Turning the ugly duckling of the travel industry into a beautiful swan
There have been days in the not so distant past when I have felt like an ugly duckling, paddling about furiously in the vast pool of order and normality in the travel industry.
Despite the hype around the tours and activity segment, the truth is that this segment, more than any other, in my opinion, has the most work ahead of it if it hopes to one day become a beautiful swan.
The benefit of entering or considering entering the segment now is that entrepreneurs can benefit from the years of market research and unprecedented sharing that many of us, myself included, have been providing over the years.
Companies like Viator, TourCMS, and Rezgo have been serving the specific needs of the tour and activity market, in some cases, for over a decade. Part of the process has been to educate the segment in the benefits of managing their businesses electronically, moving them away from paper based systems and on to online software.
Another part has been to educate the travel industry as a whole on the opportunities that lie in the tours and activities segment and to foster innovation.
In 2011 for example, when PhoCusWright released its first study in the size and composition of the in-destination activities market, I knew that the numbers would prompt many an opportunistic entrepreneur to start up a new company around the tours and activities market.
And why wouldn’t they, the US market alone was $20 billion at the time (more now of course), that’s a lot of money for a segment that is still considered in its infancy compared to others like hotels and air.
Besides just the research, companies like ours are opening up our data like never before, providing the industry as a whole with insight into booking behaviours normally considered confidential or proprietary.
This article for example, provides data and analysis based on PhoCusWright data as well as data aggregated from over a million customers who have booked through Rezgo supplier members.
Despite all this access to data and knowledge sharing however, what most if not all of these entrepreneurs fail to understand is that this segment is one of the most difficult to serve and certainly the most difficult to understand.
And so, what we have seen over the last few years is a demise of many of those start-ups and the imminent demise of many more.
Why? Because the story of tours and activities has just begun, and like any good Greek tragedy, there will be many more deaths to come.
To begin, I want to take a moment to help you understand the supply side businesses you’ll be working with. This segment unlike air, car, and hotel is dominated by small businesses.
The operators that build businesses in this sector are generally individuals who are close to their offerings. Many are former guides or enthusiasts who have decided to turn their passions into a business.
As a result, these individuals seldom have a background in business, business operations, or finance, and lack best practices for starting and running their businesses.
They often wear many hats within their businesses and as a result tend to neglect long term strategy in favour of short term tactics.
These businesses are, as I mentioned small, but just how small may come as a surprise. I believe that the relative ease and lack of capital required to start a tour and activity business is a key driver behind the relatively small size of most of the operations that make up the segment.
As an indicator of the relative size, most of the businesses are less than five employees, gross annual revenues of less than $250,000, and serving fewer than 5,000 passengers per annum.
In addition to their relatively small size, this is a group of businesses that is notoriously low tech. A third still do not have websites and only about 30% have have any form of online booking capabilities.
The best part, 40% of them spend less than $5,000 annually on technology. So, in essence, this is a large group of businesses (over 67,000 in the US alone) who are passionate about what they do, small, low tech, with little to know business expertise, and who spend very little on technology.
So you are forewarned, if you choose to enter the tour and activity market at any level, be prepared because these are the businesses and individuals with whom you will partner.
The next area I want to review is the market itself. In addition to the report released in 2011 about the US in-destination activities market, PhoCusWright has recently completed another report focused on the European market.
The combined size of the market is considerable at $67 billion for these two key markets. That number, I would argue, would be 30 to 40% larger if you take into account the Asia-Pacific market.
To give you an indication of size, that value of the in-destination market is about two or three times the size of the car rental market and about 50% of the hotel market. The average customer spend is about $100 per person, so you can imagine the number of bookings about which we are referring.
Despite the size of the market, however, the in-destination market is hugely fragmented. As I previously mentioned, the majority of the businesses that make up this space are small businesses.
I would estimate that for the US and European market, there are in excess of 150,000 businesses that fall into the in-destination activities category. Around 100,000 of these businesses generate less than $250,000 in multiple segment sub-categories, and many even consider themselves outside the tourism space.
One of the most important factors, however, that I think affects the in-destination activities market is the ability to accept payments for advanced bookings. The majority of advanced bookings, approximately 87%, are paid for with credit cards.
As such, it would seem that an important precursor for success in the space, would be the ability to accept credit card payments. This, for many small businesses, is a significant challenge, especially in emerging markets like those in South East Asia, South America, and Africa.
So, now that you have a basic understanding of the businesses and the market in which you are interested in participating, lets take a closer look at the distribution landscape of tours and activities.
So who is distributing?
Are all these small operators actually distributing their tours through online travel agencies? According to research, 80% of these businesses are doing some form of distribution.
Personally I think this may be over reported because, based on our own internal data, we see less than 20% of businesses with distribution strategies. That said, the majority of these businesses are free-selling their tours or activities, which means that they can be instantly confirmed by their partners.
The other 20% are selling on-request which means that the bookings must be confirmed by the supplier, usually within 24 hours. The majority (approximately 75%) of these distributed bookings are managed via email.
With a reported 80% of operators distributing, one would think that distribution is a big piece of the revenue pie. The reality is, however, that revenues through intermediaries is less than 1% of the total revenues for the tour and activity segment.
Don’t get me wrong, however, because that is still $670 million in total revenues.
The majority of bookings are still direct to supplier, so there is still a lot of room for potential growth in the distribution space. When asked why these operators distribute, 80% of them say that they distribute for increased incremental revenues.
Many also say that they do it because it increases their credibility and because it drives advanced bookings. For those operators who primarily deal with cash, the ability to accept advanced bookings and have a partner handle customer service and payments is a real value add for small businesses.
About 43% of those businesses that don’t distribute said that they plan on distributing in the future. The primary reasons, however, for not distributing include high commissions, inefficiency in managing reservations, and lack of ROI.
So where are the opportunities in the activities market?
I believe there are two key areas of opportunity for this space primarily centred around mobile and distribution. On the mobile side, the intent to use mobile devices to search and book travel activities is high. Unfortunately, however, the high cost of roaming data charges is a big deterrent.
According to research, only 3.5% of bookings are made via mobile devices. On Rezgo, since we released our mobile booking platform, we have seen mobile bookings jump to over 5%. So there is a clear opportunity to increase mobile search and bookings for local operators.
As with mobile, the distribution space is also an opportunity with a lot of potential upside.
There are several successful players in the distribution space that share very similar processes. The opportunity, in my opinion, is to deal with the common pain points that I have identified: streamline booking and availability processes by integrating with reservation systems and increase value for the commissions paid by businesses.
All this being said, there are some important things to keep in mind when you decide you want to enter this space. This is not a short term market.
When you enter this space, you will be working with hundreds and potentially thousands of individuals. Unfortunately you won’t and can’t simply connect to one pipe and access all the suppliers you could ever want to do business with, so suck it up!
You may be tempted to think that you are coming up with something new and exciting that will revolutionize the industry. Chances are, you are not, and if you don’t do your research or listen to those who are in the space, you will alienate yourself from your peers. That being said, add value to the space, not just noise.
You will, as in any industry, come to rely on and work closely with partners who may compete with you at some level. Understand the nature of your relationships with your partners and respect your place in the ecosystem.
In the end, the tour and activity space is an exciting opportunity but as with any opportunity, has its fair share of challenges as well.
Understanding these challenges and clearly identifying the value you bring will increase your chances of surviving the story instead of simply ending up another tragic character.
The transformation of tours and activities from ugly duckling to swan is happening, but it still has a long journey ahead of it.
NB: Ugly duckling image via Shutterstock.
NB2: This is article is based on a speech made to the WebinTravel Bootcamp in Singapore, October 2013.
NB3: The slides on Prezi:
Stephen Joyce has been a contributing Node to Tnooz since 2009 and has been working in travel and tourism technology since 1995. Stephen is the CEO of Rezgo.com, a cloud based software as a service reservation and booking platform for tour and activity providers.
Stephen is a graduate of Capilano University, a certified commercial pilot, and holds a certificate in IT Management.