Preferred supplier relationships generate the financial fuel that drives consortia and co-ops, and without those relationships, the model would collapse.
When it works, there's nothing like a preferred supplier agreement.
A classic example: All-Travel, a hybrid agency in West Los Angeles that is a member of the Signature Travel Network, a cooperative. All-Travel's president, Eric Maryanov, uses special offers he gets from Signature's preferred suppliers as hooks for his online marketing efforts, and he pays for much of that marketing with preferred supplier co-op marketing dollars.
Those offers attract consumers to the agency's website, where they discover more content about preferred supplier vacations unique to Signature. All-Travel's agents turn these queries into sales; they are experts about the preferred suppliers' products and benefits thanks to the training Signature provides them and because they are focused on a limited number of preferred suppliers.
The result: more marketing dollars and more bonus commissions. Equally important, those sales also help Signature qualify for end-of-year overrides from the preferred suppliers. It's a self-perpetuating cycle. (Click here or on image, right, for a larger view of a graphic depicting the preferred supplier relationhip
This is a scenario played over and over with consortia and co-ops nationwide. Such groups use supplier money for marketing and to build technology platforms, which enable member agencies to work more efficiently, and for training, which makes them better salespeople.
Suppliers reward consortia not just with higher upfront commissions and more marketing dollars but also with hefty end-of-year overrides based on the organization's sales.
"It's a perfect storm of disciplined selling," said Mike Going, president of Funjet Vacations.
Jim Smith, president and CEO of Jimsmithctie and a former consortium executive, describes it in terms of a shared direction.
"When everyone is pointing at the same true north of the compass, when you have goals and strategies that are in alignment and a focused commitment, there is nothing like a preferred relationship," Smith said.
And it's not just suppliers and consortia executives who praise the preferred model. So do agents.
Agencies are becoming more specialized and focusing more on a smaller subset of suppliers, said Janet Foster, owner of Wilson Travel & Cruise in St. Charles, Ill., a member of Midwest Agents Selling Travel, or MAST. Customers, she said, pay her because they value the knowledge and expertise she and her agents provide.
"Knowing your supplier well is really important," she said.
Preferred supplier relationships mean she can stand behind everything she sells to her customers, she said. If something goes wrong, she has not just a number to call but a person she knows who can help. That's a level of clout she could never swing on her own. She said she gets technology tools she could never create on her own and higher commissions that she could never earn on her own. And she's a member of a consortium that she said is responsive to her needs.
In the end, consumers also win because consortia and co-ops choose suppliers who will work for their members' clients.
Andi McClure-Mysza, president of MTravel, the host agency division of Montrose Travel in Montrose, Calif., said, "I don't care if someone were to come in and offer us 30% commission and back-end overrides; if they don't take care of our customers, end of the conversation." Montrose is a member of the Ensemble Travel Group, a co-op.
The higher commissions, co-op-marketing funds and end-of-year overrides suppliers pay consortia and co-ops for meeting sales goals pay for marketing efforts that drive clients to member agencies and also pay for increasingly sophisticated technology platforms and marketing efforts. It also pays for robust training, not just in destinations and suppliers but in how to run a business.
Suppliers get sales, and just not sheer volume but sales of high-margin products.
"Agents are able to sell more complex and intricate itineraries like Europe," said Vicki Freed, senior vice president for sales trade and support at Royal Caribbean International. "They are able to articulate the value of different types of accommodations."
Moreover, she said, Royal Caribbean uses its preferred relationships to drive sales of specific types of staterooms. An agent or agency might not hit the gross numbers target for higher commissions but still qualify for higher commissions by selling the more expensive suites and balconies.
It's a relationship built on trust, especially on the agent side. The agent has to trust that the supplier will give clients a great trip, will troubleshoot if something goes wrong and won't steal the client.
To that last point, having a preferred relationship with a supplier does not necessarily mean they won't steal your client.
Foster said that agent friendliness is a factor that consortia consider before signing on with a preferred, and some consortia have broken with suppliers over theft of clients in the past, Yet, she said it still can happen.
"It goes back to the culture of the [supplier]," she said. "If that's the culture of the company, that's what they're doing to do. But do you think I'm going to avoid them? You bet."
But for the most part, preferred relationships work for everyone involved. In fact, they have to, because if one leg of this stool crumbles, it all falls down.
The preferred supplier model is at least 50 years old. But it has changed significantly from the early days of commission clubs. In those halcyon days, everyone got the same bonus commission no matter how much, or how little, they sold. Today an agency typically gets a slight bump just from being a member of a particular consortium, generally 10% or 11%. But to qualify for the highest commissions -- 15% and 16% -- the agency has to sell more. Suppliers measure individual agency performance before paying out those rewards.
That kind of fine-tuned sales segmentation built on incentives abounds today.
(Franchises also maintain preferred supplier relationships, but they use a different model from consortia and co-ops.)
The ultimate goal of preferred relationships is efficiency.
"Most suppliers would have a hard time devoting the resources required to run around and try to take care of everyone," said Mike Estill, general manager of Westa, a West Coast co-op. "And, it's not really their core skill set. They put together vacations."
Co-ops, consortia and host agencies (which often are part of a co-op, consortium or franchise) can perform that function for suppliers. They can get the message out fast to their members. They can help educate their members so they become expert salespeople for suppliers and understand their product in enough detail so they can sell it confidently. They provide tools for their members that help them work more efficiently.
"We all provide more value to retail travel agents than we ever have before," said John Lovell, president of Vacation.com, which, with 5,100 member agencies, is the nation's largest consortium. "It is incumbent on every network to make those tools better, whether it's marketing, technology or events."
Agencies use all these tools to sell, and suppliers reward them for those sales with higher commissions, co-op marketing dollars to help generate future sales and, presumably, extra special care with their clients because they're coming from an important business partner.
However, preferred supplier relationships are not monogamous and never have been. There is a certain amount of stepping out.
Most suppliers have their own top performer groups. At Funjet, it's the 500 Club.
"That is probably the most precious relationship we have," said Going. Some are members of groups who have Funjet as a preferred, some are not.
Nor are agencies completely faithful. McClure-Mysza said that Montrose has one preferred that is not in Ensemble's stable. The reason is that the relationship dates back to the days when her parents started the business. Though Montrose was an Ensemble member then, it was a relationship that made sense for Montrose, and thus it continues today.
Sometimes it's just because it's right for an agency's customers. Annette Youngbauer, president of Travel Leaders/Journeys Travel Group in Delafield, Wis., said her agency might sell a nonpreferred tour operator because that tour operator offers a resort that matches what the client wants while the preferred tour operators do not.
Consortia and co-ops can't enforce preferred suppliers sales. But they can encourage their members to use preferreds in other ways.
Alex Sharpe, COO of Signature Travel, will reach out to a member who sets a pattern of selling a nonpreferred whose product is similar to a preferred. He'll ask the member if there's any way they can work together to craft an offer that gives the agency an advantage in the marketplace with the preferred. Defining 'preferred'
On the other hand, the preferred relationship is often diluted by a lack of exclusiveness. Some suppliers seem to be partners with everyone, which on the surface would seem to undermine the concept of preferred.
In fact, some suppliers are downright polygamous. And in some instances, that makes good business sense.
Starwood Hotels & Resorts, a company with more than 1,100 hotels around the world, is a preferred supplier with many groups.
"For a hotel company like us, it is important to be preferred across all consortia, as in theory the membership is different at each consortium," said Chris Austin, Starwood's vice president for global retail leisure and luxury sales. Moreover, the details of those preferred relationships often vary from group to group.
Albert Herrera, Virtuoso's senior vice president for global product partnerships, said that Starwood is a Virtuoso preferred, but the relationship does not cover 100% of its hotels. For example, it works with all of Starwood's St. Regis Hotels and Resorts but with only five of its W hotels.
Herrera said that suppliers have to make sure they're getting their share of the marketplace, and no matter how much a consortium might love a supplier, it usually can only fill some of a supplier's berths, beds, seats or tours, so the supplier has to work with multiple distributors.
That's the case, for example, with Royal Caribbean, which has 22 ships in operation and four more under construction.
"We partner with almost all of them," Freed said of consortia and co-ops.
However, the nature of the partnership varies. Virtuoso is important because its agents sell a lot of its Oasis-class ships and a lot of suites. They might not be a top producer in terms of absolute dollars, but they are top producers in terms of the quality of their sales, Freed said.
"Vacation.com members on an absolute basis do an incredible job for us," she said. American Express is important because it can it can tap into its card members, including its Gold and Platinum members. And so on down the line, to host agencies that might have new entrants who are just getting going but have made Royal Caribbean one of their top sellers.
"Every [consortium or co-op] has their own little niche," Freed said, and that's essential "for a brand like ours that moves 3.5 million people a year."
Larry Pimentel, president and CEO of Royal sister line Azamara Club Cruises, said that for large suppliers like Royal and Starwood, allying with multiple partners makes sense. But, he said, in general, he thinks industry organizations have too many dance partners.
"Suppliers frequently have too many agencies on their lists and historically the agent consortia have had too many suppliers on their lists, and I won't back down on that," said Pimentel. When anyone -- supplier or agency -- has too many partners, he argued, "the notion of being a preferred is a bit of an oxymoron."
On the other hand, consortia tend to cull their preferred stables. They might have one supplier for a particular category and one or two secondary ones.
"I think consortia are doing a pretty good job lately of limiting their preferreds," said John Hanratty, chief operating officer for Travel Impressions. "Not everybody and his brother are preferred."
Consortia don't expect every member to sell every preferred. Vacation.com, for example, has some suppliers that will work for members in a particular part of the country but not for those elsewhere. Agencies pick their own subset of preferreds from their consortia's or co-ops' broader offering.
"I can't support all preferreds," said McClure-Mysza, "so we cherry pick."
Estill observed, "In some markets you're getting into Coke vs. Pepsi. So you've got Carnival or [Royal]. On the escorted side you've got TravelCorp or the Globus Family. For the most part, most consortia are lined up with one or the other. And then there are a few Mr. Pibbs and cherry colas."
The preferred model is one that is as varied as the suppliers and agency groups that use it.
Consortia and co-ops don't do all the messaging for suppliers. Supplier business development managers and regional sales managers still do calls to specific agencies as well as use consortia and co-ops as their communication channel.
And there are complaints. This can vary by group, but because hosts are usually selling under one ARC number, all of their members get the higher commissions, instead of having to earn those commissions by means of their own production. This annoys other agencies that have to meet quotas to get those higher commissions.
But host agencies are a rising force in the industry. Going said that while many belong to a consortium, host agencies are almost a consortium within the consortium.
"From a trending standpoint, they have really as a category done a wonderful job at being very disciplined," Going said. "They are recruiting new people to the industry, they are training them to new habits, they are all aligned from a customer service standpoint. They're saying, 'These are the three [suppliers] you should sell to make money.' It's an interesting dimension within preferreds."
In the end, both partners benefit from preferred relationships. "We're very bullish on the preferred partner model," Hanratty said.
Montrose's McClure-Mysza said, "At the end of the day, the whole reason to join a consortium is to be able to earn more money, become more tech-savvy and have tools you couldn't invest in or develop on your own."
Even for an agency the size of Montrose -- No. 54 on Travel Weekly's 2012 Power List
, with more than $160 million in gross sales -- partnering with a co-op continues to makes sense. And the preferred relationship is key to the formula, not just for the money but for the support it provides agents and their customers.
The bottom line, said Foster, is "Pull those relationships, and you're just out there, hanging loosely in the wind." Follow Kate Rice on Twitter @krtravelweekly.