economics lesson
843 days ago
 

Time for an economics lesson and a sprinkling of the real world over tours and activities

Tnooz recently featured two somewhat academic articles about the economics of peer-to-peer travel marketplaces (Article #1, Article #2).

We can talk using academic terms such as idle assets and distressed inventory but ultimately running a successful marketplace comes down to three factors:

  1. Price – are the tours/activities selling at the right price?
  2. Supply - is there sufficient product available to book?
  3. Demand –  is there sufficient consumer exposure to make the product sell?

I am going to analyse each of these factors one by one:

1. Price

a) Entry fees

In some areas of the world licensed tour guides receive free entry to their local visitor attractions.

When a consumer buys a service from a P2P marketplace providing unlicensed guides the consumer has to pay for both their entry to an attraction AND the entry for their tour guide (who has to pay to enter just like anyone else).

This pushes the price up.

b) Commission based tours

The pricing model that we consider common in the West is not the same globally. In the Far East for example it is common for a tour guide to pay to host a tour.

The guide then earns their money from commission from shops that the guide takes the visitors to. (The dreaded carpet shop visit!).

The Hong Kong Travel Industry Council has described this tour pricing model as “a scourge” and the source of most visitor dissatisfaction. China outlawed (in 2009) the practice of selling tours at below the cost of production – but the practice continues.

NB: Do read “Day tour itineraries: Searching for the balance between commercial needs and experiential desires“, an academic paper by Cora Un In Wong and Bob McKercher, for further insight into the impact of commission based tours on local tourism (and source of my details above).

Summary:

  • Pretty clear that selling on price “buy P2P because we are less expensive than a commercial tour” is, long term, not going to be a winning strategy. Consumers will believe they are on a tour subsidised by commission.

2. Supply

Individuals don’t want to be over burdened – remember these are people who enjoy showing visitors around their locality – its not necessarily their business.

If they wanted to setup a business they would be a local tour operator (with 5 or so employees) as that size of economic unit works more efficiently (to cover marketing costs, staff organisation, variety of tours & services on offers etc).

Doing a quick back of the envelope calculation – a travel startup needs, say, £250,000/per year to pay for marketing, staff costs, office etc.

Each tour sells for approximately £100, of which they keep about £7. The P2P marketplace therefore needs to handle about 36,000 bookings a year to break even.

IF the individual only wants to run a tour once every couple of weeks (26 times a year) the marketplace now needs 1400 active individuals. If they are only booked monthly the marketplace needs 2,800 active individuals.

Is this number realistic?

Because each active individual is creating their own tour or service you now have hundreds of long tail services in each leading global city. This creates a user interface design challenge (to create differentiation between them all).

Summary:

  • Going to be difficult to create sufficient supply to enable a deal with say a leading OTA – who may send hundreds of people to a leading European city on a daily basis. What you really need is bunching of tours around the more mainstream product types rather than hundreds of difficult to differentiate long tail tours.

3. Demand

Most P2P marketplaces are taking 10% off the individual (some go as high as 20%, however).

Around 10% isn’t sufficient to share with travel industry partners upstream who may have the consumer traveller demand. This percentage is also too slim to effectively run a Pay Per Click advertising campaign.

This is because tour keywords are bid up by multi-day tour operators advertising on the same themes – enabled by higher value transactions giving them greater PPC budgets.

Distribution also requires dates (so you can pitch a particular experience to someone who has booked a flight to London arriving on the 1st of August).

Summary:

  • Can you convince 2000-3000 individuals to keep their availability calendars accurate? Having run extranet type tools in tours and activities it turns out this is quite a challenge even with professional tour companies who have staff! Not sure individuals will do this. This will lead to over booking and other consumer issues. Painful.

Looking ahead

I think four outcomes are likely in the long term.

a) Tours & experiences offered by professionals

Sites will have a smaller number of tours but each tour will offer a large selection of available dates.

This reduces the user interface search / suggest issue (by keeping the tour number down), keeps supply up (by having many dates on offer) and ensures that all suppliers are actively engaged (as they are all receiving constant booking flow).

An example of a site following this model is SideTour [New York].

b) P2P marketplaces will go local to local

The 10% revenue model works fine IF you have a high rebook factor (i.e. you have a marketing cost once to acquire a customer, rather than a cost to acquire a booking with no subsequent transactions).

Locals buying from locals tend to have a higher rebook factor than tourists / visitors – who may only book a trip once every 6-12 months. Hence it may be attractive to angle a service towards locals buying from locals.

However locals buy different tours and activities to visitors and tourists (locals want workshops, new unseen experiences – visitors often want to see the main sights).

Hence these P2P marketplaces may end up being considered outside of the travel industry. An example of a marketplace that looks like it is selling local to local is Gidsy.

c) Single experiences with multiple individual suppliers

The marketplaces may follow a model that closer resembles an existing tour guide business. They may have 20 great things to do in a city – and 100 local individuals – all of whom each deliver a subset of the 20 tours.

Now you have a simplified user interface (not too many undifferentiated products), constant availability supply on the tours you are offering and the ability to focus the tours on areas that consumers are buying (ie. the marketplace is now in control of product creation rather than the individual).

No one doing this yet ;)

d) Race to the bottom – more negatively

If P2P marketplaces end up with a reputation for having tours that are sold below market price – as a result of receiving commission from shops – consumers may become wary and stay clear. No sign this is happening yet.

Certainly going to be interesting to watch this all play out over the next few years. I have my popcorn.

NB: Economics lesson image via Shutterstock.

 
 
Alex Bainbridge

About the Writer :: Alex Bainbridge

Alex is a contributing Node to Tnooz and writes about travel technology, travel startups, specialist tour operators and the tours & activities sector. He has previously led ecommerce, social media and reservation system projects for airlines, leading mainstream tour operators and hotel distribution companies in both leisure and business travel sectors.

He is the CEO of TourCMS, a web based software-as-a-service reservation system and distribution platform used by many specialist tour operators worldwide to take online bookings and distribute to 3rd parties.

He also moderates Small Fish Big Ocean, a community that welcomes small tour operators and niche travel agents to come and discuss travel ecommerce issues. Alex has a computing degree, is passionate about usability, speaks French and still writes and reviews code.

 

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  1. Daniele Beccari

    Alex,

    you are right that demand for tours is vastly below demand for accomodation, but thoretically, with market education and appropriate pricing demand could be unlocked.

    I argue that the key constraint here is actually supply.

    The difference is simply light years away.

    The “P”s renting a house or a car do not need to be there when renting. They’re basically getting free money from a resource that would otherwise be unused, with minor side effects (arranging cleaning, keys…). In general, anyone is be happy to hand out 20-30% commission to a marketplace that’s bringing you free money.

    The “P”s doing tours actually need to be there to run the tour.
    This is not free money anymore – it’s pay against time.

     
  2. David Urmann

    Hi Alex – Great article. Certainly working with the small guides and tour operators hosts a lot of challenges. Least of all getting them to update availability.

    Tony mentioned “…. the volume of people want to book right now rather than have conversation about booking.” We dont really find this to be the case in fact we got rid of our book now button and are doing a lot better letting people enquire. It seems almost everyone looking at packages or tours wants something that is somewhat customized. Of course it might be a factor that we do most of our business in India and are focused on multiple day packages instead of the more simple one day type products like you see on Urbanadventures. Would be curious what others think? Do people really want to book multi-day trips or packages without having a discussion?

     
  3. Peter

    Ignore the business model for a minute and focus on Ken’s points above. Which are customer focused very important issues.

    Quality
    Safety
    Feedback

    I can see no way in which a p2p marketplace can ensure these points, unless someone can explain to me how? I have raised the insurance issue many times and no one seems to be able to give a straight answer.

    The two critical points to me are

    Are the p2p guides insured to do what they do ? Yes or No

    How do you ensure the guides are who they say they are and are safe and have the skills/quality they say they do?

    Without addressing the above two points their is no business model as you are just introducing guests into a risk situation that will backfire if volume is achieved.

     
    • Tony

      I think different businesses are taking different approaches to your two questions Peter.

      Tripbod for example says the following in their FAQ:

      Comprehensive insurance

      Our unique insurance policy means if the worst ever does happen – and we sincerely hope it doesn’t – we’ve got your back.

      Unique approval process

      We personally review all experiences before they go live to check they meet our guidelines and don’t jeopardise your safety.

      I can’t find the exact references now but I’ve read interviews or articles with some others who say that as the marketplace, they are just the point of exchange and introduction. The contractual relationship for liability for insurance, licensing and safety compliance etc sits with the person who is operating the experience and nothing to do with them……………..

       
    • David Urmann

      Could you say the same about other marketplace like airbnb? What about sites that let you list a vacation rental? Airbnb safety checks seem to consists of connecting to your social networks and verifying a phone number. They may or may not have a good business model but they have sure gotten a lot of visibility and investment. Whether its a legal issue or not is one question, but just assuming its not you still need to try to ensure your users have good experiences.

       
      • Peter

        David it is very different when you are guiding people from renting people property. Lets for example take a bike tour. For me to sell a bike tour in the UK , my guides who lead the tour need to be qualified via the national governing body for that sport, they need to have first aid training and qualifications , the need a company £5m insurance policy behind them. Also if the guests include under 16 year olds across a whole range of tours you need to be inspected and covered by an health and safety organisation called AALA. In order to meet all of the above standards you have to have laid down written operational procedures and risk assessments.

        I am positive it is a legal issue, if commercial transactions are taken place where the guide doing the leading is not trained or insured to do so. Of course I am taking about the UK , but I know in other countries we operate similar standards apply.

         
  4. Tony

    Hi Alex,

    Another great article on the Tours and Activities vertical.

    The piece of the supply puzzle that seems to be missing in P2P is that generally the volume of people want to book right now rather than have conversation about booking. If the Phocus Wright report is anywhere near correct then 65% want to book now and go tomorrow.

    Interesting that you mentioned Side Tour because as far as I know they are the only P2P Activity marketplace that allows you to book instantly and be confirmed instantly? That their product is engaging and the activity providers are professionals in their field helps a lot too but given the sparsity of dates you have to be pretty lucky to get the experience you want when you are in town if you are tourist (or plan your entire trip around that experience)

    I’m not sure option C above will fill that gap. It would require the marketplace to take the punt on the 100 suppliers that one is available tomorrow, contactable now and wants the job at the price the person paid less the marketplace cut. You might get away with it for a while but not always.

    I could be wrong (and would know for sure if it weren’t for the on-campus bar at La Trobe University. I think I missed the demand and supply class). ;-)

    Cheers,

    Tony.

     
  5. Geert-Jan Brits

    Great post.

    Reading this I figured “what if suppliers could opt-in/apply as guide for certain tours curated by the marketplace”? Then I read option C. :)

    Food for thought,

    Geert-Jan

     
    • Alex Bainbridge

      At some point Geert-Jan do tell me what you are upto….. the name sounds good, if a little “saucy” as we say in the UK.

       
      • Geert-Jan Brits

        Ha! had to look up ‘sausy’ in the Proper English Language dictionary. If I’m reading you correctly, you could build a great niche around that theme alone ;)

        Parisforaweekend.com is meant to cater for a bigger audience. Having said that, the ability to discover Things to do / places to stay, etc. with a certain vibe/experience in mind is one of the key ingredients for the UE. I hope to be be able to reveal more soon(ish)!

        About the post: The chicken and egg problem of (lack of) supply and demand is a big issue as well: Why would suppliers take the trouble of creating a profile and keeping an availability calendar when there’s nobody around to book. Viceversa a marketplace doesn’t attract potential visitors when that market looks like a ghosttown, without any offers.

        Starting with Viator / GetYourGuide could work to bootstrap the supply-side imho. Curate their offerings to fit your niche, to make sure you offer a tight, to the point selection of activities that doesn’t overwhelm your visitors.

        Build out from there with p2p offerings. I like strategy C. as outlined in the post. Some possible completely irrational brainstorming follows:
        1. each p2p tour is curated by the marketplace/site (perhaps crowdsourced by the p2p-guides, they’re the experts after all) .
        2. p2p-guides could lock-in dates on which they are willing to give one of these specific tours.
        3. multiple guides locking-in the same date(s) would get picked semi-randomly, once a booking occurs.
        4. Locking-in requires the guide to commit to be available on that date. Getting guides to do this is the hardest part I believe.
        5. each of these tours has a preset price. (possibly set as part of the crowdsourcing process as well)

        Net result: A nice collection of unique tours/activities, crowdsourced by locals (the p2p-guides) who know what they’re talking about. Tours are sufficiently distinctive as to not overwhelm visitors with choice. Tours can be booked directly with instant confirmation and live availability (due to 4.)

        I realize this is over-simplifying a lot, but I feel this just might work. What do you think?

        Of course, this only talks about the supply-part. The demand-part is a completely different story, but my comment is already getting too long as it is :)

        Cheers!

         
  6. Ken Frohling

    HI Alex

    Thanks for an insightful post. I agree very much with your comments, especially about supply and demand. (I knew that degree in Economics would pay off at some point – thanks, University of Wisconsin!)

    You can start a business building supply and you can start a business generating demand, but ultimately you need both to scale. And I would argue that to break out of any niche market, you need DEMAND. You can have a huge selection of things to sell, but if you don’t have customers, you won’t make it.

    You mention Price as the third factor. Important, yes, but I would argue that price is merely a determinant to stimulate demand. If the price is low or is perceived as a good deal, it stimulates demand. In my mind, there are three other factors in the demand equation: Quality, Safety and Feedback.

    - Quality – who assesses or determines that products are of a quality level? Who determines if a P2P guide us an ‘expert’ in their subject (Answer: They do!)

    - Safety – What happens if the traveler is injured or experiences a problem on a P2P tour? Is the guide licensed? Will the site stand by their provider? Does anyone do a background check? DO you really want to get in some stranger’s jeep and drive around Jamaica with them?

    - Feedback – What if the tour is below expectations? What if you did not really get the service advertised? Is there a feedback loop to correct this?

    Yes, some of these P2P offerings LOOK really interesting and I have been tempted myself to try one, but the ‘traditional’ market of curated tours and activities that exists now – by TourCMS, Viator (My Company) GetYourGuide and others seeks to address each of those issues:

    - Price: providing a range of interesting experiences at fair prices;
    - Quality: making sure that the operators used are at a certain level of quality level; the only way to do this is to evaluate the product firsthand or have it done for you;
    - Safety: making sure that the operators are licensed, insured and inspected. (Some are better than others on this topic)
    - Feedback: ensuring that customers can review (good or bad), submit photos and make suggestions – and then getting this feedback back to the vendors for improvement.

    Who will survive in the P2P space? Will it be a few larger players (like and AirBnB style) or will each region or market have its own marketplace? Or, will this all move to social media sites? My answer – I have no idea!
    - Ken Frohling

     
    • Alex Bainbridge

      Hi Ken
      The other point I would say is “operational resiliency” – i.e. if you only have 1 tour guide in a region – and their car breaks down on the way to a hotel pickup for a customer – turns into a bad customer experience (often very bad if there is no 24 hour customer service from the P2P marketplace). But a local tour operator with several local staff – has, normally, sufficient capacity to sort these problems out. I didn’t make this point because I have made it before on Tnooz and don’t want to sound like a broken record!

      And then there is this post…. where I mentioned insurance concerns
      http://www.tnooz.com/2011/09/01/news/ultimate-guide-and-analysis-to-tour-guide-marketplaces-on-the-web/
      Still not completely addressed to my satisfaction either!

      Ha – you have a degree in Economics – I have one in Applied Computing / Computer Science – still haven’t quite worked out whether better to be an economist with an understanding of tech or a tech person with a working knowledge of how businesses work ;)

      Cheers for commenting. Alex

       
  7. Mario Ricciardelli

    Alex – Great overview of the economic challenges in this model! Over time, one of the models you’ve outlined may emerge as a winner or some innovative group may come up with a completely different revenue model. (ie. annual membership fee for access to a global network of reviewed guides (Angies List) or listing fees for tours combined with a very small commission to cover transaction costs (Etsy).

    At HipHost.com, we’re continuing to test a fixed price model (with commission) as well as an hourly model (with markup). I have no doubt that over time someone (hopefully us!) will land on the winning formula as the value offered by connecting with locals provides an exceptional experience over more traditional activities. As travelers discover the value of connecting with locals, word will start to spread about P2P activities being an option to consider while traveling thereby driving up transaction volume and enabling a winning model will emerge.

    Airbnb is the obvious analog that folks point to as validation that P2P activity marketplaces can work, but keep in mind that the economics are different both for both the customer acquisition as well as lifetime customer value. PR leading to a network effect is what drove Airbnb largely in part to the fact that their offering was so novel. It remains to be seen if the same strategy will work in our space.

    No doubt its going to be an exciting ride and we’re glad to be in the race. Enjoy the show, Alex!

     
    • Alex Bainbridge

      Really? AirBnB? No – people need – when they travel – to get there, to sleep and to eat. They don’t need to go on a tour, whatever our marketing suggests.
      Focus on needs don’t focus on desires…. so AirBnB is in a sweetspot….. not sure it follows that tours & activities will follow the same track? Yes?

      Do send me info about what you are upto!!….
      Alex

       
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