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Could an elimination of agency commissions in the hotel industry happen, like the elimination of airline commissions did in 1995? With the mounting pressure toward increased profits by hotel owners and the evolving nature of the hotel industry, further impacted by the mergers and acquisitions in recent years, industry leaders are looking for additional revenue sources in all corners of the hotel P&L. A big potential target is the commissions paid on every room night booked through an agency or meetings management company.
Commissions have historically been a channel-marketing fee that hotels offer to intermediaries when they place volume at their hotel, and were seen by the hotels as compensation for the use of the intermediaries’ sales channel. In recent years, hotels began looking at all cost-reduction opportunities, including commissions.
Three different models exist for how commissions are utilized by intermediaries:
The Impact of Commissions
Three major players are impacted by the payment of commissions:
In a GBTA Meetings Committee survey of medium to large companies across industry verticals, 50 percent of companies responded that they rely on commissions to support some part of their meetings management program.
Paying commissions on hotel rooms associated with meetings has been an inherent part of hoteliers’ expenses, and they have historically found value in paying commission to intermediaries for the use of their sales channel.
For those intermediaries that use commissions as some, or all, of their revenue stream, commissions are extremely important. For intermediaries that offer sourcing only, commissions are their main source of revenue. For others, commissions are part of their revenue while fee-based services might make up the rest.
Likelihood of Elimination
While we have no definitive answer, we note that there are differing opinions on the issue.
As one of the hotel chains shared, “Owners are pushing hotels to maximize profits, reduce costs and evaluate all cost-of-sale points, to a greater degree in recent years. Due to increased financial obligations to banks, increased business costs and competition, owners are challenging hotels to find savings in all areas more than ever.”
If you are an intermediary or company that is funded in whole or part by commissions, Tony Wagner, vice president Americas, for CWT M&E, has reassuring words for you: “Hoteliers may evaluate the structure of their sales channel compensation model (e.g. commissions) and incentives — all good businesses do — but no, I do not believe commissions will be eliminated in the M&E space. The difference between hotels and airlines is fragmentation. (Unlike airlines), the hotel industry is massively fragmented. What’s key is that hoteliers understand the risk and bottom-line impact if they eliminated this channel compensation and others did not.”
Mark Harris, on behalf of the UK-based Hotel Business Agents Association (HBBA), in the white paper “Money for Nothing,” says, “The industry consensus is that change will come; the issues are the degree, and the speed at which the switch to fees takes place. It will take time, because this will be a huge step-change here that will need many disconnected parties to take the same steps at the same time — no easy task!”
Intermediaries that rely on commissions as a sole source of revenue will face a significant impact. Some could end up closing shop as they may not be able to show any other value. Intermediaries that use commissions as part of their revenue could have an easier time shifting to the fee-based model as they already utilize that model for other services and customers are accustomed to it.
For the corporations and associations that receive commissions back and use these commissions to fund some or their entire program, a significant impact would be felt. Ninety percent of our survey respondents rely on commissions to offset the cost of their meetings management program, and 42 percent said they would need to find another way to pay for their entire program if hotel commissions were reduced, or went away completely.
It would seem that hoteliers might not feel the negative impact as seemingly their profits would go up since they are not paying commission. Jerry Horan, president and COO of ConferenceDirect, sees it differently: Hotels don’t have enough sales resources to cover every account. Lose the channel, lose the business opportunity.
He also believes that the client decides how to drive the business and will continue to do so. A reduction or change in commission structure by hotels will steer the customer to another brand, shifting market share.
No one can predict the future, and the best advice we can provide is to be prepared.
Mike Bingham, managing partner at BottomLine Group, says, “Those in the meeting supply chain, including the SMM industry advocates, have worked hard to mature the category. Like the transient world, those who can articulate and define the value of their programs will have no problems explaining a shift in the underlying supply change economics. One could argue that if companies had to invest in SMMP, versus relying on commissions to pay for the program, there would be more stakeholder support for the business case.”
If you are a company or association using the services of an intermediary, have a conversation now that clearly identifies what is at risk if the commission model were to change, and how as business partners you could lessen the impact. Also, begin to articulate clearly the value of your SMM within your company now.
The GBTA Meetings Committee also recommends viewing the new training offering called “Corporate Meetings Program and Design: It’s About TIME,” which has a module on building a business case that is useful for a new program as well as proving the value of an existing program.
We can never be certain if this change could come, but one thing is certain; if it does, it will be very disruptive to the industry, so take the time now to make sure you have a plan. C&IT