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Fees or Commissions?
By Mark Murphy
Published on: October 29, 2009
The debate over fees versus commission has been going on for quite some time in the travel agency trade. Indeed, just last week Kate Rice, our executive editor covering retail travel, wrote a column with ideas on fees and the future of commissions. She outlined a strategy for both areas, and one that has created a lot of debate due to the fluid nature of pricing. I’ll get to that in a minute, but suffice it to say, I believe agents need to be charging fees in addition to earning commissions from suppliers, which may contrast a bit from what Kate outlined last week. (For Kate's column, see www.travelpulse.com/Resources/Editorial.aspx?n=62392.)
The question really comes down to whether you are you a retail outlet serving your customers or an agent of the supplier. Many cite the retail model when it comes to selling travel and suggest that travel agents should be treated the same way. Under that model, why shouldn’t travel agents take the product, mark it up and sell it like every other retail store? They could buy it wholesale and profit handsomely in the process. If they choose, they can even add service charges on top.
There are several things that get in the way of this argument. First, suppliers aren’t willing to give up their pricing model and hand it over to third party channels. That has become quite evident over the past few years as pricing has become transparent. Hence all those “best price guarantees” you see on most hotel websites these days. If they truly used a retail model, agents would be able to buy travel products at a significant discount to the TSRP (travel supplier retail price) and sell it for whatever they choose. Of course, that doesn’t exist in today’s market, nor do I see suppliers lining up to go down this road anytime soon.
The problem is this: you can’t have it both ways. You can’t say on one hand, as many suppliers have, that agents can’t undercut the supplier’s pricing in the market; but on the other, talk about a net rate environment and ask agents to mark things up. Once you turn over your pricing model, you’re out of the picture so to speak on what the retailer ultimately charges.
Another issue affecting this model is the concept of “yield management.” This impacts virtually every sector of this industry and makes it impossible not to be affected by wild pricing swings. Just ask the wholesale packagers who continuously see their bulk contract-pricing undercut by the airlines’ need to fill last-minute inventory or drive demand in specific markets. It creates a constantly shifting environment that can change by the minute or even the second.
Here’s another issue to consider in this process: travel is a perishable product. That hotel room available tonight has zero value come tomorrow. You don’t see that in the traditional retail world outside of the food business.
So let’s be clear. You aren’t selling jeans here; you’re selling a dynamic product that is affected by weather, geopolitical issues, economic issues and more. If you buy 200 pairs of jeans and sell them through a store, it’s quite a different picture than the one I just laid out in this crazy business.
The travel distribution system is highly fragmented. Many suppliers use multiple channels to move inventory based on different needs. Travel agents represent the highest yielding and at the same time the largest part of the distribution channel for most suppliers. Unless those things I outlined above stop affecting this industry, agents should continue earning commissions, and charging fees, on every sale for years to come.
Mark Murphy
President & CEO
Performance Media Group, LLC
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