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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.”