Why Marriott's new agency commission has been a long time coming
By Alan Newton, co-founder & COO, Eventopedia
As a business, you can’t blame Marriott for making a sweeping change to their commissions policy, reducing it from 10% to 7% for groups business in the US. There, I said it. “Sell Out!”, some will scream. “You wouldn’t have said that as an agent!” some may say. Only, I frequently did, and occasionally in a more public forum. However, let me be clear, I did not advocate for such a change, I merely felt it was an inevitable consequence of how the industry has been operating. Not everyone agreed with me of course, but it was not unheard of for me to state ‘Unless we, as agencies, changed our habits of operation, we risk hotels cutting their commissions.’ Many agents felt that group commissions wouldn’t go the same way as the airlines.
So, as someone who spent 15 years in agency, and for whom a big part of my job was negotiating commissions to achieve the best for the agency and our clients (client rebate models are negotiated on the premise that clients are refunded part of the agency commission for guaranteeing a sizeable value of their annual spend to that agency), why would I be sympathetic to a move that could spark industry wide change threatening the life-blood of agencies?
Because; I’m not advocating it (it’s a consequence that makes some sense), and
I don’t think it will threaten agencies in the long-term. I believe this will be the making of many agencies and that their true value will finally be recognised in an industry where much of the tireless work of various stakeholders can, all too frequently, be taken for granted because the payment for services rendered is often attributed somewhere else within the value chain.
“It is not the strongest or the most intelligent who will survive but those who can best manage change.” Megginson (in reference to the work of Darwin)
Something had to give…
‘Don't bite the hand that feeds you’ is a well-worn phrase and given the reliance a lot of hotels & venues have on agencies (hotels suggest between 60%-75% of total groups revenue in the UK comes via a 3rd party agent, albeit I do believe the figure is a little less in North America), it may, prima facie, seem like an odd decision for Marriott to make. After all, it’s not the first time Marriott has tried this tactic, given their Ritz Carlton brand reduced agency commission to 5% several years ago before gradually increasing it again. However, there is a feeling amongst the hotel community that enough is enough, and there is a fear this time more of the large hotel chains will follow suit, rather than capitalising when agents inevitably switch-sell to protect their livelihood.
I am very sympathetic to many of those agencies to whom this change is going to create great difficulty, especially given the short notice period involved. However, I do also have sympathy with the hotels, and the underlying cause of this change. It is not a change that couldn’t have been foreseen and it’s also not a decision that couldn’t have potentially been avoided.
Part of Marriott’s announcement read: “Marriott’s group distribution costs are growing faster than our group revenue; these costs are limiting our ability to invest in meeting products, experiences, and innovation... Changing economics in this segment, plus these growing costs, required us to re-evaluate our intermediary compensation model. We are introducing a new strategy that will result in a more sustainable way of partnering with intermediaries.”
In a two-sided market, payment for services rendered must come from one side or the other, and – as far as sourcing suppliers goes – it very rarely comes out of the pocket of the planning organisation (client). Indeed, the client can typically receive cash back in the form of rebates from agencies. But, why should that be? The client pays for all other event delivery services, so why is there no perceived value from the souring expertise? After all, it saves the client a lot of time and cost in terms of not having to employ teams of additional event planners to source and negotiate, so why is there little value attributed to this service? These are not straight forward questions, and the hotel chains have long known that if a client wants to use an agency but prefers the commission model (and let’s not forget, many clients do prefer the commission model), then hotels need to adopt a sensible commission model that allows an agency to survive and make a profit. Therefore, we need to understand causation.
Equally, and to what I believe to be part of the rationale for this strategic decision by Marriott… Why should hotels pay commission to agents who (certainly not all) don’t consider that they’re providing the hotel with a service? When I was an agent, I took the approach that hotels & venues were both a client and a supplier. If someone pays you, they are invariably a client because you’re providing a service, presumably of some value. Yet, the most consistent gripe I heard when sitting on hotel advisory boards was the escalating costs of distribution and the poor business conversion rates via 3rd party channels compared with direct, both of which impact on profit. The latter pain point is a consequence of the way agencies operate and thus makes the former more difficult to bear. My teams and the agencies I worked for took this on board and we strived hard to ensure that we provided optimum value as a distribution channel and ‘service’, which meant working hard to increase average conversion rates and providing a service that would ultimately be of greater value via a 3rd party. This benefited our business as much as it did the hotels, with stronger supplier relationships, more efficient operations, and strong client retention and new business win ratios.
“If you are paid by someone, they are invariably a client, because you’re providing a service, presumably of some value.”
In the context of client-agency-hotel relationships, these are big challenges but they are not insurmountable. Agencies can bring great value to the market. Marriott have said as much within their statement. Some may view that as hollow words and ask what else they’re meant to say, but Marriott employs large teams that are focussed on account managing the agencies and nurturing the partnerships that provide them with value. However, as with any partnership, if one of the parties doesn’t feel they are getting full value, they’re eventually going to employ an alternative strategy. You may not agree with it, but once you pinpoint the cause and effect, you can make sense of it.
So, what does the future look like? Well, this is the first move and it depends now upon what follows. The agency community, most likely via industry associations, will seek dialogue with Marriott and try to exert pressure. If Marriott are to buckle under such pressure, it’s likely they will want some assurances in return. Hotels largely report that business conversion from agencies sits at an average of 5%-8%, which needs to – at least – be tripled for hotels to see real value from a commissionable service.
The hotels have long felt that this is not an equitable model. It’s eroding their profits. Equally, agencies have seen their costs of business increasing over the last decade, having to provide more services for increasingly less margin. So, the client must come into the equation somewhere too, but that’s probably the basis of an altogether different blog.
Technology, data, and thus business reporting has improved immensely over the last decade. It’s still not where it needs to be, but maybe Marriott and other hotels will utilise their reporting mechanisms to adopt an alternative commission policy rewarding agencies that support their business objectives and deliver higher average business conversion rates.