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Favoured payment structure for tour operator / agency relationships

There has been much discussion recently about agency relationships for niche tour operators both here and on Alex's blog. I'm interested to understand the pros and cons of structuring commissions transactions and payments.

As I understand it there are broadly three ways of working:
1. Agent collects commission and full payment and passes the money onto the supplier less their commission (I'm not sure exactly when the money changes hands in this instance?)
2. Agent collects deposit only (of which part or all is their commission, with the balance of the deposit passed on to the operator) and customer is responsible for paying the balance of the total to the supplier
3. Agent facilitates payment of deposit directly to a tour operator either by passing the credit card details on (which strikes me as a little dodgy) or by storing the tour operators merchant number in their system.

From a tour operator's point of view and a travel agents point of view I'd be interested to hear the favoured option and the pros and cons. (I'm not using the term 'agent' in its strictest legal sense), just as a term to cover somebody promoting a niche tour operators products.

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#3 I know some agents pass on credit card details to the supplier.... however that is non compliant with PCI requirements and more than just a little dodgy

When I was working in the hotel industry (for a hotel distribution company) although we invoiced the hotels for the commission there was only a 90-95% successful collection (this was for customers paying on checkout, i.e. #3). i.e. because the money is having to flow from customer to supplier to agent, not all the money makes it to where it ought to.

and a subcategory of #3 (perhaps #3a) is an affiliate, who is responsible for promoting the niche tour, but the customer perception (and reality) is that they undertake the transaction with the tour operator directly (as opposed to your limited definition of #3, which is where the customer perception is that they are dealing with the agent)
Also, one other factor is booked value vs actual value of the booking

For tours maybe this is the same hence not such an issue

For hotels, people would checkout early, extend their stay etc..... so if the money was flowing from the customer to the hotel then commission back to the agent, the question then is should the commission reflect the booked value, or the actual value.... e.g I wouldn't be surprised if the customer extends their stay, it is the booked value, but if they checkout early, then it is the actual value (i.e. lower)....
Hi Ben,

Firstly, as a tour operator we welcome all kinds of possibilities of working with agents. However, if they are going to be taking payments for our tours, we do expect them to have given as much information out to the client as we would have had they booked directly.
Another aspect to consider is who is doing the pre-booking and post-booking pre-tour correspondence with the client as this changes the level of commission that we would be prepared to pay out.

From a tour operator's point of view...

1. This is what I think a travel agent does - handling customer correspondence, bookings and payments for a tour on our behalf.
We would normally expect the agent to pay us at the same time as a normal customer - i.e. the deposit payment when the client books, to secure their place, and the balance payment a certain period before departure (8 weeks in our case).
For some high performing agents delivering lots of bookings we'd be happy to invoice them on the date of booking or balance due date and take payments based on a monthly statement (if any readers think they could be a high performing agent like this, please do contact us! :)

2. We've never done it this way. I know there are some websites that do it like this (hostelworld??), and yes I guess it is good to get a payment from the clients straight away to tie them into the booking. However, I'd want to know that that website/agent was giving all of our tour information out to the client before they booked, and that they were seeing our booking conditions and agreeing with them before they made their payment.
I would expect to pay a lower level of commission to an agent doing this than in No. 1.

3. As a point of principle, we would never accept credit card information from an agent on a client's behalf. We must speak to the card holder directly (this includes insisting that a husband or wife call us up separately if they try to pay with their partner's card).
I'm not sure of the rules regarding agents having our merchant number in their system, or indeed how this would work in practice.
We'd need to clarify what the agent is actually doing here. Are they corresponding with the client, or just displaying our tour information and then sending leads on to us ? This would determine how much commission we offered them.
The agent could give the client our bank details to make a bank transfer, or get them to post us a cheque or call us up to pay by card. In all these cases we would need to get back to the agent to confirm receipt of payment before they could confirm the booking to the client. This all starts to feel a bit messy.
Again we'd expect a lower level of commission to be expected than No. 1.

Re. Commission payments

1. I would much rather have these deducted from the payment the agent sends us, than receive full booking values and send commission payments back out again (this creates extra work and costs, especially for agents outside your home country).
We would provide a booking form for the client to complete with the full booking value on, and an invoice addressed to the agent showing the booking value less their commission. The agent would then issue their own invoice to the client. Bookings are only confirmed after the client has agreed to our booking conditions and we have received the deposit from the agent.

2. If an agent is only giving us a deposit payment, then we would only let them take their commission % of that deposit (eg. 10% of a £150 deposit, so paying us £135 p/p).
I would not let them take their commission % of the full booking value out of the deposit payment they send us (if the customer cancels, then the agent gets all the money and we get nothing to cover the costs we have that require the deposit in the first place).
If an agent suggested a system like this, we would not work with them.

3. In this case we would have to pay commissions back to the agent. We would pay these after the clients finish their tour (our TTA membership guarantees the money is there to pay the agent so they should have no problems with this).

One other final note...
- We pay agents commissions based on the final booking value. If this has decreased from the price the agent originally sold the tour to the client, then they receive their commission on the lower amount. If it increases, for example the agent sells extra options to the client before they travel, then they get it on the higher amount (We had an example of this recently where a client had booked and paid for a hot air balloon flight option to their agent. The hot air balloons in Egypt were subsequently grounded (before the travel date) and we could not offer the option. We did not refund the full sale price of the hot air balloons to the agent, but rather the price less the agent's commission. They then had to refund the client the full price, so reducing the total commission they earned. I think this was fair on our part though it took some explaining to the agent.

Hope this helps.
Cheers, Ralph
Thanks Ralph, superb answer. Overall I think somewhere between 1 and 2 are the best options. It seems to me that most OTAs operate under option 2, particularly in the hotel / hostel world and this is the easiest (read lowest cost!) for an online agent to execute. Option 1 requires a greater investment in customer support but offers the agent the opportunity to build a stronger brand and higher margins.

Product Information & booking terms - I agree if an agent is reserving or confirming a booking then the customer should have access to a complete information set about the product (tricky with adventure travel!) and the operators booking terms too.

Post booking and pre booking correspondence - Agreed it makes sense for pre booking correspondence to be managed by the agent. My question is at what point after booking does the correspondence become between the customer and the tour operators? From a user experience point of view surely it is better if it is direct correspondence at this point?

Timing of payment - I think there is a challenge for any new agent in paying the deposit to the tour operator to confirm the booking. With potential merchant bank terms of 30 days+ the cash flow funding requirement would be an issue. It is my understanding that the most common way of working for hotel/hostel e-commerce sites is for the site to collect the credit card details, take an immediate (mostly non refundable) deposit which presumably is their total commission. At this time the customer is advised of the hotel's cancellation terms. The credit card details are passed on to the hotel and the hotel charges it according to their own policies (i.e they could take a further refundable deposit themselves or just have the balance). Some even simply collect a (say) 12% deposit as their commission (and don't pass any of the deposit onto the establishment as you suggest), with the balance payable to the establishment directly on arrival, so there isn't the issue of passing on credit card details. I guess this is fantastic for the agents cash flow and keeps paper work / admin / payments to a minimum. On the other hand the establishment may quibble that they are reserving beds without holding any deposit in their accounts and suffer from exposure to cancellations (although presumably there is some divying out of the deposit payment in this instance) and cash flow.
For 2, the ones that immediately come to mind to me are Hostelworld and o-escape. I remember a while back a fellow tour operator telling me how envious he was of i-escape's model compared to being a tour operator (this was at a time we were being hit hard by the exchange rate changes!). I just had a quick look on their website and dug this page out.
I believe Laila Ram from i-escape is on SFBG so you may be able to contact her and ask her to kindly share her no-doubt intelligent thoughts on your issue!

Kind regards




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