The 80/20 business maxim has long dictated that companies focus on the 20 percent of their business that generates 80 percent of their revenues. But at a PhoCusWright conference here last week, dozens of travel industry suppliers detailed how they're going after the incremental business from the masses as they embrace the economic models explained in the book "The Long Tail," by Wiredmagazine editor Chris Anderson.
"There are all these other products that people buy when they travel--insurance, meetings, limousines, ticketing, dining--all kinds of products that are relatively high-margin and relatively low volume, and when you sum them up they add to something pretty interesting," said Terry Jones, Travelocity founder, Kayak chairman and Rearden Commerce board member.
"If you think about business travel, we think half the spend is in the long tail--not air, car and hotel," Jones continued. He noted that Johnson & Johnson spends $1 billion in travel annually, of which $270 million is spent on air travel, and PricewaterhouseCoopers spends $260 million in air, with total T&E of $678 million. That leaves "an awful lot of money outside air, car and hotel," he added.
PhoCusWright research indicated that 64 percent of online business travel buyers bought an event ticket last year. The average price for a Broadway ticket is often more than a ticket on Southwest Airlines, and "high margin," Jones said.
"One Rearden client, a large pharmaceutical company, spends $210 million in air, car and hotel and an amazing $90 million on dining," Jones continued. "All of that is not addressable online, but much of it is. Then they spent $18 million on shipping, $9 million on conferencing, $9 million on parking and $7 million on car service. Sum it up, you could earn another $5 million a year after taking out the margins ... exceptionally high margins, some as high as 50 percent."
Through it's partnership with Rearden, American Express signed 900 customers with annualized revenues of $1 billion to a private-label platform called Axiom, according to a separate presentation by American Express Global Travel Services president Charles Petruccelli. Jones said Rearden has added 1,000 customers to its platform.
However, Concur Technologies CEO Steve Singh questioned the potential for garnering substantially more spending. "Concur last year processed about $35 billion worth of expense reports," he explained. "What's interesting in that data is that about 80 percent of it was air, hotel and car. So, for long tail, you have to really question how much is there. I don't view the long tail as anything that is a unique business model, but it's really how do you get to the desktop."
In his presentation, Jones acknowledged that the "challenge is making it easy for travelers to book some of these more complex transactions, such as event tickets, web conferencing, shipping and dining." One way in which Rearden is meeting that challenge, Jones said, is by introducing a mobile platform. Details of this new platform--designed specifically for mobile phones--are expected early next year.
"The goal is to move the money from destination to pre-departure," Jones told delegates. "This changes how many of you will market your services going forward. You have to present the customer with the right offer. You have to personalize the offer and you have to deliver it at the right time--before the booking or in the itinerary, or just after booking, just before departure or even during the trip. Selling the right product at the right price and exactly the right moment is going to take a lot of experimentation."
Jones asked delegates how their companies would participate in the evolving online travel marketplace--selling primary travel components (at the "head") or ancillary products and services (at the "tail"). "The answer is probably both," he said, "but you need to think what the compelling offer is going to be. Connectivity is a big barrier in long tail, so be sure to use standard interfaces."
Studying how consumers are booking on the Web today, Travelocity found that travelers "consistently booked where they started," according to CEO Michelle Peluso. If they started on a supplier site, 46 percent booked there. If they started on an online travel agency, 42 percent booked there. Only 10 percent started on an OTA site and booked on a supplier site, and only 2 percent booked on a supplier site if they started on an OTA, she said.
Pointing also to the University of Michigan American Customer Satisfaction studies, Peluso noted that airline customer service for the first time ranked below that of the Internal Revenue Service. "Surely we can do better than the IRS," Peluso said of the travel industry's need to focus on customer service. "We as an industry are not doing all we can and should" to spur travel demand.
Frequent flyer guru Randy Petersen, president and CEO of WebFlyer and FlyerTalk, queried Peluso on one area of traveler angst: incorrect airfares offered through online travel sites. In one highly-publicized 2005 incident, hundreds of Petersen's readers booked $51 "mistake fares" to Fiji. Travelocity honored the fares, Peluso said, and also trained all employees about such fares. "Two developers stayed up all night writing a program to alert us of big variances off historical prices," she conitnued. "We've found over 800 fare misfilings and over 400 hotel [rate misfilings]. We've alerted both types of suppliers."
In another area of disillusionment, Marriott International senior vice president of e-commerce Shafiq Khan noted that airlines generate 80 percent of Orbitz sales but 80 percent of Orbtz income is attributable to non-air sales, notably hotel reservations.
"Why is there such a big difference?" Khan asked Orbitz Worldwide CEO Steve Barnhart. "Do you feel that you're providing three to five times more value to hotels than air?"
Barnart responded that consumers typically spend more "energy focused on where they stay."