TMC Fee Models: A Topline Review

Changing travel management companies—or working with one for the first time—brings many questions around technology, service and support. Understanding the fee structures around all of that is a big part of the conversation. What offers the most value to the client? What exposes each party to risk? What offers the best relationship and service to travelers? What offers the most transparency to program administrators?

All those factors are important, so here’s a quick guide to three of the most common TMC fee models in the market today, along with their strengths and weaknesses.

Transaction Fee Model

A transaction fee model is by far the most common model used in the market today for travel management company relationships. One reason for this is that they have been acknowledged as providing more transparency for procurement and finance teams, given that every billable interaction with the TMC comes with a line item charge. Such charges can be billed back to appropriate department codes, if necessary; plus, the administrator of the TMC relationship can review line item charges to understand how travelers are utilizing the TMC and if that use can be optimized in certain ways—for example, how many times travelers are changing their itineraries with live agents, how they utilize the agency for on-trip assistance, use of the VIP or after hours desk, etc.

For transaction models to be successful, the TMC and the client must agree upon a definition for a transaction. Transactions aren’t always about buying travel. Sometimes a transaction is a refund, void or exchange. TMCs take on risk when companies have a high incidence of these transactions because they reverse agency revenue.

TMCs learned a hard lesson during the pandemic: Agents worked to enable refunds and voids but didn’t bring in revenue or commissions. Risks like these require TMCs to have details about transaction types, and TMC relationship managers need to becomes familiar with all the transaction types possible. There are many, and examples can include different fees for online and offline transactions, domestic vs. international, assisted and touchless and that list can go on.

Some of the drawbacks of a transaction fee model are reticence of travelers to use the TMC because it may seem like they incur fees every time they use a tool or send a text message or phone call to an agent. A transaction fee model has also been seen as too complex. While it was devised to provide transparency, travel buyers have noted the proliferation of fee types has made the model confusing and sometimes frustrating.

Management Fee Model

In a management fee configuration, the TMC returns commission revenue to the client, who then pays the TMC for the cost of direct labor and other direct operating expenses, TMC profit and overhead. Since the model depends on commissions returned to the client, the corporate should understand exactly how hotel commissions are recovered and managed. This process isn’t always straightforward and can become an area of frustration. Clients will also want to understand how the TMC measures, divides and distributes override money received from airlines and other suppliers.

Management fees often cover some additional consulting or support services provided by account managers. Some midsize programs, in particular, have called out the advantages of this configuration for its ability to provide a more robust support system for program optimization projects or procurement exercises because the value of the account to the agency is more defined upfront in this configuration. Travelers, also, are more enabled to contact the TMC for support and stay in the program without seeing additional charges hit their budget codes. That said, TMCs may have certain services that incur additional fees, and those should be understood.

Additionally, the client takes on some risk in this structure: Should travel volumes drop significantly, the client is still on the hook for the management fee regardless of transaction volume.

Some agreements based on a management fee also include a financial incentive for the TMC for meeting specific key performance indicators. These are defined in the contract, and often are compensated on a sliding scale. Management fee contracts may also include a penalty for TMC underperformance.

Subscription Fee Models 

Subscription models in which customers pay a flat regular fee—generally based on forecasted transactions and services needed—to cover TMC services per user rather than paying per transaction, have gained a little ground in recent years, though they remain a distinct minority of TMC contracts.

The model has been praised for its simplicity and alignment with structures in other industries like software, where companies pay providers per user. Aside from simplicity, though, the subscription modell has benefits for both the customer, providing a more predictable travel budget, and the TMC, guaranteeing revenue even if travel volumes suddenly drop.

It also bring challenges, however, as subscriptions disrupt TMCs' models and systems built on the transaction-fee structure and for that reason can be less transparent to manage. They also could present budgeting issues for buyers, such as how to pay a single fee if they do not have a central travel budget.

Hybrid models incorporating the subscription model have arisen, such as all-inclusive standard transaction fees at the point-of-sale that automatically include after-hours or any other ancillary services.

Need More Guidance?

For more insights and a playbook for sourcing a travel management company partner—and how to structure such an agreement—check out BTN Academy “Selecting a Travel Management Company Partner.”