Why commission is critical to the industry

Learn why commission is critical to the industry

Commission payments have recently come under scrutiny, with two major hotel groups announcing that they are reducing their commission payments to agents in America and Canada from 10% to 7%. This has caused concern within the industry that this may be the start of something much more widespread and that hotels could follow the airlines lead, where commission payments have all but disappeared over recent years.

Low risk

Meetings and events agencies largely emerged as a force in the early 1990s, but the commission model that funded the agencies growth can be traced back to Thomas Cook who, in 1845, organised transport and accommodation for 540 members of his temperance movement whilst charging a commission for his services. Hotels, like any other business, have long understood that there are costs for third parties in delivering firm bookings and so have paid a standard commission in return. Unlike most other sales channels to market - such as hotel sales teams, marketing, and advertising - agents are only paid on delivering confirmed business and so the agents have traditionally represented a very low risk way for hotels to grow their sales.

Client perspective

Any reduction in commission payments clearly represents a threat to agents, as margins are already tight and paid only on confirmed business, rather than for the work done. Arguably though it is clients who will suffer most financially. Approximately 70% of the meetings business placed in UK hotels is generated through agents, with the vast majority of companies preferring to use an outsourced specialist rather than tie up valuable in-house resources with meeting planning and venue sourcing. These companies are fully aware that a small percentage of their spend is used to pay the agent for their service but prefer this method of payment, rather than the alternative which is to pay a direct cost to the agent.

Alternatives

Whilst companies with significant meetings spend (£2 million+) now often reward their agent through a management fee - which involves calculating the agents costs and an agreed profit margin for delivering their services - this management fee is paid out of the commission generated from the company's bookings. Arguably the term management fee is misleading then, and this form of recompense is closer to a type of commission share based on the company generating significant volumes of business and in turn commission, which bring about economies of scale for the agent. The key point though is that the agent is still paid through the the commission generated, rather than by the client.

Closing thoughts

The truth is that the current commission model has worked well for both agents and crucially their clients, for many years. Procurement - who now manage many companies meetings policies - remain in favour of the commission model and have showed no desire to move to net rates. The hotel bookings industry has been built around commission and whilst I think it seems unlikely therefore that commission will disappear, it is vital that hotels understand that any small financial gains they make through reducing commission will negatively impact on the many thousands of companies that use hotel booking agents, every bit as much as the agents themselves.

About the author

Savva Hadji-Savva

Savva Hadji-Savva is commercial director of Grass Roots Meetings & Events. Savva oversees the procurement and management of all suppliers; building strong and meaningful relationships with brands, independent venues and owners. In addition, he retains Executive Board Sponsor responsibility for a number of Grass Roots' global banking clients, focused on delivering service, solutions and knowledge to support their M&E policies.

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