As you expand your agent network and improve your distribution strategy, you will need to consider the cost of commission rates. All of the agents who resell your tours and activities will expect a commission, regardless of the type of agent that they are. Within the travel industry, there are two types of commission rates to consider.
A net commission rate is a payment option that allows the agent to set their own commission, while still allowing you to make a profit on every tour that is booked through your company. With this payment plan, you set a net price for your tours that each agent must resell it at. This net price has already taken into account your own costs as a business, and has included your profit margin. The agent can then sell the tour for that exact net price, or a higher price in order to earn a commission.
For example, if you offer a whale watching tour to your customers, you might sell that tour on your own website for $50 per person. You can establish a net rate for your tour of $40. All agents who resell your tours must sell it for at least $40, but they also have the option for selling it for $45, $50 or $55 in order to earn more commission. They can vary their rate based on the current competition and availability. It gives them greater control over their earning potential, which might make agents more motivated to work with you. At the same time, you don’t have to sacrifice your profit.
Percentage commission rates are likely the most common type of commission payment in the industry. With this payment option, you set a retail rate for your tour that includes both the profit for your business and the commission for the agent. Every agent must sell your tour at this same price, but they will all earn a specific percentage of the price as a commission.
For example, you might decide that the minimum price you can sell your city tour for is $80 per person. You know you are going to pay each agent who resells your tours a 20% commission rate. This allows you to establish a retail rate of $100 per tour, giving all agents a consistent price to work with that allows them to earn a commission and you to maximize your profits. Individual agents often prefer this type of payment option, because it gives them a set and reliable commission. Larger agents, however, may prefer the flexibility and competitive nature of net commission rates. OTAs, in particular, prefer to work with tour and activity operators who offer net commission rates through their distribution partnership agreements.