A travel buyer walks into a hardware store and asks for a quarter-inch drill bit. The clerk quickly fetches it, wraps it up and sells it, and the buyer walks out, a seemingly satisfied customer. So, what's wrong with this metaphor for buying benchmark data?
The buyer did not ultimately want a quarter-inch drill bit. What he really wanted was a quarter-inch hole. Benchmarks, like drill bits, are tools designed to solve problems or, as in benchmarking's case, to answer questions.
In the airline category, when buyers ask for benchmarking data, what they're really asking is, "How good is my deal compared to what my company should be getting?" That is clearly the right question to ask--but benchmarking is not the right way to answer it. Benchmarking airline contracts is often wrong and, for the most part, worthless. TRX Travel Analytics always refuses to do traditional airfare benchmarking for our clients, for two main reasons:
Legality. We have analyzed thousands of corporate airline contracts and bids. In many cases, airlines first request legally binding non-disclosure agreements prohibiting use of their pricing data for benchmarking. Consequences of breaching this clause typically include cancellation of the contract. We have always complied with this non-disclosure request.
Practicality. Bringing traditional benchmark data to airline negotiations doesn't help buyers. If anything, it increases the risk that the buyer will reject the fairness of an airline's offer. I've seen many instances where a buyer demands better pricing "in line with our benchmarks," and is told by the airline that the benchmarks are simply not relevant. Airlines ignore benchmarks and price each account individually. What the buyer really needs to know is how much room the airline has to deal. Only then can a buyer properly judge the fairness of an offer.
If benchmarking airline pricing is wrong and worthless, why is it so popular? Benchmarking has a long history of improving business operations. It's a classic method for identifying high performance and setting stretch targets, particularly for process improvements. In the travel category, it's hard to resist using benchmarks to help improve, for example, travel agency operations or online booking adoption.
Benchmarking supplier prices is popular because it's easy, and for non-airline categories, fairly effective. Travel agencies, hotels and car rental suppliers are much more vulnerable to having their products compared on a commodity basis than are airlines. Before throwing airlines onto the commodity heap, ask why very large buyers in Minneapolis, Newark, Dallas and Cincinnati have to settle for lower discounts than smaller buyers in Boston, Chicago or Los Angeles.
The answer, of course, has to do with the degree of airline competition available to the buyers headquartered in these cities. But competition is just one factor an airline uses to set its pricing for a client; other factors include the strength of the buyer's travel policy, traveler behavior and the expected yield and load factors on the buyer's routes. Spend volume is not as big a factor as most buyers believe--another reason traditional benchmarking doesn't work in the airline category. Buyers using traditional benchmarking, with eyes wide open, should keep in mind four points:
Benchmarks are like a rich man's friends--easy to get but hard to trust. It's often difficult to know what's underneath the averages quoted in benchmark data, so be prepared to dig deep before trusting the interpretation.
Outliers are insightful. Often, datapoints at the extremes of a benchmark analysis are the most revealing. Buyers should be able to see these and ask enough questions to satisfy their curiosity.
Questions are often better than answers. Smart buyers use benchmarks to ask more questions about not only the data, but also their own travel programs. Used properly, benchmark data can help build senior management support and change traveler behavior.
Know when to stand your ground. This applies not only to negotiations with suppliers, but also for senior management presentations. Senior management may ask for benchmark data, just like the guy who asked for a quarter-inch drill bit, but it doesn't mean that a category manager should just go fetch the drill bit.
Buyers and suppliers benefit by striving to improve performance, productivity and profitability. Let's use benchmarking where it works well, and avoid it where it doesn't.
Vice president and general manager of TRX Travel Analytics, Scott Gillespie can be reached at email@example.com.