustments to operations, including tour scheduling, guide training, and customer service.
4. Recommendations
1. Implement a Tiered Pricing Structure:
- Free Tours: Continue offering free tours as a core offering, focusing on accessibility and attracting budget-conscious travelers.
- Premium Tours: Introduce paid tours with enhanced experiences, such as smaller group sizes, specialized themes, or exclusive access to attractions.
- Differentiation: Clearly differentiate free and paid tours through marketing materials, website descriptions, and tour guide uniforms.
2. Invest in Quality Control and Training:
- Tour Guide Selection: Implement rigorous selection processes for tour guides, focusing on knowledge, communication skills, and passion for the city.
- Training Programs: Develop comprehensive training programs for all tour guides, covering historical knowledge, storytelling techniques, customer service, and safety protocols.
- Performance Evaluation: Establish a system for regular performance evaluation, providing feedback and opportunities for improvement.
3. Leverage Technology for Efficiency and Marketing:
- Online Booking Platform: Develop a user-friendly platform for booking paid tours, allowing customers to choose their preferred tour, date, and time.
- Mobile App: Create a mobile app for tour guides, providing access to tour information, customer reviews, and communication tools.
- Social Media Marketing: Utilize social media platforms to promote tours, engage with customers, and build brand awareness.
4. Explore Partnerships and Collaborations:
- Local Businesses: Partner with local businesses, such as restaurants, shops, and attractions, to offer exclusive discounts and packages to tour participants.
- Travel Agencies: Collaborate with travel agencies to promote tours to a wider audience.
- Non-Profit Organizations: Partner with non-profit organizations to offer tours that support local charities and initiatives.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The hybrid model aligns with FTBF's mission of providing accessible and engaging tours while addressing the need for financial sustainability.
- External Customers and Internal Clients: The tiered pricing structure caters to a wider range of customer preferences and provides tour guides with a more stable income.
- Competitors: By offering premium tours, FTBF can compete with paid tour operators while maintaining its unique brand identity.
- Attractiveness: The hybrid model offers a balanced approach to revenue generation, allowing for growth and investment in quality control.
- Assumptions: This strategy assumes that customers are willing to pay for premium tour experiences and that FTBF can effectively market and differentiate its offerings.
6. Conclusion
By adopting a hybrid business model, FTBF can address its financial challenges, improve tour guide quality, and expand its market reach. This strategy allows the company to maintain its commitment to accessibility while leveraging the potential of premium tours to attract a wider customer base and ensure long-term sustainability.
7. Discussion
Alternative Options:
- Maintain the current business model: This option would maintain FTBF's core values of accessibility but could lead to financial instability and difficulty attracting and retaining high-quality tour guides.
- Transition completely to paid tours: This option would provide financial stability but could alienate budget-conscious travelers and compromise FTBF's brand identity.
Risks and Key Assumptions:
- Customer acceptance: The success of the hybrid model depends on customer willingness to pay for premium tours.
- Competition: The market for paid tours is competitive, and FTBF needs to differentiate its offerings effectively.
- Tour guide quality: Maintaining high-quality tour guides is crucial for customer satisfaction and brand reputation.
8. Next Steps
- Develop a detailed business plan: Outline the specific details of the hybrid model, including pricing, tour offerings, marketing strategy, and operational adjustments.
- Pilot the premium tours: Launch a limited number of paid tours to test customer response and refine the offering.
- Invest in technology and training: Implement the necessary technology solutions and develop comprehensive training programs for tour guides.
- Monitor performance and adjust as needed: Continuously track key performance indicators (KPIs) and make adjustments to the model based on data and customer feedback.
By implementing these recommendations and addressing the risks, FTBF can position itself for sustainable growth while remaining true to its core values of accessibility and inclusivity.
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Case Description
In early 2003, an outbreak of SARS in Hong Kong led to a plunge in inbound travel to the city. Many local travel agencies started hosting below-cost inbound tours, dubbed "zero-fee tours", for mainland Chinese tourists. They make a profit by bringing these tourists to shop in designated retail outlets that charge them inflated prices but offer lucrative commissions to tour operators. Zero-fee tours first caught the public's attention in October 2006 when a group of tourists were abandoned at a pier because they spent too little while shopping. Then in June 2010, a tourist died of a heart attack after a heated argument with a tour guide over a shopping arrangement. Despite preventive measures implemented by the industry association, tourist complaints keep increasing and high-profile cases in which tour guides insult or even fight with tourists continue to happen. Trendy Travel Limited is a local travel agency that hosts regularly priced inbound tours. Facing strong market demand for zero-fee tours, it would like to understand the business model of zero-fee tours: what is the driving force, is it sustainable, and what are the impacts to the company and the entire industry? It also wants to determine how to position its inbound tour business in the short and long term.
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