As the meetings industry begins to climb out of the rubble of the earthquake caused by Marriott’s abrupt decision to give commissions a 30% haircut, it’s an opportunity for all sides, particularly third parties, to step back and assess the damage, and fix what many have said for a long time was a broken business model.
Few things cause more chaos, panic and outrage than messing with someone’s livelihood on very short notice, as Marriott is quickly finding out. The pain and impact of this decision is far-reaching, and includes thousands of small, independent meeting and event companies, large sourcing houses with considerable volume, and scores of in-house event departments who’ve relied on those commissions, directly or indirectly. All will have moments of heavy reckoning in the days and weeks to come, but clearly the heaviest blows will fall on the third parties.
1. THE TRAVEL-BAN-STYLE ROLL OUT
Third party agencies can rage all they want about the move, but ultimately it was a calculated business decision by Marriott. In the end it may backfire, but someone at Marriott obviously thought it was worth the risk, and we won’t know for some time how to grade that decision.
How they rolled it out, on the other hand, was a disaster, seemingly following the blueprint used by the Trump administration in announcing their first travel ban days after taking office, without notifying government agencies or airport personnel. In both cases, ‘the how’ was so bad it often obscured discussion over ‘the what’ and ‘the why’:
- Choosing an April 1st start date gave the industry two months to plan for the change, a paltry amount of time given the lead times and planning cycles of most meetings.
- Notifying clients of the change before or at the same time as informing third parties caused unnecessary chaos, and had the impact of throwing many loyal agencies under the bus.
- Little thought seems to have been given to the many corporate event departments that rely on commission-driven agencies to help them manage their workflow. In some cases agencies rebate a portion of their commissions to help directly fund those departments.
If Hilton, Hyatt, IHG, or other chains decide to follow suit, they will at least score points with everyone by following a more orderly roll out with at least six months’ notice, and by engaging with agencies in advance on a smooth transition.
2. COMMISSION – DISCLOSURE = KICKBACK
When I’ve taught or spoken on pricing for event services, I’ve often said the difference between a commission and a kickback is one word: disclosure. A kickback is something received under the table as a thank you for steering business to a vendor, without the client’s knowledge. A commission, on the other hand, is a fully disclosed incentive-based payment that is only earned upon the consummation of a deal.
The risks to the 3rd party of not disclosing a payment like this are significant:
- If the client finds out (and eventually they will), they will call into question the integrity of your sourcing process, thinking you recommended a certain venue because of the payment you got from them.
- Worse, trust between you and the client has just evaporated. If they’re hiding this from me, the client will reason, what else are they hiding?
The meetings industry has been moving slowly, but steadily, toward greater transparency of commission payments, which is good. For those companies that have still not disclosed their commissions to their clients, it’s time to get with the program and come clean, for the sake of your own business, and for the industry at large.
3. HOW COMMISSIONS OBSCURE THE VALUE PROPOSITION
This is the real problem at the core of the commission model. Even if you disclose the fact that you’re earning a commission, your client still has no idea what your service is worth. Why? Because they’re not paying for it directly, and most likely you haven’t told them what it costs.
There are numerous ways to charge for event services: flat fee, hourly rate, day rate, markup, percentage of budget, commission, etc. Each has its own pros, cons and best practices. When people ask me which pricing model they should use, my answer is always the same: how clients pay you shouldn’t matter. What’s important is being clear about how much you charge, and why you’re worth it. In other words: your value proposition.
Third parties should be able to say to a client: For us to provide venue sourcing (or contract negotiations, or on site management, or anything else) the price is X. Once you agree on a price, how they pay you is like a store clerk asking if you’ll be paying by cash, credit card, or Bitcoin.
If you’ve been doing that all along, then Marriott’s decision shouldn’t be the end of the world. You can simply go back to your client and say, “Remember we discussed that the price for our meeting management was $20,000, and that we were going to fund most of that through commissions. Moving forward, if we wind up at a Marriott, our commission will now be 30% less, so we’ll need to charge you that difference.” If the client already knows what your services are worth, you can come up with a solution together.
4. GROWING RISKS OF THE COMMISSION MODEL
Even if agencies disclose their commissions and show their clients the actual price/value of their services, they face a number of risks and challenges using a commission model:
- If the client cancels the event, they get nothing for their work.
- If the client changes their event parameters (e.g. location, dates, city, number of guests, etc.) they have to repeat the entire sourcing process, without charging any more money.
- It has horrible cash flow. Payment is received a few months after the event is over, which can be years after the sourcing work was completed.
- And now, as Marriott has shown, the rug can be pulled out from under you on a moment’s notice with little recourse.
Marriott’s move should catalyze event and meeting planners to shift to billing the client directly, following many commission-based fields. Stockbrokers (now called financial advisors), for example, primarily used to make money off of commissions from trades, but that proved unpredictable, in addition to calling into question the integrity of advocating constant trading when ‘buy and hold’ was often the best strategy for their clients. Their compensation model has shifted to billing the client a percentage of assets under management, which is more transparent, offers steadier income, and is probably more lucrative as well.
5. WHAT’S NEXT?
To say that hotels pay commissions begrudgingly is probably an understatement. Many hotel sales and marketing executives eye the ever-growing commission line on their profit and loss statements like lions watching a gazelle with a bum leg on the Serengeti.
They dream of cutting or even eliminating commissions. In 2000, for example, Ritz Carlton tried to scale back commission levels, but soon after reversed course. What’s different now is Marriott’s scale following the Starwood acquisition, putting it in the best position of any brand to drive down commissions.
However, it’s hard to believe Marriott would risk the potential loss in sales from such a move to save 3% on commission payments. In cities where Marriott has strong market share in meeting hotels, the impact might be minimal, as agencies won’t have as many alternatives. But in markets where Marriott faces stronger competition, and can least afford any sales disruption, they will surely see some events go elsewhere. The fallout will be messy.
Many industry experts, therefore, think the 7% is merely a precursor to dropping commissions to 5% in a couple of years, and perhaps lower after that.
Yet while Marriott’s market share is indeed very strong, one could argue that the commission horse has left the barn, as the percentage of business booked via commissions grows every year.
For many hotel brands, third parties represent some of their biggest clients, if not the biggest. Helms Briscoe, for instance, placed 6.4 million room nights in 2017 accounting for $1.275 billion in revenue, a level of volume not easily ignored.
For large sourcing agencies with armies of agents and an entrenched commission infrastructure like Helms Briscoe, expect to see deals negotiated for commissions at various tiers based on hitting volume targets. Then look for smaller agencies to form consortiums in order to gain access to these higher rates.
Likewise, look for some chains to be opportunistic and use this inflection point to gain market share at Marriott’s expense, by going the other direction and offering commissions above 10%. Preferred Hotels & Resorts, for example, seized the moment by offering 11% commission, with a further dig at Marriott by calling it a “We Appreciate You” promotion.
Also, the announcement by Marriott doesn’t prevent individual hotels from agreeing to a 10%, or even higher, commission on select pieces of business. Third parties can and should try to negotiate on an event-by-event basis to maximize their leverage when they can.
For third party agencies reliant upon commissions, the best advice is as follows:
- Stay calm. A number of industry leaders, like Maritz’ David Peckinpaugh and HPN’s Bill Kilburg, have rightly said it’s worth taking a step back and not panicking. While definitely a problem, the commission cut could’ve been worse. It could’ve been 5%.
- Talk to your clients. The silver lining in Marriott’s botched roll-out is that this is front page news all over the industry, creating an opening for agencies to start a frank conversation with their clients about pricing and value.
- Plan to shift your business model away from commissions. Unless you want to be on the commission roller coaster for the indefinite future, now is the time to start planning for moving away from commissions and toward a transparent fee-based model billed directly to your end-user clients.
NOTE: An earlier version of this article was published in The Meeting Professional