In any business partnership, it's generally understood that both sides expect to gain, whether in monetary terms or services received. But even in the best of relationships things change over time, and that seems to be the case with travel management companies and the way their services are priced in a hard-hit business travel market. The emergence of alternatives such as subscription models is bringing a host of challenges for travel buyers, from understanding options and gaining the best possible terms, to deciding how to meet demands for higher service levels.

While options for pricing may be changing, the conversation itself is not new. "There is often discussion in the industry about change to the pricing structure and approach," says Helen Menniss, vice president–global account management for GlobalStar Travel Management. "As we’ve seen and heard before, there are pros and cons of all models, be it transaction fee, management fee or subscription fee."

One way to regard flexible pricing models is seeing it as a positive reaction to significant changes in the way we work and travel for business, notes Hansini Sharma, practice lead-corporate travel for Acquis Consulting. "There are many more factors to consider now than perhaps in the past when forecasting travel spend of the future," she says. That includes levels of comfort in traveling, situations involving COVID-19 or other illness, cost of travel, and availability. In response, many TMCs are adjusting pricing models to match the flexibility of their clients' programs and demonstrating their willingness to be open to new models that are mutually beneficial to both the TMC and client.

Emerging Demands
As in many areas, COVID has no doubt been a catalyst in re-examining pricing. “The pandemic has made TMCs and other travel suppliers realize transaction fee models can cause revenue to go away overnight,” says Greeley Koch, managing director of 490 Consulting. "They want to protect themselves from any future event that causes travel to suddenly stop."

According to Koch, about 50 percent of a TMC’s revenue comes from transaction fees and the other half from suppliers and distribution channels. "Being able to smooth out their revenue is a focus." Noting that some TMCs are staying with transaction fees and others are reviewing subscription models, he believes it’s still in its early phase as these new methods get tested to see what works for the client and the TMC. Ultimately, basing a subscription fee on travelers or employees depends on the types of services a TMC is providing to a company and how much those services are utilized.

Mike Orchard, principal and APAC lead at travel consultancy Festive Road, says that while it’s true the pandemic has thrown TMC pricing into the spotlight, it has been in need of change for some time.

“The pandemic has heightened focus on the cost-value equation for travel managers,” Orchard says. “And of course for TMCs, whose revenue might be largely driven by the number of booked tickets, it's been a real struggle." But there are underlying trends driving change that pre-date the pandemic, he adds. Examples include the ongoing desire for transparency by buyers and further erosion of supplier revenue streams for TMCs. And more recently, the TMC battle to attract talent looks to be increasing labor costs. "I don’t think we’ve seen all the changes play out yet," he says. "But across our clients there is a common thread in that most are looking for a more simplistic and user-friendly charging mechanism that rewards TMCs fairly for the value they bring."

Exactly what constitutes that value has also changed. Koch cites a variety of services that go beyond air and hotel bookings, which drove transaction fees in the past. “Now TMCs offer payment support, expense reporting, their own tech tools, duty of care tracking and more,” he says. “The expansion of the offered services means it’s time to evaluate the pricing models.” Koch adds that other areas within a corporation, such as e-mail and CRM tools, feature pricing models based upon software as a service. “Companies have accepted these other pricing models and that is why TMCs are looking at adopting them for their service offerings,” he says.

Menniss argues that TMCs need to do a better job at communicating the true breadth and depth of the service and value they provide. “Traditionally, the real costs of the support services and expert value TMCs deliver to their clients are included within transaction fees and labeled as data management or profile management,” she says. “They pass unnoticed and are to an extent, taken for granted.”

Historically, the transaction fee model (commonly known as pay-as-you-go service) has resonated with clients for its simplicity in administration, allocation to cost centers and cost calculation, according to Jorge Cruz, executive vice president, global sales and marketing for BCD Travel. He acknowledges that there is interest in other pricing models. "But the main request is for even greater simplicity, around fewer fees, easier budgeting and less internal dialogue about being charged for every single touch point.”

Orchard notes that the main buyer concern is defining what’s included in the subscription model. "Transaction pricing has been clearly defined for years, with some auditability," he says. "Subscription pricing is still being defined and will vary by client." He points out that with TMCs currently having more contacts per trip, due not only to the pandemic but also widespread issues with travel supply, pressure is being placed on the whole ecosystem.

Travelers might have to be more patient for a response and plan their trips earlier, and TMCs are needing to find ways to streamline and automate servicing as well as attract back talent and grow their teams. "This isn’t really a case of ‘higher’ service levels being needed at the moment, it's just more complex and more hands on but it will fade over time," he says. But while in the end this will all have to come at a cost, Orchard says this in itself isn’t a driving force for change in the commercial model, just an underlying cost increase in the short- to medium-term.

Cruz explains that moving from a pay-as-you-go model to a subscription model or other periodically charged subscription hybrid model requires a change of mindset. As an example on a personal level, he notes that when signing up for Spotify or a gym membership or taking out a Microsoft license, people don’t negotiate on usage. Rather, it’s an all-in fee and users appreciate the predictability of billing and the usage clauses. They can choose certain bundles but must make that a conscious choice and live with the consequences. "The same applies to travel so high-volume users balance out the low-volume travelers," he says. "Taking an alternative model doesn’t always mean being able to pick and choose.”

In some ways, a subscription plan might actually be simpler, Koch points out. “If you’ve ever seen a TMC invoice and tried to reconcile online and offline transaction fees, change fees, VIP fees, data fees and on and on, then you might be open to something that streamlines the billing.”

Optimum Adjustments
In considering pricing options, it's important to clarify your own requirements and then what services you need the TMC to provide versus those you can either deliver in-house or source from other providers, according to Orchard. "Run a TMC sourcing process to identify the best TMCs for your program from a culture and capability perspective first," he advises. "Once you have that worked out, then – and only then – sit down with the TMCs remaining to work out an appropriate pricing mechanism and negotiate overall commercial terms are that fair and equitable for both sides."

Koch strongly recommends taking the time during any discussion of pricing models to conduct a thorough strategic review of the overall corporate travel program. "Take a clean sheet approach and evaluate what your company and business travelers need today," he says. "Once you have that updated view of your travel program, then you can work with your TMC on the proper pricing model."

Before any change happens, plenty of communication is a must. Koch advises making sure both parties talk with one another about what each is trying to accomplish and why, followed by a full exchange of financials. A TMC desiring a change must be transparent and produce numbers to show the "before and after." In addition, he suggests that once the travel manager understands what is being proposed, further steps should include consulting others within the company who are used to subscription pricing models.

"Talk to the IT group and finance teams about the change, and how that relates to what they see from their subscription-based suppliers," he says. "From there, you can take it further within the company to see what impact a subscription model has on how the cost of travel is allocated within an organization." He adds that some companies add the transaction fee to the booking and bill directly to the traveler’s department, while others allocate it out using other methods. "It will be good to understand how a change in the pricing model changes the internal accounting of the cost of the TMC support,” Koch says. "Once all of that is done, then you can finalize the discussions with your TMC."

Menniss likewise stresses the importance of having an open and frank dialogue with the TMC if pricing changes are on the table. "You need to have a mutually agreeable contract that provides protection for both parties during the tough times and the good times."

She also advises being open to innovation and new opportunities. For example, in the contracting process a possible solution could be to have a minimum guaranteed “floor fee” that would ensure that core services are always available. Similar to a business continuity plan for the pricing structure, this could include specific markers as to when it would be invoked, defined in advance with the client and providing security for everyone.

Patience throughout is a key, according to Koch. "Given the labor shortages, consistent travel disruptions and traveler anxiety in returning to travel, buyers should focus on great communication with stakeholders to advise and counsel about current conditions," he says. “Then bear with the suppliers as they continue to ramp up."

Cruz encourages both exploration of new options and communication about expectations so the TMC can offer guidance to what model is best suited. He adds that there is no one size that fits all. Instead it comes down to the individual organization, including the corporate culture, travel patterns, how costs are allocated and more requirements specific to a client’s needs. “It’s not really about pricing, but about partnership,” Cruz says.