Sustainable pricing principles

Networking and distribution channels play an important role in the tourism industry and especially among small, specialized services providers that lack their own sales resources for actively offering their products to international tour operators. The trajectory of tourism products from producers to the consumer goes through two distribution channels. These distribution channels consist of sales professionals who work in an area, where most services providers lack resources and expertise. They get customers and promote the destination and its offerings.

 

Leisure-segment: free time travelling

International tour operators usually prefer to cooperate with a few or even just one partner per destination, because they do not have the time and resources to negotiate over single services. Tour operators seek to work together with a DMC or incoming agencies since they are confident that through them they get the best services of the destination, tour operators’ prices and a fair commission.

In addition to their own offerings, the DMC/incoming agencies look for reliable and high-quality service providers, whose products can be sold to tour operators. The expertise of the DMC/incoming agencies plays an important role in product development and creating attractive products by combining single services. They are very active in sales and marketing in the target markets.

The establishment of suitable and efficient sales and distribution channels is crucial in the tourism industry. Finding the right distribution channel, tour operator and target group for a specific product requires international business expertise and a high degree of experience and knowledge of the industry. Tour operators are usually specialized in particular target groups. As a result, one has to be aware of their profile. This is actually part of the work of the DMC/incoming agencies, which are specialized in offering the products of a destination to the right tour operators.

As a reward for their work, the DMC/incoming agencies receive a commission fee for their services. In cases of larger and broader cooperation, the DMC/incoming agencies may also be granted a marketing fee. Commission fees are usually fair and based purely on the concrete sale.

Service providers should price their products so that the price includes the commission fee required by the distribution channel. It is recommended that 25%-30% of the end price of the product is reserved for a possible commission fee. It should be noted that in some deals we offer -30%, in others -20% or -15% and in some other cases one is not subjected to give any commission at all (for example direct local sales). Service providers should define the end price of the product in such a way that it includes possible commission fees. This helps to keep pricing consistent and immune to the different levels of the distribution channel. When the service provider does not define the sale price of his/her product, due to the different levels of the distribution channel s/he starts to compete with herself/himself. Indeed, the sale price is defined by the distribution channel, which delivers a distorted view of the product price and the pricing policy of the destination to the final consumer.

Examples based on different levels of the distribution channel

Let’s take a product whose sale price is EUR 100. The service provider has defined the sale price and is willing to pay a commission fee, if necessary, up to 30%.


Service provider

DMC/incoming agency

Tour operator

Travel agencies

Consumer pays

EUR 80

10% (eur 10)

10% (eur 10)

 

EUR 100

EUR 80

20% (eur 20)

 

 

EUR 100

EUR 70

10% (eur 10)

10% (eur 10)

10% (eur 10)

EUR 100

 

Sustainable pricing, MICE* segment

The role of the DMC/incoming agencies becomes more important in the MICE business segment. The client is an incentive house that has received the mandate of a company or organization. Incentive houses may even suggest particular destinations based on the nature of the trip or event and the wishes expressed by the client. While the distribution channel can differ in the number of intermediaries, the following pattern seems to prevail: Finnish DMC/incoming agency – incentive house – company (end customer).

In this kind of a business segment, all efforts are focused on finding the services and products that meet the purpose of the trip. In particular, the company playing the host has to keep in mind the type of travellers it is dealing with and to be aware of their needs and expectations.

The DMC/incoming agency puts all elements together according to the bid of the customer (incentive house). These trips are a good mix of tailor-made products and basic offerings to the last detail.

Pricing:

The DMC/incoming agency gives a net price to the incentive house. The final price that the company pays for the trip is usually a mystery to the incoming agency and it depends on the contract signed between the incentive house and the company (end customer). The travellers, on the other hand, are guests and they do not have to pay anything for the trip.

The DMC/incoming agency puts together a programme by combining services from its own house with the offerings of other service providers. These groups always require an incentive coordinator; that means a skilful and multilingual local tour leader. This service is provided by the DMC/incoming agency. The input of the DMC/incoming agency is calculated in the price. The work with these groups is usually intense and may last even a whole year. A significant number of working hours go into the planning of a program that has to be fitted to the needs, wishes and expectations of the customer.

The net price offered by the DMC to the incentive house includes:

- Service providers’ prices: These are either prices including a commission or a net price agreed on a customized product, to which the DMC/incoming agency has added a required profit margin.

- The services of the local tour leader

- The work of the DMC/incoming agency

The contractual agreement is only between the DMC/incoming agency and the incentive house. If the prices of the services included in the program are displayed in brochures and on the Internet (e.g. accommodation and restaurant menus), the service provider is also expected in MICE business deals to give a commission fee (preferably 20%) to the DMC/incoming agency. If the programs and services are completely customized according to the requirements of the customer, net prices can be used. The price is then a contractual agreement between the DMC/incoming agency and the service provider.

*) MICE = Meetings, Incentives, Congresses and Events. In this segment, the client is a company or other similar organization. The travellers are the client’s employees, business partners or other stakeholders. These groups are more demanding than the leisure travel segment, because it is about a reward trip, incentive travel, conference travel or an event for investing on staff development or promoting business cooperation. Everything that happens during the journey is on the name of the company’s reputation.

 

Things a service provider needs to think about when determining the sale price

It’s not only about determining the right commission level, but also the right combination…

Service provider: “We cannot afford to give 30% commission, we won’t maintain anyone, everybody should take care of their own profit margin”. It must be remembered that international business is long-term oriented. Also the reservations made by individual consumers and businesses that take place on site are the outcome of commercial demand development, long-term marketing efforts and cooperation with tour operators. Also this kind of work needs to be compensated somehow.

When the service provider is prepared to offer 30% of the sale price, it does not mean that everything should be offered at -30%. The service provider should be in a position to assess how much of the business takes place on site at the sale price and how much comes in through the distribution channel. Those cases, where a commission is paid, can be regarded as done business. The service provider has not spent resources in negotiating and finding the customers. Additional business deals increase the number of visitors, contributing to the allocation of costs among a larger number of guests and the development of the entire business. The cooperation network grows and becomes stronger, when different intermediaries (DMC and tour operators) are not competing with one another at least regarding price.

Market price and benchmarking

It is important to determine the price level of similar or competing products. Benchmarking does not mean that one copies the business practices and prices of other companies. Instead, it is about exploring the market and trying to position one’s product and price level within it – this is an essential precondition for business success.

Can the product be sold and further developed?

Tourism products should not be made for oneself, but for a defined target group. To make the product marketable, it should include an appealing sales text, a script, its implementation, an accurate time schedule and price. When one creates products for the leisure segment and intends to sell a weekly programme, one needs to think when (which day of the week) and at what time of the day the product is doable. Service providers should seek to serve several target groups and different types of customers. This, however, requires that certain conditions are met. For example, incentive groups want to experience different kinds of products within a private atmosphere. The service provider should not be attending to other customers at the same time, at least not in the same place. At the same time, service providers should consider some possible product variations and follow trends and new developments in the tourism industry that can help to update their offerings.

Distribution channels and networks

Service providers should actively and consciously think about possible distribution channels and networks. They should seek partners with whom they are able to reach their target groups. There should be more than one distribution channel so that the customer flow does not depend on a single channel. It is not enough to develop the product and to invest in physical elements, but service providers should also actively work on their networks. Otherwise the risk of failure is high.