Time for an economics lesson and a sprinkling of the real world over tours and activities
We can talk using academic terms such as idle assets and distressed inventory but ultimately running a successful marketplace comes down to three factors:
- Price – are the tours/activities selling at the right price?
- Supply – is there sufficient product available to book?
- Demand – is there sufficient consumer exposure to make the product sell?
I am going to analyse each of these factors one by one:
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).
- 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.
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).
- 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.
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).
- 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.
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 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.