When you speak to any old-timer in the travel management
company business, he or she will reminisce about the "good ole days"
when commissions were 10 percent and incentives were plentiful. Then came
several industry-changing events, and the model evolved to what we have today:
declining fees that barely cover the cost for the service, TMCs struggling to
provide value and back-end incentives from GDSs and suppliers that drive almost
100 percent of anemic TMC profits. This new financial model is not sustainable
as more transactions become touchless and TMC services are further
commoditized. In the meantime, the online leisure travel market is doing great.
Somehow, they've found the right mix of service and costs to drive value and
make decent returns without any commissions or fees. How is this possible? They
do it by using the merchant model.
"Merchant model" is the industry catchphrase for a
supplier/vendor relationship in which the vendor is given discounts in return
for volume. Vendors in turn have the ability to mark up the products to make a
fair return, but those markups are kept in check as they need to sell inventory
to grow. The online leisure space discovered the model years ago and has
mastered the ability to make substantial revenues without charging fees for
service. Have you looked at the revenues and stock prices for Expedia and
Priceline lately? They dwarf those from any of the traditional TMCs, and it's
partially because they've adopted and perfected the merchant model for selling
travel. Without charging any fees, they can somehow sell air, hotel, car,
packages and a bunch of other stuff at rates below the TMCs and still make
higher profits. The traveling consumer has spoken, and the winner is the online
travel agency and the merchant model.
The first reaction from corporate travel managers when
discussing merchant models is that this can't be good: Travel management
companies are going to mark up the fares and rates and sell them to my
corporate travelers? Will my costs go up or down? How will I know? Will the
total costs be included in reports?
What travel managers need to remember is that if we stay on
the current path, travelers will seek out the lowest fares and rates, which are
on the online leisure sites and potentially the supplier sites. It's only going
to get worse, putting more pressure on TMCs to provide value and travel
managers to justify their programs.
The biggest advantage of the merchant model for corporations
is that it motivates TMCs and consortiums to use their selling strength to
negotiate discounts for all their customers. Today, only the largest
corporations obtain meaningful discounts from vendors through fares and rates
that are below the spot market and are actually available for purchase. Having
worked for several of these companies, I can assure you that traveler
frustration is growing as they follow policy by booking through the TMC but can
obtain significantly lower rates and fares through online leisure sites. Any
midsize to small company would love for their TMC to negotiate on their behalf
and obtain discounts as good as or better than the online leisure market.
What's holding the merchant model from becoming corporate
travel reality? First, vendors are reluctant to cannibalize their premium customers—i.e.,
you. Corporations pay more for travel than do leisure travelers, even though it
should be the other way around, and vendors want to keep it this way. What the
vendors don't realize is the shift is happening and will grow whether they like
it or not. If the trend continues, online agencies will continue to take share
and have more buying clout, resulting in even further discounts from vendors.
The online market needs competition, and the best place for it is the TMCs.
Second, the point-of-sale system used by the TMCs, the global distribution
systems, has to improve. There is no ability for a TMC to mark up a rate or
fare in the GDSs. TMCs must have the ability to dynamically mark up a rate,
package or fare. Finally, companies need data to report across their entire
travel spend.
Fortunately, technology providers are working on these
problems and solutions are near. Net Edge Solutions of Houston has tools that
support the point of sale and provide the analytics necessary to mark up
intelligently. Initial point-of-sale products will integrate with the GDS and
fill in the gaps, enabling a TMC to sell products "around" the GDS. Eventually,
the GDSs will add the functionality needed for a more elegant approach. Another
positive result from this transition would be an improvement in card data, as
the TMC becomes the merchant of record and responsible for data sent through
the card, eliminating the need for GDS or TMC back-office data to provide
detail.
To summarize, a lot has to happen to enable traditional TMCs
to become effective merchants. If these changes don't happen, market share will
continue to shift to the online agencies that already have solved these
technical hurdles. In the end, corporations will be forced to switch to a
merchant model approach whether they want it or not. TMCs have to change their
financial model or perish. The merchant model can be the answer.
Steve Reynolds is
president of The R Group.
This op-ed appears in
the Nov. 29 issue of Business Travel News.