Tiered Pricing Gains Foothold

<B> Tiered Pricing Gains Foothold</B>

By Sarah Welt

As online booking grabs the attention--and begins to capture the volume--of corporate travelers, corporations that have rolled out systems are going back to their travel agencies and asking for their fair share of the savings.

At Thomson Consumer Electronics in Indianapolis, for example, worldwide corporate travel manager Cindy Heston has negotiated a tiered contract with Maritz Travel Co. that cuts the company's per-booking fee based on the usage of Worldspan's Trip Manager. "If our bookings hit 20 percent, our fee goes down. If we hit 30 percent it goes down again, and again at 40 percent and so on," she said.

Heston expects the contract to help reduce her per-ticket payout to the agency by 40 percent this year.

Travel services manager Betty Lucero, at Times Mirror Resource Management Co. in Los Angeles, said that since beginning a pilot of American Express's AXI booking system last summer, the company has seen the "opportunity to save as much as $5 a transaction."

And even though Earl Foster, the New York-based global travel manager for Joseph E. Seagram & Sons Inc., has yet to implement an electronic system, he already is talking about tiered pricing. "We are having dialogue with the agencies as we speak. It is the absolute right thing to do," Foster said, noting that he has similar tiered contracts for other cost-saving initiatives, like electronic tickets.

The industry benchmark that seems to be developing is that a corporation must hit 20 percent usage of an online system before its agency will pass back any savings, a number of insiders said. At that point, clients paying transaction fees can begin to talk to their agencies about assigning different costs to different services.

Clients on management fees also eventually will see savings in direct labor expenses, because an increase in tickets processed electronically will lead to a reduction in agent headcount.

While only a small minority of corporate accounts have achieved the 20-percent benchmark, agencies are dealing with the reality that the number likely will grow exponentially. St. Louis-based Maritz, for example, has in the past 12 months renegotiated several client contracts to include different pricing model for electronic bookings, so that when usage levels hit the mark, clients can immediately benefit.

<B><CENTER>Thomson Gets Deal At 20% Usage</CENTER></B>

Maritz customer Thomson Consumer Electronics has negotiated a discount of 20 percent per booking that kicked in when its usage of Trip Manager hit the 20-percent benchmark, Heston said. Usage is now at 25 percent. At first, the company negotiated a tiered pricing model where each kind of transaction, electronic versus telephone, had a different price. But tracking which transactions came in which way became a major headache. "We would have had to hire a new person to track it," she said.

Maritz director of technology marketing Becky March referred to the current single fee structure as a "blended rate" where, once each benchmark is achieved, "we reduce the fee on all transactions by X amount."

Meanwhile, Lucero said Times Mirror now has about 75 AXI users. The contract with Amex for her $17 million travel program established a pricing matrix "based on the types of services they offer us: a call to the agency with a hard copy ticket, a call to the agency with an e-ticket, an electronic booking system with a hard copy ticket or an electronic booking system with an e-ticket. So we got a fee structure that includes all four of those different types of services."

Lucero said electronic tickets are "about 50 percent" cheaper than paper tickets, yielding "savings of between $1.50 and $3.00 per ticket."

Still, the agencies note, few customers have the volume to begin talks. Said Amex senior vice president and general manager Jud Linville, "AXI and other booking tools hold great promise for delivering a lower cost transaction. However, only a handful of accounts are achieving penetration."

Most of the industry still is focusing on implementing the systems and building usage through traveler education. "Once you have somebody booking, the repeat booking goes up dramatically," he said.

Linville said there are essentially three themes in pricing: a transaction fee with some kind of penalty or incentive based on performance standards; an unbundling of other value-added services such as a concierge desk, consulting fees or an international rate desk; and online booking discounts. The latter "should be somewhere around one-third cheaper" than a full-service reservation, though extra services like calls to the agency, paper tickets and net fares will add to the fee.

Maritz has about 15 clients in rollout or about to begin implementing a self-service reservation tool--a number March expects "to increase dramatically this year, to 20 percent of customers." One other customer besides Thomson has a tiered contract.

Maritz corporate vice president of information technology Richard Spradling said there has been "a lot more client interest" in unbundling service fees in the past six to 12 months, but clients "can't expect us to provide a lower pricing structure until they actually move the volume."

Even so, March said, this is an evolving trend and "something we need to get in front of and be prepared for. We are not waiting for clients to come to us."

At WorldTravel Partners-BTI Americas, co-president Danny Hood said RFPs coming in "are now asking for channel-specific pricing." Hood said an average agent does 2,300 transactions, and it takes "2,500 to 2,600 transactions to truly eliminate an agent."

Hood said WTP-BTI has two ways of pricing for traditional transaction fee contracts--either tiered pricing or a "gain share" that assumes that "we did a lot of the work and you did a lot of the work, and we work on some kind of split of that." Of the 300 clients using a booking system, about 10 percent are in the 15 to 20 percent usage bracket, he said.

Rosenbluth International said two-thirds of its top 30 clients are in various stages of online rollouts, including two who are piloting the new @Rosenbluth system it developed with Xtra Online to eventually replace E-Res. Said director of marketing John Buck, "It is appropriate to have a different price for a different level of service-- and if that is not a trend, it ought to be. We are working with one client right now so they can see savings associated with electronic booking in a better, more direct way."

Still, some corporate clients have opted not to go with tiered pricing at this time.

Chevron Corp., for example, soon will have 200 users on Internet Travel Network's Global Manager system, but the San Francisco company still has a management fee. "It is a moot point for us because we pay all direct costs," said global travel manager Nancy Godfrey. "Our feeling is as soon as we can start to reduce agency involvement we will get the benefit."

To accomplish that, Chevron plans to "significantly reduce" the number of agents handling its $60 million travel account from the current 52. While it now books only 1 to 2 percent of tickets online, "we are shooting for 50 percent online by the end of the year," Godfrey said, and likely will consider tiered pricing in 2000.

Busy testing booking tools at Colgate-Palmolive Co. of New York, director of corporate travel services Cyndi Perper said that "few companies are ready to take advantage of that kind of pricing. It is going to take us a few years to shake this all out and come up with a pricing situation that makes sense."

Lucero, too, acknowledged that Times Mirror has a long way to go. While a reduction in agent headcount would be a "big benefit," corporations don't see that as being possible until online booking volumes hit about 35 to 40 percent, she said.

Meanwhile, at Chaska, Minn.-based FSI International Inc., travel manager Jeri Freeman has a transaction fee contract and gets a $3 discount on tickets booked electronically, but "I would prefer that travelers didn't book online," she said. "I have better control with my contracts if they don't, so I try to discourage it. I know it is a thing of the future, but we have 37 percent international--and when they start screwing around on the computer themselves with international, it ends up costing me more money."

Both Rosenbluth's Buck and Amex's Linville noted that corporate buyers should be looking at other ways to reduce costs as well. Buck suggested "redeploying capacity and going through intellicenters." Linville agreed with that approach, but also reminded travel managers to remember the basics. "To save money this year, let's get policy nailed," he said.