Following hot on the heels of GetYourGuide's news of its Preferred Partner program, I thought it was a good time to look at what this means for the industry.
In truth, I’d written this article a week ago as I did not expect Tao Tao's announcement, but things are moving fast for tours, activities and attractions, and if you don’t keep up you risk being left on the sidelines.
This is as much true for operators as it is for technology companies serving the sector.
From a B2B perspective, this activity certainly ruffles feathers as pricing pressure, particularly in the notorious “long-tail segment," has increased.
It is reasonable to assume that this announcement will push it further.
The main issue here is that online travel agencies are now dictating terms for this industry, while operators are increasingly losing control of how they distribute their products.
Capital is flooding into distributors who are fighting it out for consumer eyeballs, and this is a high-stakes game with plenty of subtexts.
So on reflection, the Fareharbor and Bokun acquisitions, and now Tao Tao’s announcement, are like pebbles dropping in the ocean.
A greater impact may have been more visible for operators as reservation technology is where they make their investments, but the startling change is the dramatic increase in booking share now generated by well-financed OTAs determined to follow in the footsteps of the airline and hospitality industry.
That puts intense pressure on direct bookings and advertising costs. It feels so much like in 2002...
Anatomy of one deal
The interesting question to ask is: "Are the former investments by Booking Holdings and TripAdvisor about supporting their consumer offerings rather than offering compelling solutions for operators to run their businesses?"
In TripAdvisor’s case, my answer is: It’s absolutely about supporting its consumer offering.
For example, Bokun charges just 0.1% on bookings. Processing $1 billion in bookings would net it just $1 million in revenue.
Its operating costs are conservatively 5x to 10x that, indicating that TripAdvisor is burning at least $5 million to $10 million a year to operate Bokun on top of the $20 million it allegedly paid to acquire it.
If it’s not using Bokun to generate more bookings on TripAdvisor and Viator at commission rates of 20% to 30%, then why would it do this?
We guess that TripAdvisor hoped to expand and control its supply considerably, thereby maintaining its position as the dominant distribution channel in the industry and winning the battle for eyeballs with a consistent bookable inventory.
However, the number of channels seems to be growing and the value of capital attracted suggests this strategy may already be redundant. Scaling Bokun alongside fighting it out with GetYourGuide, Klook and other OTAs is bound to be a challenge.
As part of GetYourGuide’s preferred partner program, both Bookingkit and Rezdy have made what appears to be hefty discounts by offering lower-priced plans, but they have not eliminated per-booking commissions and fees.
It’s eye-catching, but not impactful, as businesses with high volume will push back on commissions to a level that’s acceptable for them. This is perfectly normal in any sales negotiation for reservation technology.
GetYourGuide CEO at The Phocuswright Conference 2019
Johannes Reck will appear at the industry's premier event for movers and shakers in digital travel.
Anatomy of another
The future for both FareHarbor and Booking Holdings is as yet unclear to me.
On one hand, the scaling up of resources suggests it’s about providing the infrastructure for a large OTA to enter a new segment.
On the other, Booking Holdings has acquired businesses before and left them to operate relatively independently - take OpenTable and Kayak, for example.
The recent departure of Gillian Tans as the Booking.com CEO and the assumption of the role by the Group CEO, Glenn Fogel, might indicate that the focus is to be more interdependent.
So, with all this corporate activity, what does it mean for a tour, activity or attraction operator in 2019?
In two words: margin compression
Economics in a new world
Tourism businesses have traditionally focused on volume growth and the mantra of “all boats rise with the tide” is something that strikes a chord with operators. While visitor numbers rise and fall with global demand, so do profits.
Except now, many operators are paying the excess profits to OTAs and in some cases, they are not even recouping the cost of running tours despite growing revenue significantly.
This is not new, it happened in the airline and more recently the accommodation industry.
Now, the same forces are driving down margins in tours, activities and attractions. To combat this, operators and their tech partners need to be more proactive in their revenue management strategies.
Starting in the 1980s, revenue management was used across the airline industry to optimize financial results. Revenue management is now a common practice across airlines and hotels to sell smart.
The necessary conditions for revenue management are as follows:
- Different customers must be willing to pay the same price for the same service or commodity
- The business must be able to predict the changing levels of demand ahead of time
- Only a fixed amount of resources are available for sale at a given time
- A perishable inventory. After a certain period of time the resources can no longer be sold
In the tours, activities and attractions industry, revenue management is still relatively new and limited to basic yield management, fixed seasonal price discrimination and bundling via packaging.
While there are a lot of similarities to the hospitality industry, there are also important differences.
For example, one of the key conditions for revenue management to work is the presence of high fixed costs and low variable costs. Whilst in attractions this is generally true, in tours and activities, the level of variable costs are a lot higher due to guide ratios, ticket entry and payments to suppliers.
In a study by Cindy Yoonjoung Heo in the International Journal of Hospitality Management (albeit in 2009), the application of revenue management to theme parks were assessed. It was found that many of the conditions for revenue management were met, but that there were unique characteristics, such as:
- Capacity of theme parks are more flexible than that of a hotel or airline
- Advance reservations are lower
- The perceptions of consumers were unknown
We know that advance reservations are growing but the lead time is still low. Critically, we have no idea how consumers would react to a dynamic price environment or one that is based on their willingness to pay.
Consumers also have intrinsic price expectations for their own unique needs and desires and these are often based on their perception of value, the availability of alternatives and the urgency or need for the particular product or service.
Perceived fairness is critical for customers in this respect.
This is why revenue management is so strong in airlines and hotels, as capacity is not only restricted on an airplane or hotel, but also by route and location.
While this may work for attractions, in tours it may be more difficult, particularly for commodity day tours providers.
At the destination level, more stringent licensing for tour sellers and coordination with attractions could help address this, which would optimize revenue for operators and also reduce capacity constraints for tourists and locals alike.
Has anyone visited the Uffizi Gallery in Florence at 11 a.m. in the peak of summer? It’s not much fun, is it?
Looking forward
We started this discussion by talking about how the growth of OTAs is leading to margin compression for tour operators.
Revenue management can be a win-win for operators and partners alike as it can increase total revenue.
we have a lot to learn from the wider travel industry. Don’t get distracted by all the noise around reservation systems. The real battleground is where your products are sold.
Olan O’Sullivan - TrekkSoft
However, in the absence of some level of product differentiation by providing a unique or exclusive offering that consumers can’t merely price-compare, operators may be unable to influence consumer behavior.
They will simply shift their preferences to lower-priced alternatives and, with such low barriers to entry (DMOs take note), the ability to control capacity is also low. Branded products by Airbnb and GetYourGuide indicate they understand this very well.
Yield management is more tactical than strategic and describes the price optimization of the process.
In hotels, for example, yield management would be concerned with the sale of a hotel room, whereas revenue management may take into account the full implications, including areas of secondary spend and the cost involved in actually selling the room in the first place.
This is critical.
If you are not looking at the costs of each revenue source then you will fail to optimize the profitability of your tour, and despite high revenues, you could end up with a very unhealthy relationship with your bank manager.
I talked about this process at a workshop at Arival in Berlin, where we looked at the difference between direct bookings and OTAs from a Profit Per Available Tour (ProfitPAT) perspective.
At TrekkSoft, we are increasingly seeing that operators are reducing net margins substantially to achieve volume growth. In our opinion, this is not sustainable.
For many years the conversation around tours, activities and attractions centered on the things it was not good at. People did not want to make advance reservations, operators were too slow to adopt technology, the products were too fragmented to distribute easily.
While many of these assumptions still hold, technological innovation is breaking them down and digital distribution, in particular, is looking to capitalize on that.
Operators need to become a lot more forward-thinking to really assess where their growth is coming from and how profitable that growth is.
In this respect, we have a lot to learn from the wider travel industry. Don’t get distracted by all the noise around reservation systems.
The real battleground is where your products are sold as it’s going to get a lot harder for the seller to be you.
* For those interested in further dissecting the GetYourGuide news, I’d recommend listening to Shane Whaley’s podcast, Tourpreneur, where he discusses the announcement with Peter Syme and Alex Bainbridge. Bainbridge provided further context on GetYourGuide’s ambitions on his Destination CTO blog.