Passengers by the pound, revisited

By Arnie Weissmann
Arnie WeissmannThe recent agreement between Azamara Club Cruises and Virtuoso to take multiple factors into consideration when evaluating agent compensation is a welcome development, though it raises an interesting question: Can the concept be scaled to include retailers outside luxury channels and less-upscale cruise lines?

I think so. I have long believed that supplier-agent commission structures seem designed more for ease of implementation than to maximize a sales channel, and in 2004 I wrote "Passengers by the pound," a column on the subject. Looking it over, it's surprising how little has changed, with one exception: My prediction that a "new structure will not be as fair as one that focuses on lifetime value" found form in noncommissionable fees. 

Here's the original column, edited slightly for length:

Is it unreasonable for suppliers to believe that their high standards have everything to do with repeat business? And is it unreasonable for agents to believe that, if they hadn't sent a client to a specific supplier in the first place, there would have been no opportunity for repeat business?

Both are valid perspectives, but, interestingly, most structured commissions seem to discount both parties' contributions.

Suppliers pay commissions and overrides based on the number of bookings or dollar amounts. First-time passenger, 10th-time passenger, it doesn't matter -- the override tabulations just look at passengers in terms of numbers. They may just as well be paying for passengers by the pound.

Presumably, by looking at repeat business patterns, a supplier knows the average lifetime value of a customer. A certain percentage will never repeat, another percentage will repeat once, another percentage twice, and on and on.

And a supplier doesn't have to be terribly sophisticated to discover that certain factors -- age, income, location of residence -- among passenger demographics contribute to creating the highest lifetime value.

Given all that, it's a mystery why suppliers don't pay travel agents more to bring them new business than repeat business, and, further, give them a bonus to bring in the type of new business that has the greatest value.

The flip side of this type of compensation would be that agents would get less on subsequent repeat business from that same passenger -- after the first booking, the commission on that passenger would go down. That's fair on two levels -- repeat business usually takes less time to book than new business, and suppliers would be allowed to reap a greater reward for having produced a product good enough to merit repeat business.

Doing away with volume-focused pay would address other vexing problems. Level playing field? The current system encourages rebating, but a sliding compensation scale, though by definition not level, would make it more difficult to offer flat rebates.

Are suppliers poaching your clients for return business? They'll have less incentive to do so if they're paying less commission on repeat business.

Accepting this type of structure may require a bit of enlightened self-interest on the part of some retailers and cruise lines. Though the current structure is lucrative for traditional retailers in the short term, they should be aware that overrides based on volume alone disproportionately reward the large online players, who get the highest overrides.

And when a repeat passenger migrates from an agent offering personalized service to a large online aggregator, the cruise line ends up paying more for that repeat business, even though all that has occurred was a shift in market share between channels. As long as the current system rewards volume players with highest override levels, cruise line distribution costs will go up.

I have no doubt that it will reach a point where the lines will feel they have to restructure commission compensation -- and when that occurs, there's a possibility the new structure will not be as fair as one that focuses on lifetime value rather than volume. Instead, the lines' thinking may be more similar to how airlines approached cutting commissions.

There are, of course, further issues that would have to be worked out in a compensation plan based on customer value. For instance, tracking first-time vs. repeat passengers, and paying agents enough on repeat business to prevent them from steering clients to a competitor simply to reap a first-timer reward.

I don't think these challenges are insurmountable. But the problems presented by the current system are.

Email Arnie Weissmann at aweissmann@travelweekly.com and follow him on Twitter. 
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