This blog post is an extract from our workshop held in March 2019, hosted by TrekkSoft CEO, Olan O'Sullivan. Below are some of the key takeaways from the workshop. We also have a link to the presentation slides and handout materials to download.
So let's talk commission rates.
You pay them when you sell through Online Travel Agents, partners, referral websites, channel manager and your booking system.
While most commission rates are static, we've seen a pattern in the airline and hotel industry. As Online Travel Agents gain more market-share, they increase commission rates. It makes sense from an advertising perspective.
The higher the reach, the your higher cost.
But, what is the difference between 20% and 25% to your business? This post aims to help you understand your costs to help you identify the optimum net profit your business can make.
Understanding your costs
Your business success is determined by the profit you make. Understanding your Net Profit allows you to work out how much commission you can afford to pay and what amount could be detrimental to your business.
Let's start with your costs:
This will vary depending on your tour type and partners but this would include your office, staff, equipment, additional guides, photographer, transport, storage etc.
On average this is around 50% of your tour but can be lower for example with a walking tour with one guide or as high as 65% for a complex tour that involves 3rd parties.
This is your commission paid to your OTA, sales team, channel manager, payment gateway or reservation software.
Marketing costs includes the retainer you pay to your marketing agency, advertising budget, internal marketing team members or time set aside setting up your tours online (e.g. writing listings, adding availability), your booking engine and channel manager.
Now let's drill down to your margins:
What is your balance once you remove all of your costs from your revenue? This will give you your Gross Profit.
Gross Profit Margin
What percentage is this and how does it set you up for growth? Does it give you flexibility or are you limited? A strong profit margin would be over 65%.
Again, this will vary for different tour types.
What are you left with at the end of the year after removing all of your outgoing costs? Is this profitable and does it offer a steady growth for your business?
Calculating your costs
In the example below, we've compared a direct booking to a booking via an Online Travel Agent.
It's obvious that direct bookings can provide a healthier net profit, but direct channels might not always drive bookings to your business.
Online Travel Agents can assist with reaching new markets and targeting a wider audience. It's all about having a balanced distribution strategy that works for you.