5 Reasons for Tourism Entrepreneurs to get Comfortable with Paying Commissions

method mindset money Aug 31, 2022
5 Reasons for Tourism Entrepreneurs to get Comfortable with Paying Commissions

Have you ever found yourself kind of resenting the commission you pay to third party sellers like travel agents, incoming tour operators and the like? Ever said “they’re creaming off me and I could just go direct”?

Do you feel like you’re not on top of it – that you don’t know how much money is going where and how much you are relying on commissions overall? You feel it’s a big hit to pay out that commission. You feel it’s dead money.

Or else you’re at an early stage of your business and while you would like to expand to international markets, the levels of commission you’ve heard about scares you stiff?

 

A Tricky Question that Needs More Clarity

I get it. Pricing is one of the trickiest questions for tourism experience entrepreneurs particularly as you begin to diversify and scale your business. It’s also an area that’s not talked about all that openly – we’re a bit funny talking about the actual prices we charge.

Imagine though that you could get a lot more clarity and confidence in this area. That you knew enough to make an informed decision about whether to work through third parties or not. And once, you’ve committed to new distribution channels, that you were confident that you were managing them effectively and optimizing the yield for your own business.

 

The Tourism Context

Let’s look briefly at how the tourism industry works. There are direct and indirect channels, as this graphic from Fáilte Ireland shows:

These are called Distribution Channels. You can go direct to the visitor yourself using channels like website, social media. You can also go indirectly through other businesses. In direct channels, you do all the sales and marketing and you pay no commission. The full retail price returns to your business. In indirect channels, somebody else does the sales and marketing and you pay varying levels of commission – anywhere from 10-45% - for that service. Commission is usually the major source of revenue for retail travel agents, wholesalers and inbound operators for example. Tourism Experience Entrepreneurs need to understand how commissions are divided between the different levels of sellers and allow for the payment of commission in their prices.

 

Managing Your Mindset Around Commissions 

At those levels of commission, you can see how some Tourism Experience Entrepreneurs believe they save money by not paying commission to third party sellers.

I know lots of businesses who think of commission as a discount or a slice out of their own profits and really resent the commission. This mindset betrays the fact that the business has set prices without taking account of the rules of pricing in tourism (quite different to other industries) or the distribution structure in tourism.

Another way to look at it is to ask: what do you lose by not paying commission?

COMMISSION = DISTRIBUTION = NEW MARKETS = SALES YOU WOULD NOT OTHERWISE HAVE

While you may find it difficult to justify the commission required, the costs of accessing new international markets are generally beyond the reach of small independent operators. If you want to enter new markets, the most cost effective way to do it is through the commission structure.

There are choices to make and it becomes a question of clarifying the strategic direction of your business. The best way to consider commission is payment for a service provided. The service in question is access to a sales team and sales channel that helps you reach your international markets.

If every time you hear or see or say the word ‘commission’, you replace it with the word ‘distribution’ or ‘way to get to customers’, you would automatically become a lot happier with it.

 

The Bottom Line on Commissions

Commissions are the cost of distribution in this industry. If you want to have your product distributed, you need to be prepared to pay commissions. If you want a distribution network, you need to get clarity on the commission structure for your business.

The service you are buying through commission is often the most cost-effective and sales-effective route to multiple markets and consumer segments. Commission is a necessary and indeed transparent cost of doing business in international markets. If you wished to access those markets yourself, you would still incur costs of travel, sales and marketing but you would not be as expert as they are. This is one case where it really does pay to pay the experts, I believe.

 

5 Reasons to be Comfortable With Paying Commission to Trade Partners in International Markets

Here are my Top 5 reasons to get comfortable with commission to trade partners. As the name suggests, trade partners partner with you to market and sell your product or experience.

1. They have well-established distribution channels and an established customer base. They have nurtured relationships over a long period of time and you get to coat-tail on those.

2. They have expert market knowledge – they are experts in their field and in their geographical area.

3. They open up multiple markets and segments - from larger groups to small, high-value groups to free independent travellers. They allow you to diversify without having to accumulate years of expertise and relationships.

4. They help secure advance bookings with longer lead-times over an extended period.

5. They offer an avenue to diversifying your income and spreading your business risk across multiple distribution channels. As the pandemic has shown, it’s wise to spread your sales as a means of protecting your business against unknowns.

 

Common Mistakes

I’ve come across many Tourism Experience Entrepreneurs who simply haven’t taken the time to get really clear on commissions and how they may work for their business. Yes, it means digging in with spreadsheets and calculators but it’s the very bread and butter of your business and central to any ambition you have to diversify or scale.

Many get clouded by the big scary commission figures and don’t take time to value the expertise and services of the trade partner.

Others fail to equate like with like – while you pay no commission on direct sales, you will have invested considerable time and money in securing that visitor also. While commission free they were not actually free.

 

What Next?

Examine deeply your thoughts and feelings on commission and rationalize it as a cost of business service.

Work on developing a business mix that blends direct and indirect channels and allows you understand your average commission rate across your own business. Create a simple table for yourself of your average commissions:

 

Sales Avenue

Average Commission

Direct to Visitor

0%

Via a Retail Travel Agent

10%

Market-based Wholesaler

20%

Income Tour Operator

30%

Other

35%

Average Commission

19%

 

Now, make a list of 3 ways you can influence your business mix so that you get an optimal balance of costs of distribution across you’re the markets you operate in.

 

We Can Help Grow Your Confidence in Your Pricing Strategy

Managing commissions and business mix is one element of an overall pricing strategy for your tourism experience business. If pricing is an area that you’d like to grow your clarity and confidence in, then consider checking out our Tourism Business Accelerator Programme. It is designed especially for tourism experience entrepreneurs and we give significant time to the entire area of Pricing. This includes things like The Rules of Pricing in Tourism, Pricing for Profit, Pricing Strategy Options, the Price Experience Hierarchy and the Buying Continuum. Above all, apart from the Mechanics of Pricing, we also look deep into the Mindset of Pricing, supporting participants to nurture the mindset that optimally serves themselves, their trade partners and their visitors.

 

Tina O'Dwyer

Tina is a Certified High Performance Coach specialising in tourism. She has extensive experience in sustainable tourism, regenerative tourism, food tourism, networks, clusters and collaborations. On the 28th of September 2022 we will be commencing The Tourism Business Accelerator Programme. We will have an upcoming lunchtime information session which you can attend online on the 12th of September 2022. For more information and updates on the Tourism Business Accelerator Programme click here.

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