A suggestion for a fundamental commission change

Posted on by in Point-to-Point

Last week, John Frenaye and I were debating a recent move by a major cruise line to cut the commission rate they paid on Interline rates (these are special rates for airline and other associated industry employees) to 10%. John’s concern was that cruise lines might in fact be looking to reduce their commission expense or even eliminate it on certain classes of bookings—early booking rates, groups, military, residency, etc. My first response was something I used to say to an occasional complaint call to my weekly cruise radio show in Miami, “He who pays for the new ships, makes the rules.”

I guess this whole topic stems back from my early banking days. I learned in graduate school, that when a business seeks to sustain its growth by expanding its asset base, it needs to carefully review how they will pay for this expansion. There are only three ways,

  1. Raise more capital or borrow
  2. Expand profitable sales though its existing distribution network
  3. Reduce existing operational or sales expenses in order to pay off the expansion cost

Having entered the travel industry in 1986, I have applauded the cruise industry’s bold move to continue to grow their industry by building such wonderful new ships. Agents need to appreciate that these new enhancements were designed to help travel agents sell clients their first cruise. And, it isn’t like the cruise lines haven’t been telling us how important that first cruise is to subsequent ones. I remember that mantra twenty years ago.

While most agents don’t want to think about it, I question if we have met the expectations of the cruise lines in filling all these new ships?  Judging from all of the direct sales and alternative channels of distribution, I would say as an industry, we came up short.

So my question is, how can travel agents regain their prominence in the cruise selling business? Agents have a choice. They can be a true sales consultant and seek out new business or they can be order takers or worse yet, rebating their last nickel to close a sale. So the bottom line is, I think that the cruise lines are getting a little concerned about their distribution system. And don’t kid yourself; they are looking for ways to reduce operating and sales expenses, including how agents are paid.

Why Not Pay The True Sales Consultants More?

A parallel concern is that the small brick and mortar agencies are being forced out of business partially because the big host agencies are attracting their good agents. While large host agencies are aggregating the sales of mostly part time or hobbyist agents to attain the highest commissions,  the smaller agencies are left in the dust—commission wise.

As John and I were hashing it out, it dawned on us that there is a possible solution. Why not pay each individual agent on a tiered basis? The qualifying host, independent, and brick and mortar agencies could earn an override based on total passenger days sailed year over year. As the cruise lines lower the prices and cut more deals to fill ships (are you seeing a trend here?), making an override is becoming more and more challenging. Something is fundamentally wrong with our existing programs. I would be very willing to spend more of my advertising efforts and dollars to attract new clients if I knew I could earn higher overrides based on my performance.

Here is how it could work. With the cruise lines building ships with more and balconies and suites, why not pay agents more to sell those categories? The order takers and non-salespeople will earn 10% commissions on the inside cabins and 12% on the Ocean View cabins—the bread an d butter for them. This would free up the money to help pay true sales consultants 15% on balcony or 17% on suite sales. This is a simple concept for the cruise lines, as they would pay a little more when they earn a little more on the higher per diems from a balcony or a suite. The agents who learn how to sell will earn even more; and more importantly increase their lifetime client value, as we all know that once a client sails in a balcony or suite, it is hard to go back to anything else.  What do you think? Does it make sense? How would you make it better? Please leave a comment!

Larry Norman, CTC, MCC is an icon in the industry. He has been a consultant to over 5,000 Home Based Travel Agents and trained an estimated 22,000 travel agents over his career. He was Travel Trade’s 1996 Travel Educator of the Year. Larry owned a four state network of 17 agencies, with annual sales of $28 million.  Larry is known as “The Outside Sales Agent Expert” for his presentations on outside sales at Travel Trade Cruise-A-Thons, ASTA, ARTA and NACOA travel agent conferences among others. You can share your views with Larry at LarryNormanCTC@Gmail.com or leave a comment here.

  6 thoughts on “A suggestion for a fundamental commission change

  1. 1Laura says:

    Interesting concept Larry. Good points!

  2. Larry, your idea makes sense and is eminently rational. However, I think the direction of the cruise lines is disintermediation, quietly moving towards a higher percentage of direct bookings and eliminating commissions altogether. Fortunately for us, due to the complexity of the purchase, they are a decade or so behind the airlines in this process, but moving that way, none-the-less. I think the future for travel agents, especially those of a sales & marketing mindset – and a knack for self-promotion – is to become content providers in niche areas of expertise – driving revenue primarily from associated online advertising and affiliate links- with commissions limited to market or brand specific hosted booking engines.

  3. 1Nolan Burris says:

    As always – your insight is terrific Larry (and John). I’ll take the opportunity to wave my fee banner a bit though.

    The main reason I focus so much on charging professional consulting fees is to escape the clutches of dependency on supplier commission whims. Any business that puts its financial well being in the hands of another business that has its own agenda, is risky at best.

    Still, I’m definitely NOT anti-commission! Commission is important and a good arrangement. Just remember, commission is and always has been intended for one thing: to compensate agents for BOOKING the supplier – it was never for service related things an agent might decide to do for a client.

    At the end of the day, it’s the client that really has all the power. Fees allow you to pay for giving them the service they expect and desire. I’ll never say it’s easy, just very very important.

  4. Larry, I couldn’t agree more! Our agents have been “trained” to upsell at each and every opportunity, so well now, that our Top 100 clients are actually uncomfortabel if they don’t have at least 2, usually 3 trips , under deposit, paid in full and/or pending departure. About 1/2 of those will book their next one while onboard. Our biggest fear is that as we have developed these long term relationships (over 30 years) that the cruise lines might next decide that these bookings will no longer be “transferred” or credited to us. This is very similar to some of the current issues with room and auto upgrades, where the original reservation is washed and a new trans is tarted resulting in zippo for the agent. A slippery slope indeed!

  5. 1DCTA says:

    A question and then a comment: do they actually pay commission on interline rates? Those rates are obscenely low and not anywhere near what a TA can get for him/herself let alone for a client!

    I think there are a couple of issues here: first, if the cruiselines just did away with backend overrides and left their tier structure alone, then the true “consultants” would be the ones being rewarded. The rebators would still be rebating some, but nowhere near the high levels they do now.

    Second, I don’t have a problem at all with an Agency being on a tier. In fact, I think it’s more than appropriate. We have B&Ms locations of our agency. One one cruise line, one location is earning 14%, another is at 13% and the 3rd and 4th are at 12%. While we all take clients from all over the country via email, most of our clientele come from our individual neighborhoods. The first two agencies have a natural constituency for this particular line, while the latter two do not. Likewise, those two make much higher commissions on another product in comparison to the first two.

    To Nolan’s point – interstingly, using the example above, the B&M location with the 14% commission is the only one of the four that consistently charges consultation fees. Hmmm….gotta wonder about that.

    Anyone notice that CCL is going to a flat 5% in the UK?

  6. 1Susan says:

    Larry,

    Intriguing idea, but I don’t think it will truly succeed as long as the back-end contracts continue to exist. Or at least until they have strict wording in the contract that forbids any and all advertising of rebating/gifting.

    Also, this may actually increase the work for cruise lines, tracking bookings/revenue at an individual level (not just at the agency level). They won’t be too keen on that I’m sure. 😉

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