18 www.r-economy.ru R-ECOMONY, 2018, 4(1), 18–27 doi: 10.15826/recon.2018.4.1.003 Online ISSN 2412-0731 Original Paper FOR CITATION Njegovan, N., Demirović, D. & Vaško, Ž. (2018) Selection and application of pricing strategies in rural tourism: the case of Vojvodina’s farmsteads. R-economy, 4(1), 18–23. doi: 10.15826/recon.2018.4.1.003 FOR CITATION Ньегован, Н., Демирович, Д., Вашко, Ж. (2018) Отбор и применение ценовых стратегий в сельском туризме: пример хозяйств Воеводины. R-economy, 4(1), 18–23. doi: 10.15826/recon.2018.4.1.003 doi: 10.15826/recon.2018.4.1.003 Selection and application of pricing strategies in rural tourism: the case of Vojvodina’s farmsteads Nikola Njegovana, Dunja Demirovićb, Željko Vaškoc a Faculty of Economics, University of Belgrade, Belgrade, Serbia; e-mail: nikolanj@ekof.bg.ac.rs b Geographical Institute Jovan Cvijić SASA, Belgrade, Serbia; e-mail: demirovic.dunja2@gmail.com c Faculty of Agriculture, University of Banja Luka, Banja Luka, Bosnia and Herzegovina; e-mail: zeljko.vasko@agro.unibl.org ABSTRACT Tourism today is a mass phenomenon involving a large number of actors, both on the demand side and on the supply side. For more efficient and better organized performance, tourism companies need to ensure a high quality of service and apply effective pricing strategies. Therefore, the aim of this paper is to outline the key pricing strategies and analyze their ad- vantages and drawbacks. For this purpose we have chosen the specific case of farmsteads in the Province of Vojvodina, Serbia. We focus on the com- plementary products or services provided by these farmsteads that have a seasonal element to them, that is, they are hard to sell out of season. As a result, we devised guidelines for entrepreneurs to enhance their business opportunities by applying effective pricing strategies such as the marginal costs strategy. KEYWORDS strategies, prices, marginal costs, rural tourism, farmstead, Vojvodina province (Serbia) ACKNOWLEDGMENTS The research was supported by Ministry of Education, Science and Technological Development, Republic of Serbia (Grant III 47007 and 46006) Отбор и применение ценовых стратегий в сельском туризме: пример хозяйств Воеводины Н. Ньегованa, Д. Демировичb, Ж. Вашкоc a Белградский университет, экономический факультет, Белград, Сербия; e-mail: nikolanj@ekof.bg.ac.rs b Географический институт «Йован Цвиич» Сербской академии наук, Белград, Сербия; e-mail: demirovic.dunja2@gmail.com c Университет Баня Луки, сельскохозяйственный факультет, Баня Лука, Босния и Герцеговина; e-mail: zeljko.vasko@agro.unibl.org РЕЗЮМЕ Туризм сегодня представляет собой массовое явление, в который вов- лечено большое количество участников, как со стороны спроса, так и со стороны предложения. Для более эффективной и высокооргани- зованной работы туристические компании должны обеспечивать вы- сокое качество обслуживания и применять эффективные стратегии ценообразования. Поэтому цель данной статьи – наметить ключевые стратегии ценообразования и проанализировать их преимущества и недостатки. Для этого мы выбрали конкретный случай фермерских хозяйств в сербском регионе Воеводина. Мы фокусируемся на допол- нительных продуктах или услугах, предоставляемых этими фермер- скими хозяйствами, которые характеризуются сезонностью, то есть их сложно продать вне сезоны. В результате, мы разработали советы для предпринимателей, направленные на расширение возможностей их бизнеса путем применения эффективных стратегий ценообразова- ния, таких как стратегия «предельных издержек». КЛЮЧЕВЫЕ СЛОВА стратегии, цены, предельные издержки, сельский туризм, фермерские хозяйства, провинция Воеводина (Сербия) БЛАГОДАРНОСТИ Исследование поддержано Министерством образования, науки и технологического развития Республики Сербия (грант III 47007 и 46006)   https://doi.org/10.15826/recon.2018.4.1.003 http://doi.org/10.15826/recon.2018.4.1.003 mailto:demirovic.dunja2@gmail.com mailto:demirovic.dunja2@gmail.com R-ECOMONY, 2018, 4(1), 18–23 doi: 10.15826/recon.2018.4.1.003 19 www.r-economy.ru Online ISSN 2412-0731 Introduction The competitive position of enterprises op- erating in tourism industry, especially small en- terprises specializing in rural tourism, depends to a large extent on the applied concept of their growth and development, i.e. on the establish- ment and implementation of an adequate strate- gy [1–3]. Therefore, to devise an efficient and dy- namic strategy, these enterprises need to take into account both internal and external factors such as the level of the company’s development and the market in which it is operating. The term strategy is used so widely nowa- days that in practice its significance sometimes seems overrated. Everything that is important in an enterprise tends to be referred to as strategic, which makes this concept too broad and, there- fore, useless as it confuses more than it clarifies. Moreover, it is often misleading in the sense that it emphasizes the elements and aspects which are not crucial for the company. Ideally, a strategy should provide a framework for the company’s business for better coordination and more efficient management in order to make the company more responsive to the changing environment [4]. The strategy should articulate the desirable relationships between the compa- ny and its environment, take into account the specific nature of the business sector and thus help the company’s management plan, structure and organize the company’s business activities accordingly [5]. Based on those assumptions, every strategic decision contributes to the successful perfor- mance of the company. All strategic decisions can be divided into two categories: fundamental and applied. It should be noted here that funda- mental or the so-called corporate strategies are based on decision-making associated with, for instance, creation of new products. Strategies dealing with the implementation of such deci- sions (e.g. how to set prices or advertise the new product) can be called applied or business strat- egies. In this paper, we will primarily focus on those corporate and business strategies that can be applied in small enterprises [6], more specifi- cally, the pricing strategies of rural tourism com- panies, since they have more pronounced pecu- liarities in the production and marketing phases. These strategies should support the portfolio product / market, i.e. should be applied within small companies in the phase of production and distribution to the final consumer. Material and Methods Our research was conducted at farmsteads in the Autonomous Province of Vojvodina, Republic of Serbia. The initial stage consisted of interviews with entrepreneurs, who were managers at nine farmsteads. At the second stage, we analyzed the collected data and used them for devising guide- lines for entrepreneurs. The age of our respon- dents ranged from 22 to 64; the average age was 43. The majority (72%) had secondary education; about 12%, higher; and 16%, elementary educa- tion. In addition to the interviews, we gathered and analyzed the information about the products and services that these companies were providing to rural tourists, their methods and strategies of calculating the prices and the mutual compatibil- ity of products/services as well as the problems that entrepreneurs faced in sales. The results were calculated for each individual farmstead and on average for the set of farmsteads we studied. In the paper two concepts are used to deter- mine the appropriate price strategy: total costs or costs plus and marginal costs [7; 8]. Each concept takes into account the expectations that appear on the input market, since pricing is based on the analysis of the production costs. We believe that the key factor that determines the success of a small business is the sales market. Results and Discussion In this section we are comparing the results of the application of the two pricing strategies – total costs or costs plus and marginal costs. Fixing the prices by using the strategy total costs or costs plus This method of pricing usually includes es- timation of the production cost for a product or a service under normal conditions, that is, when there are no fluctuations in capacity utilization, employment or output [9]. The method can be ap- plied to an entire range of products/services and called the strategy of building prices. This proce- dure is illustrated in Table 1. After the implementation of the above-de- scribed procedure, we add to the cost of the unit the desired profit of the company. This element is determined according to the company’s po- sition in relation to its competitors, usually by calculating the average profit rate of business in this sphere [10]. However, the drawback of this pricing strategy becomes evident when the cost of a particular product or service turns out https://doi.org/10.15826/recon.2018.4.1.003 20 www.r-economy.ru R-ECOMONY, 2018, 4(1), 18–23 doi: 10.15826/recon.2018.4.1.003 Online ISSN 2412-0731 to be higher than the competitors’ market price of the same product or service, which makes it impossible to apply the appropriate profit mar- gin because the product would be too expensive. Therefore, most businesses choose to apply a more widely spread but also more complicated pricing strategy – the strategy of marginal cost. Table 1 Strategy total costs or costs plus – Suggested selling price All prices in EUR Product Item P1 P2 Direct cost of materials 5 10 Cost of direct manpower 4 2 Direct expenses 1 0 Prime costs 10 12 Additional production costs Variable costs of production 5 5 Fixed costs of production 5 10 Total cost of production 20 27 Marketing and distribution 3 3 Variable costs 2 1 Fixed costs 1 2 Additional administrative costs 1 1 Fixed costs 1 1 Total costs 24 31 Pre-determined profit margin (%) 10 20 Selling price 26,4 37,2 Marginal costs (total variable costs) 17 18 Fixing the prices by using the strategy marginal costs Pricing based on the marginal costs strategy is a particularly effective method. It provides in- formation that helps companies manage product selection, markets, sales areas, and market seg- menting in relation to individual categories of customers [11; 12]. The ‘marginal cost’ strategy involves the vari- able costs of a product or a service unit. These are the costs that could be avoided if the product was not produced at all or if the service was not pro- vided. An example of such calculations is given in Table 2. We were using the case of farmsteads working as tourism and catering companies. These farmsteads were run as family ventures. Our calculations illustrate the profit that can be gained by such enterprises if they sell two basic products or services (see Table 3). The assumption is that both products or services are realized, that is, completed and sold to the customer during one calendar year. Table 2 Marginal cost of a product Direct costs per unit EUR/unit Materials 0.70 Staff wages 0.10 Expenses 0.25 Total prime costs 1.05 Additional variable overhead costs per unit Production 0.15 Marketing and distribution 0.20 Administration 0.05 Overhead costs 0.40 Total additional variable overhead costs per unit 0.80 Marginal costs 1.85 Table 3 shows an example of an income state- ment on the company’s performance over a one- year period Table 3 Income statement, EUR Indicators Total Product P1 Product P 2 Sales 1.500 800 700 Sales revenue 23.000 16.000 7.000 Direct materials 11.500 8.000 3.500 Direct labour 5.400 4.000 1.400 Prime costs 16.900 12.000 4.900 Production overhead costs1) 3.100 2.000 1.100 Production costs 20.000 14.000 6.000 Marketing, distribution and Administration costs 2) 2.200 1.000 1.200 Total costs 22.200 15.000 7.200 Profit / loss 800 1.000 –200 Estimated allocation of supplementary and administration costs: 1) variable costs 1.700 900 800 fixed costs 1.400 1.100 300 2) variable costs 500 300 200 fixed costs 1.700 700 1.000 The profit statement shows that the P2 product is selling not very well, which means that the company management might want to consider the question of discontinuing its pro- duction. Such decision, however, does not take into account the fact that this product whether produced or not, is bound to certain fixed costs of the company itself, such as the rent of space, taxes, fees, equipment depreciation and the sala- ries paid to administration. Therefore, the appli- cation of the ‘marginal cost’ strategy should help the entrepreneur get a clearer view of the situa- tion (see Table 4). https://doi.org/10.15826/recon.2018.4.1.003 R-ECOMONY, 2018, 4(1), 18–23 doi: 10.15826/recon.2018.4.1.003 21 www.r-economy.ru Online ISSN 2412-0731 As it is evident from the example in Table 3, the P2 product makes a difference of EUR 1,100. This is the amount that the company would lose if the production of this product was stopped. On the other hand, the company’s total fixed costs of EUR 3,100 would remain uncovered. Therefore, if the company discontinued the production of P2 product, it would lose about would EUR 300. The previously gained profit of EUR 800, despite the negative result of product P2 sales, would thus be lost if the production of P2 stopped. Although the fixed costs could be reduced by more than EUR 1,100 if P2 was discontinued, Table 3 clearly shows that the optimal decision for the company would be to continue its production. Table 4 Fixing the prices using the strategy marginal costs (as of 31st of December), EUR Indicators Total Product P1 Product P 2 Sales revenue 23.000 16.000 7.000 Less variable costs Direct materials 11.500 8.000 3.500 Direct labour 5.400 4.000 1.400 Variable production over- head costs 1.700 900 800 Variable marketing, distri- bution and administration overhead costs 500 300 200 Total variable costs 19.100 13.200 5.900 Contribution 3.900 2.800 1.100 Less fixed overhead costs Production overhead costs 1.400 Marketing, distribution and administration over- heads 1.700 Total fixed overhead costs 3.100 Profit / loss 800 The application of the marginal cost strate- gy creates a combined effect but it also has some limiting factors. The application of this strategy makes it easier to search for a combined effect that is caused by price and cost factors, affect- ing both profits. In order to illustrate this, it is sufficient to make the company’s profit and loss account in two successive years (see Table 5). Changes within the given period result from an increase in the sales price by 20% and from an increase in the volume of products and services sold. Thus, in this case, we need to investigate the effects of individual factors which lead to an increase in the contribution (difference) to EUR 150,000 in the second year. Each company has one or more limitations. They represent a critical input for business which at some point or during a certain period limits the business [13]. First and foremost, this is the company’s selling potential but the limitations can also be associated with certain characteristics of raw materials or production, with the degree of tourist product integration, the skills of the productive workforce, or with the availability of space or working assets [14]. When these limit- ing factors are introduced into analysis, the profit will be determined by their contributions. Linear programming can be used to investigate each in- dividual influence and choose an optimal plan. This mathematical method successfully addresses cases with a number of limiting factors and inter- active variables. Table 5 The combined effect of changing the volume of sales, selling prices and costs EUR Year 1 Year 2 Sales 200.000 400.000 Marginal cost of sales 100.000 150.000 Contribution 100.000 250.000 1. Сhange related to the volume of sales Sales of year 2 at year 1 prices = 400.000 · 4/5 – 320.000 Sales of year 1 at year 1 prices – 200.000 Change related to the volume = EUR – 120.000 % change in volume (120 : 200) · 100 – 60% Sales increase = EUR – 120.000 marginal costs = EUR 60% · 100.000 60.000 Contribution change related to the volume = EUR 60.000 2. Сhange related to the selling price Sales of year 2 at prices from year 1 320.000 Sales of year 2 at prices from year 2 400.000 Contribution change related to the price 80.000 3. Reduction in costs Change in sales volume = (120,000 : 200,000) · 100 60% Marginal costs in year 1 related to the change of volume 100.000 Marginal costs in year 2 = 100,000 + (60 : 100 · 100,00) 160.000 Marginal costs in year 2 150.000 Reduction in costs 10.000 The change in contribution of EUR 150.000 related to the following factors: Volume change 60.000 Price change 80.000 Cost change 10.000 Contribution in year 2 150.000 https://doi.org/10.15826/recon.2018.4.1.003 22 www.r-economy.ru R-ECOMONY, 2018, 4(1), 18–23 doi: 10.15826/recon.2018.4.1.003 Online ISSN 2412-0731 Consequently, it may be concluded that the marginal cost strategy is most suitable for com- panies operating in unstable economic condi- tions. In such cases, it is better to accept orders below the level of the total value of the costs. This recommendation is based on the need to cover the marginal costs, which means that each level of the contribution above the fixed costs will at least reduce the company’s losses and help the company stay afloat until better days retaining its staff and preserving its facilities and equip- ment. Thus, the application of this strategy can help entrepreneurs to set prices [15] in such cir- cumstances as: 1) economic recession in this business sector; 2) excess of the company’s productive ca- pacity; 3) seasonal fluctuations of demand; 4) situations when the company is using the individual employment contract; 5) situations when alternative levels of busi- ness activities are included. Conclusion Starting entrepreneurial ventures in the sphere of rural tourism, such as family farm- steads, is a complex and demanding job, since it requires entrepreneurs to expand their expertise in business and management. 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Price Determination and Price Strategy in the Marketing View. Management & Marketing, 3(4), 21–36. Information about the authors Nikola Njegovan – PhD in Economics, Assistant Professor, University of Belgrade, Faculty of Economics (Kamenička street no. 6, 11000 Belgrade, Serbia); e-mail: nikolanj@ekof.bg.ac.rs. Dunja Demirović – PhD in Tourism, Research Associate, Geographical Institute Jovan Cvijić SASA (Đure Jakšića street no. 9, 11000 Belgrade, Serbia); e-mail: demirovic.dunja2@gmail.com. Željko Vaško – PhD in Agriculture, Associate Professor, University of Banja Luka, Faculty of Agriculture (Boulevard vojvode Petra Bojovića 1A, 78000 Banja Luka, Republika of Srpska, Bosnia and Herzegovina); e-mail: zeljko.vasko@agro.unibl.org. https://doi.org/10.15826/recon.2018.4.1.003 https://www.sciencedirect.com/science/journal/03605442 https://www.sciencedirect.com/science/journal/03605442/34/11 https://doi.org/10.1016/j.energy.2009.08.015 https://doi.org/10.1016/j.energy.2009.08.015 http://ieeexplore.ieee.org/xpl/RecentIssue.jsp?punumber=59 http://ieeexplore.ieee.org/xpl/tocresult.jsp?isnumber=19647 https://doi.org/10.1109/59.910776