Among the effects of the Covid-19 crisis is more dialogue about the efficacy of the prevailing transaction fee pricing structure used by travel management companies. Based on his experience in the technology services industry as it adopted the Software-as-a-Service approach, Fox World Travel chief information officer Sam Hilgendorf makes a case for subscriptions and other recurring revenue models.
As the Chinese proverb says, “The best time to plant a tree was 20 years ago; the second-best time is now.” We could also apply this proverb to building resiliency into a business model.
Over the last 20 years, we have seen three key events that severely impacted daily travel transactions: September 11, the Great Recession and Covid-19. Still today, many businesses within the travel industry rely too heavily on individual transaction volume. As we start working through the recovery of the most recent challenge, we need to prepare our financial models for the next global impact to travel. History has shown it is a matter of when, not if, this will happen again.
Over this same period, we have seen other industries successfully transition into recurring revenue models, better positioning themselves to withstand times of crisis. One classic example of this is Netflix. Netflix introduced a monthly subscription that effectively rendered the video rental transaction obsolete. Out of the dotcom crash, cloud computing and Software-as-a-Service began to replace large one-time capital purchases. Finally, to reduce their reliance on in-store transactions, the retail industry has started experimenting with subscriptions, from curated clothing crates to the replacement of grooming supplies and even pre-portioned meal ingredients.
Covid-19 may have created the tipping point needed to make a similar evolution in the travel industry, compelling us to build additional resiliency in our business models.
Before joining Fox World Travel, I spent over 20 years in the technology services industry. I was fortunate to be part of the transition of a transaction-based industry of hardware and software sales to a recurring revenue model of ongoing managed services and, eventually, to the full subscription model with Software-as-a-Service.
This evolution did not take place overnight. It took technology companies years of experimentation to establish profitable pricing structures. Fortunately for us, this road has now been largely paved for the travel industry. There are many sources available on different recurring revenue models and their benefits.
Below is a simple primer on identifying the opportunities to create resiliency within our business models and how we can start experimenting with and exploring new ideas.
Analyze The Current Financial Model
As we are experiencing the severe impacts of Covid-19 on travel transactions, our financial models’ weaknesses are fully exposed. Here are several questions we each can use to evaluate our strengths and opportunities:
1. What percentage of my income is based on individual transactions versus automatic recurring sources?
2. What percentage of my income do I collect before the cost I incur for delivering the sale or service?
3. Am I able to grow my revenue without adding to my resources and effort at the same pace (in turn, avoiding excess cost during a period of decline)?
Business models based heavily on ticket transactions all show dramatic weakness right now, where a subscription license or a recurring service fee has much stronger resilience in the current environment.
Separate Unique Value From A Transaction
A transaction-based pricing model often has many different value-added services that have been included over time to create a competitive advantage of features. This often lowers the resiliency of the business model. It adds more direct cost prior to the actual transaction, relying on even more transaction volume to fund that investment.
When we bump this pricing model against our questions above, it shows some innate weakness. This is made worse by any global event that restricts travel. These additional services are delivered regardless of the reduced number of ticket transactions.
Identifying and detaching the services which do not tie directly to a transaction allows you to create a new, distinctive offering. While previously the service was automatically included as part of the transaction, now we can have a discussion on its unique value.
Evaluate And Understand Our Customers’ Usage Patterns
A key lesson from the last decade of software subscription models is the importance of collecting and analyzing the data on how different customers use the service. Each customer may view that value differently. Understanding these experiences and the usage of that service is how we can start to better express the value of the service in a new pricing model.
It would not make much sense to charge a flat monthly fee for a service where one customer has a single person using it twice a month while another customer has 50 people using it daily. In this example, a tiered pricing model may better serve the stark usage differences of these customers. These customer experiences must be well understood to effectively develop the price structure that best addresses their various needs.
Price Based On The Value To Our Customer, Not Our Cost Or Competitors
As we are all aware, our customers do not really care about the cost we incur to deliver a service. In a subscription model, we need to start thinking about our pricing from the perspective of our customers’ perceived value of the service.
One widely accepted philosophy for the initial creation of a subscription pricing model is the “10x rule,” which states: “We believe our customers receive value worth ten times what we charge for the service.” While just a guideline, this helps ensure we are not either overcharging or undercharging for our service.
While we want to price our service on the perceived value, we cannot ignore our costs. It is even more imperative that we understand our complete cost to deliver the service. That includes both fixed and variable costs. As we think about our fixed costs, these need to be spread across the number of customers we expect to manage.
To illustrate these concepts, we will apply them to a traditional TMC business model. In this example, the TMC will have services focused on individual trip planning, along with services designed for the corporate travel program’s financial performance. This TMC’s current financial model is almost entirely made up of fees and commissions centered around the ticketing transaction.
When we begin to apply our resiliency questions against all the services provided by the TMC, we can start to see how much revenue is driven solely through individual transaction fees. While the value of the TMC is no longer just about generating the ticket, it is traditionally how the industry still prices out services.
As we further analyze what is all included within the pricing of the transaction fees, it includes program-level services that are not tied to the unique value of the trip planning and ticketing service. These services include reporting, account management, policy management services and supplier negotiations support.
Next, we look at how these reporting services are accessed, how often, by how many individuals and for what reasons. We can then start to define the best structure for delivering this service to our customer. This service maintains its value to the customer regardless of how many transactions occur a month, and may have its own cadence of measurable activities, which could be weekly, monthly or quarterly.
When we then apply the 10x rule to the value that holistic reporting, analysis and intelligence creates for our customer, we can start to justify a subscription for this service. This also provides additional confidence in the stand-alone value of the service when negotiating with customers about separating this service from the transaction fee.
In this example, simply removing the reporting service from each transaction fee and converting it into a monthly subscription provides greater business resiliency for this TMC. The TMC delivers the same service as before, and at the same competitive price. But it is now collecting revenue at the beginning of each month regardless of the number of transactions completed.
If we multiply this example by the number of customers we manage, we now have the start to a financial model that better withstands another global travel disruption.
Now is the time for our industry to review the aspects of our business models that are both highly transactional and require us to incur all costs prior to receiving the revenue. Is there value within these transactions that we can separate out into either a license for usage, a feature-based price or a flat fee?
As other industries have shown, this change is an iterative process and requires a lot of experimenting with pricing and offerings to become sustainable. But companies that have successfully made this transition have been handsomely rewarded.
Let us all agree that it is time to sow the seeds for more resilient business models in travel, so that in another 20 years, we will not be asking ourselves why we have not planted the tree.
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