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Third-party Planner Commission Cuts: Where Are We Now?

By Julius Solaris

Many big hotel chains made headlines in 2018 when they decided to suddenly cut their group commission rates, affecting both event planners and their clients. Wild furor followed. Industry-wide fanfares of war.

 

Then what happened?

Silence. We spent some time with some third-party planners to understand how they were impacted by the changes and what the future looks like.

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A Brief History of Planner Commission Cuts

In January 2018, Marriott announced it would reduce commissions for group bookings in North America from 10% to 7%.

There wasn't much lead time once the change was announced either—the rate cut was effective March 31st, 2018, leaving third-party planners scrambling to figure out how to make up for the loss in revenue. Hilton and InterContinental quickly followed suit and lowered their commissions by the same amount. In November of 2018, it was Hyatt's turn—its new 7% rate took effect on bookings as of February 1st, 2019 in the US.

These drastic commission cuts from major hospitality players are often exacerbated by higher-risk room block commitments as online travel agencies (OTAs) and alternative booking sites offer the same or similar options at the same or cheaper rates.

So where are we now?

 

Planners Were Hit Hard

Whether planners feel the current situation is discouraging or transformational, what's certain across the board is that hotel commission cuts have changed the way they approach venue sourcing and room blocks.

  • Planners are facing 30% cuts to their revenue when it comes to working with traditional hotel options, which is a big hit to their income that is often passed onto their clients in the form of higher fees or additional service charges.

As a result, organizations like the Alliance of Independent Meeting Professionals (AIMP) have sprung up to help independent planners unite and strengthen their position within the industry.

 

We all know this decision isn’t being made at the property level in most cases. However, there has been much damage to the relationship between these chains and the planners who use them.

David Bruce
Founder, AIMP

 

Bob Schuster is the National Director of Conferences and Events for CMP Meeting Services and a board member for Meeting Planners Unite, and he is also concerned about the effect on planner-hotel relationships.

 

[Hotels] broke trust with planners by making the change without enough transparency and lead time, and that really transformed the relationship for independent planners who thought we had a relationship to maintain.

Bob Schuster
National Director of Conferences and Events, CMP Meeting Services

 

Planners are already at a disadvantage given the prevalence of room booking alternatives such as OTAs and Airbnb, and the commission cuts have forced them to be "creative and innovative and pivot to other avenues of revenue drivers," according to Schuster.

One way they're doing this is by targeting under-utilized venues and destinations that are more willing to cooperate and form mutually beneficial partnerships with third-party planners.

 

The Rise of Independent Properties

While many international hotel chains have joined the commission reduction bandwagon, smaller, independent properties have taken the opposite approach—generally keeping commissions at 10% or even offering higher rates in an effort to entice group bookings.

 

Second-tier cities (and some third-tier cities) have facilities, want planners, and are great options. They offer fair financial packages and great experience for attendees.

Bob Schuster
National Director of Conferences and Events, CMP Meeting Services

 

They've been given an opportunity to gain market share, and they're taking advantage.

This strategy has worked to encourage planners to work with smaller venues or less popular destinations depending on their event needs. According to Richard Torriani, VP of Global Congress Management at MCI, some hotels such as Radisson hotel group have experienced significant growth since committing to keeping the 10% rate.

Interest in these properties is a combination of exploration on the part of the planners as they look to make up for the 30% cut to their income and investment on the part of the destinations as they attempt to win more business.

We do see more leverage and more business for the more flexible hotels and second- and third-tier cities that want the business, but only if it makes sense for the group and the show organizer. For associations and events with tight budgets, commissions keep their costs low and therefore are becoming a significant consideration when selecting hotel properties.

Richard Torriani
Chief Operating Officer, MCI Group

 

Marybeth Powers, President of Planning Powers, LLC, agrees. "Most independent planners now look more closely at independent properties or those properties offering 10% or higher commissions."

However, like others, she also sources properties who have cut commissions "in all fairness to [her] clients." The reality is that this approach may not make sense for everyone. A high-level corporate event may only have a couple hundred guests, but if they request a big-name hotel in a first-tier city, that's what the planner's focus will be on.

The bright side is that clients seem to be catching on to the changes in the industry and are increasingly understanding of the tricky situations planners are put in because of this decision by the hotels.

Bruce shares that members of the AIMP usually "present properties that make sense for the client," but if planners are presented with similar hotels and similar packages, they generally push for the properties with the higher commission or better contract. Whether it's out of loyalty or the knowledge that they may have to make up for the commission cut in other ways, clients tend to be on the same page.

 

Most of our clients have become close to our members. They understand the bottom line for their independent planner, empathize with their situation, and are understanding enough to pick a property which offers the planner a better check.

David Bruce
Founder, AIMP

 

But managing commissions and keeping costs low while delivering high value is becoming more complicated. Depending on what amounts to a courtesy on the part of clients is not a solid long-term solution.

 

Attrition and Cancellation Policies Need to Change

There are several aspects of the current model that are becoming increasingly untenable for planners in addition to commission cuts from major hotels. Contractual terms that define attrition and cancellation are two examples. Currently, planners book room blocks at hotels and receive a commission based on the number of rooms that are filled, but if they don't fill the entire block, they also have to pay the hotel attrition fees—80% of the booked room price is generally standard.

"We need a real industry debate about attrition fees," cautions Torriani. "They were invented before ecommerce as rooms were difficult to resell weeks or months in advance, but they have no place in today’s transparent distribution."

 

Our data suggests that the peak booking window for an individual participant is only 22 days before the event, yet we know of hotels asking for attrition fees more than 360 days before the show. How can that be justified in today’s economy?

Richard Torriani
Chief Operating Officer, MCI Group

 

The risk to the planner of not filling the entire room block is exacerbated by a market that favors online ecommerce-based individual bookings, but it's not clear why hotels are complicit. Torriani summarizes it: "Hotels have put third parties in a difficult position by paying higher commission to OTAs that provide fewer services to the hotel with better conditions and no attrition."

Inflexible attrition policies incentivize planners to book smaller room blocks to minimize risk. This reduced availability can also lead to more delegates booking their rooms directly using services like OTAs and trains them to check OTAs, not just as a last resort but as a first option. The end result is that hotels are actually paying more commissions, which doesn’t benefit either party.

 

The popularity and ease of bypassing the room block with OTAs and alternative booking sites also threaten the relevance and existence of smaller housing bureaus, which book room blocks at hotels for large events in order to resell smaller blocks of rooms to groups, and often have strict cancellation policies.

As housing bureaus also book smaller blocks, according to Torriani, attendees will book through an OTA and hotel commission costs will increase substantially. "The policy of low commission and onerous cancellation and attrition fees seems to be destined to increase OTA market share."

Torriani encourages increased communication between hotels and planners around this issue.

 

If the delegates numbers are meeting expectations but they are not booking at a specific hotel, it means that the hotel has overreached with the rate or the booking conditions. We need proactive communication around this issue so that both parties can potentially modify rates and conditions to optimize sales.

Richard Torriani
Chief Operating Officer, MCI Group

 

Transparency will be a key factor in arriving at a tenable solution that works for both hotels and third-party planners. Meanwhile, planners are looking to alternatives that will allow them to remain competitive and, most importantly, continue to deliver the best value to their clients.

 

A Recourse for Planners

Where planners were left in the lurch because of the lack of transparency on the part of hotels, they can take a page from the other distribution channels they’re competing with and double down on their own transparency with their clients about the cost of the services they provide.

 

Applying any commissions from hotels as a 'payment' against those services is one way to do this. This will inform clients of the costs in the eventuality that commissions will be cut again to the point of not covering the costs. At that point they will need to either cut services or pay third parties directly for the service."

Richard Torriani
Chief Operating Officer, MCI Group

 

However, since most contracts are entered into for several years, we likely won't see an impact like this until after 2021. In the meantime, Powers suggests that planners also consider cities and Convention and Visitor Bureaus that are offering to contribute the 3% that planners are losing out on from the lowered hotel commissions of 7%.

 

What the Future Holds

Although there is still much uncertainty for the future, there is also hope that major chains will reconsider cuts or offer new incentives to planners. We can expect more changes to the business model to sustain business in a 7% commission rate era.

"Hotels will need to re-evaluate/restructure their internal sales commission and organizational structure to match the new marketplace," advises Torriani. "Show organizers will need to be smarter when it comes to bookings. Increasing their booking options and channels will facilitate the attendee participation journey and reduce costs, eliminate friction, and enhance overall delegate experience."

This may even involve a shift in alignment with new partnerships between planners and the OTAs they're currently competing with. This way, according to Torriani, they can "provide the services that delegates require but that hotels are no longer willing to pay for through the commission structure."

 

Planners cannot continue to take on more risks under worse contractual conditions for less commission. Going direct or through OTAs provides less risk and potentially a better net commission percentage.

Richard Torriani
Chief Operating Officer, MCI Group

 

Booking rooms directly without group room blocks is undoubtedly going to become more and more common. In addition, properties that are more willing to offer better commissions and work with the planner may have an upper hand in winning new business.

 

IN CONCLUSION

In the end, however, a planner’s ultimate goal is to deliver the best experience for their clients, so they'll inevitably need to continue working with all types of hotels.

There will need to be flexibility and goodwill shown on both sides, with innovative and reasonable compromises being worked out. Whether hoteliers are motivated to make the necessary changes and meet in the middle remains to be seen.

 

about the author

Julius Solaris
Julius Solaris is the editor of EventManagerBlog.com, he is an international speaker, author and consultant.
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