Blog homeTour operator reservation systems can be expensive to develop and maintain. The chances are that you use a reservation system provided by a travel technology company rather than building your own.
How do you pay for your software?
The total cost to you is likely to come down to three or four components:
- Software license (either fixed or perhaps per seat / person – either concurrent or total)
- Professional services (configuration, training, consultancy, web design)
- Booking fee (performance based) – either fixed per booking – or % of transaction revenue
- Bespoke development costs for custom development (based on time & materials)
Different travel technology companies will adjust and cross subsidise the different components hence the true costs of each component are often obfuscated.
For example some companies will hook you in with a low cost license model – but then charge you significant fees for bespoke development. [It is these companies that have come unstuck during the travel downturn as fixed income has remained fixed (!!!) whist professional service income has fallen as travel company projects are put off for another 12 months]
Other companies have merged their charges into a single, performance based, value. E.g. perhaps they take 1% of the value of the transaction. Some go upto 5% of the transaction. It is this method I am reviewing today. I don’t think it works very well as a pricing model for reservation systems.
Why the % of transaction revenue based system for software pricing doesn’t work for activity company / tour operator software providers
Training bookings – how do you handle bookings that have come as a result of staff training? You wouldn’t want to pay for these
Test bookings – during configuration & setup phase there are often many test bookings. These can happen once live for regression testing as a result of new products. How can you distinguish between a test booking and a real booking?
Spam bookings - unless you have a credit card payment system integrated into your booking engine you will receive spam bookings. (Not all tour operators do incorporate credit cards in their booking engine, as it isn’t necessary, unlike for more commodity based products)
Handling quotes and enquiries – many small and niche tour operators have a “quote request” or enquiry stage prior to booking. Not all these convert to final bookings. If you are on a performance model do you charge for these non-confirmed bookings or not?
Multiple quotes - for tailor-made tours you can end up with multiple quotes for different travel products – of which only one may be confirmed. Do you charge for each quote?
Products without prices – we have customers who sell products that are zero priced (for example some forms of logistics management). If you are charging a % of the transaction revenue then tricky to workout how to charge a company with zero priced products.
Backloading – When new companies take on tour operator software for the first time they tend to do significant booking backloading so the software has a good picture of all transactions. If you are charged for historical booking backloading then the full picture won’t be in the software.
Multiple layer transactions – Take an agent who sells a tour that is sent to a tour operator. Each wants a separate booking in their own account (one represents the contract between the agent and the consumer, the other represents the contract between the agent and the tour operator). If you charge a % of transaction revenue then you will end up charging twice on the same booking. Both layers may not even know they are using the same software.
End up enhancing system around transactions only – if you as a technology provider earn all your money from transactions you tend to only want to enhance functionality that drives transactions. For example because we are not focussed around just transactions we have enhanced our website CMS, the enquiry management system etc. No temptation only to work on transactions.
Unfair pricing for low volume high value bookings - take a tailor-made angling tour operator who sells high value tailor-made tours. Compare that to a high volume bus tour company selling low priced tours. Why should the angling tour operator pay more for light use on the system than a heavier use bus tour company? If you are going to do utility based pricing it should be based around usage not around transaction value. Doesn’t matter where the decimal place is on a bit of data in your data store… its just a number.
Disincentive to online bookings – If as a tour operator you have a customer on the phone what you want to do is tell them to visit your site and put the booking online (once you know they are converted). However if your web booking transaction % charge is too high it introduces an incentive for the tour operator to take the booking manually (via the phone). This is inefficient for the tour operator and not as nice for the customer. Pricing should be created to reward efficient behaviour.
Disincentive to having all bookings in your software – instead you may just have a sub-set of bookings where the tour operator has seen value in paying the % (e.g. perhaps those coming from an online distributor)
Competitor systems pricing #1 – As soon as you start pushing through many bookings on a % transaction basis you will soon hit a ceiling where other tour operator system suppliers who sell based on a license fee basis compete at. Hence % based looks competitive to start with – but not for any company employing more than a few tour leaders.
Competitor systems pricing #2 – You can’t charge for content on the web if someone else is providing the same content for free. This is why newspapers are struggling so much. Hence if just one competitor isn’t charging on a % transaction revenue basis then you can’t either.
As far as I can see all that performance based pricing does is cause plenty of opportunity for negative conversations with travel company customers. Very few upsides at all.
Having said that I do believe that performance based marketing does work very well in the travel industry – but only if it is your performance that is being rewarded. Hollywood screenwriters don’t pay a % of their royalties to Microsoft just because they used Microsoft Word to write their blockbuster. The fact that they used Microsoft Word was immaterial to the success of the film. It was just a tool.
About us – TourCMS
We are running on a low cost license based model based on number of seats (staff users) who need access to the system. See our prices. Only over several thousand bookings per month do we charge a booking fee – and then it is a fixed booking fee (not based on the value of the transaction).
Most of our competitors are running on % of revenue – ranging between 1% and 5%.
I calculated ours at about 0.1% revenue. i.e. we give 10x more ROI / cost effectiveness overall than competitors who charge 1%.
Interesting. Not sure competitors charging on % revenue works. Who is right?
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True. This was an issue at a recent “bargaining”/negotiation session we had with our vendor. They bended finally and settled on a flat-fee per transaction. % of transaction revenue is just silly.
Alex – a great article – took me a while to get round to reading it.
The winners will definitely be the developers and systems providers who can build systems that can keep up with the times and be flexible to their customers’ needs at a competitive price. Having conducted research recently into what the options are out there, there are still a lot of technology dinosaurs but it is moving in the right direction and what has been refreshing is the move away from the GDS systems being the ‘be all and end all’.
I totally agree with you that a % of revenue model is something that a company will start to resent of it’s supplier as it grows.