DRIP, DRIP, DRIP. Hear that? That's the sound of your destination management company's profit line draining away. The business of DMCs (providing the local staff and expertise to make your transfers, tours, dine-arounds, and off-site parties a success) is being squeezed as hotels and third parties — and increasingly, both — demand a piece of the action in the form of commissions and referral fees.
“Nobody starts awith the idea of becoming a millionaire,” says Helen Moskovitz, DMCP, executive vice president of The Key Event & Helen Moskovitz Group in Nashville. “It's not a big money-making business.” Profit margins aren't particularly high, she says, and they often fail to fully reflect the labor that goes into booking and managing events.
But what has really become a danger to DMCs' financial health is the whack that they are taking from referral fees and commissions from third-party vendors and hotels. While it's fairly standard for third parties to request commissions from DMCs, particularly in warm-weather destinations, the practice of hotels asking for commissions is becoming more widespread.
With DMCs operating at fairly low margins, the implications are huge. “Margins vary so much,” Moskovitz says. “We like to look at a 20 percent margin, but with things like dine-arounds and tickets, you have to bring those margins way down. I don't know how the economics of our industry will work in the future if we are only allowed to work on these small margins.”
For example, Moskovitz says her firm might add a 10 percent markup for providing tickets to the Grand Old Opry in Nashville, which means that there wouldn't be much financial value to providing this service if she had to pay a substantial commission on that service.
But in many cases, DMCs do. According to Julie Greenspoon-Kelly, president, Destination St. Louis, third-party vendorswith DMCs “all over the country,” with language mandating that DMCs have to pay a commission based on the bottom line. “These companies will collect proposals [from DMCs] for the client … so we are still in a bidding situation,” she says, adding that if her company gets the contract, she knows that up to 10 percent has to go to the third party. Contractually, she is not supposed to pass along those added costs to the client. And with her hands tied, she says, “the difficulty is that my net profit is taking a huge hit.”
On top of that, DMCs are being hit with a double whammy as these same third parties ask them to lower their costs. “If they're already asking you to give them a discounted rate and you add on 10 percent [in commission fees],” Moskovitz says, “we have to go to them and say, ‘You've asked us to do this, but if we don't make any money, how can we stay in business?’”
Bruce Harris, president of Conferon Global Services Inc., a meeting management and event services company based in Cleveland, has his own side of the story. Third parties like his, he says, take on a substantial added burden when they're asked by a client to find a DMC. “When we're working with DMCs, it's an extreme rarity when we're not managing the relationship with the DMC so the client doesn't have to do it,” Harris says. “That's an important service, and I don't know many people who are going to do that for free.”
Harris says Conferon has a relationship with a network of DMCs — “really high-quality, with excellent reputations and high reliability” — and it “negotiates hard” to ensure that clients get a favorable deal while giving the DMCs a good return as well.
Commissions “are never more than 10 percent,” Harris says, and as a full-disclosure company, Conferon's clients are made aware that Conferon will receive a commission if itwith a DMC. “Our clients expect we will be getting a fair commission.”
Hotels Get Into the Act
Most recently, hotels are getting into the act as well. The issue has become “a pet peeve” of members of the Association of Destination Management Executives and caused a stir at the association's last meeting in San Diego, says Pat Schaumann, DMCP, CMP, CSEP, president of MAC Meetings and Events in St. Louis and ADME's current president. According to Schaumann, the problem is particularly pronounced in first-tier meeting cities such as San Diego, New Orleans, Miami, and Las Vegas, where the environment has become much more competitive for DMCs over the past couple of years.
“It's just not a fair practice for choosing a vendor,” Schaumann says, adding that many qualified DMCs lose out on business “because they are not paying that commission.”
Chris White, CEO of Global Events Partners, a DMC network based in Washington, D.C., is outraged by the practice. “Charging DMCs for a recommendation — that's just highway robbery. Why would a good hotel play this game? Why drive up the price for your client?” Instead, he says, “The right thing to do is say, ‘Here are four or five we've worked with, and here's the one we think is the best.’”
Other DMCs, however, have no problems paying fees to hotels. “We're always delighted when a hotel makes a referral,” says Greenspoon-Kelly. “You don't have to go into a bidding situation, it takes less time, the buyer is ready to buy, and the hotel is not putting any limits on us passing on [the commission costs of the referral]. Some DMCs get really outraged by this request for commissions, but I'm not bothered by it. The hotel should get something for the effort.”
Another DMC, based in Nevada, agrees. “Why shouldn't the hotel get a commission?” he asks. “It only becomes a dilemma when there are two commissions to deal with.”
Out of Control?
The problem is that, increasingly, there is more than one party asking for a fee for the same piece of business.
For example, the Nevada-based DMC recounts a situation in which he shook hands on a deal with hotels from two large chains, only to find two large incentive houses looking to get into the action. “At the end of the day, there's 10 percent and no more,” he says of the amount he is willing to surrender in fees. “They'll have to deal with it.”
One California-based DMC says she is getting pressure from third parties to pay fees for business with clients with whom she has ongoing relationships. “We may have the client, but still have the third party send us referrals,” she says. “In one case, we had three different companies send us a referral for a client we already had.” Refusing to pay a fee in such a situation is problematic, she says, “because the third parties can threaten to withhold business in the future.”
With so many people trying to get a piece of the action, determining a “good referral” — the one that should receive the commission — becomes difficult. A scenario could have a business lead from a hotel contact, or a client via e-mail, or a production company. At some point, a third party could refer the business. “By this time,” the California-based DMC says, “we could have heard about the same piece of business from three or four sources within 24 to 48 hours.”
How do DMCs handle these situations? “It all becomes a bit murky,” she continues. Sometimes the good referral is the one that hits the building first. Other times, the referral by the third party is the way to go because “we have developed a strong relationship with them, and they can build value for us by selling services to the client.”
The Bottom Line: Who Pays?
There's no question that these referral fees are eventually making their way to the client. As Greenspoon-Kelly points out, if she's paying a referral fee to a hotel, she's under no obligation not to pass some of that cost along to the client.
A Midwest-based DMC agrees. “I don't know many DMCs that can take that [commission fee] off the bottom line without passing it through to the client. They [third parties] are just crazy if they think that we're not going to pass it through.
“We have to stay competitive,” she adds. “We may be talking about only 1 [percent] or 2 percent, but we need to recoup as much of that commission as we can.”
If DMCs are fighting for a decreasing share of the pie, that means their vendors are making less as well. “We have certain vendors who will give us breaks, and we have to use them to get a little discount,” says the Nevada-based DMC. “You have to rely on people who can really deliver product and count on them to give you a better rate.”
Bill Boyd, CMP, CMM, CITE, president of Sunbelt Motivation & Travel Inc., Irving, Texas, wonders if, in the end, commissions are just bad business. For example, Boyd suggests that Sunbelt could do business with a large consortium of DMCs and get a volume rebate of 5 percent across the board.
“But I'm not sure we'd be getting the best deal for the customer then,” he says. “We're looking for creativity, competitiveness, length of time in an area, knowledge, and financial well-being. But if all of a sudden we say we'll use [one of the consortium DMCs because of the 5 percent rebate], then one of those things might be missing in that DMC.
“You'd rather have the independence of being able to pick and choose,” Boyd adds. “They should give us a price and that's it. If it's too high, then we'll go to another.”
Another Virginia-based meeting planner agrees that commissions could potentially create situations in which she might not get honest recommendations.
“I want to use the DMCs I choose,” she says, adding that it's not necessarily a question of price but of comfort level. When she gets recommendations, she's more impressed if there are no referral fees attached because it means the recommendation was made because the DMC will do “the best job for the client.”
When Did It Get This Bad?
Commissions have been an accepted part of the business for years, but Sam Thompson, DCMP, president of metro-Connections in Minneapolis and past president of ADME, suspects that the 2001 recession was the start of DMCs getting hit with more and more fees. One consequence of the recession was corporate cutbacks in meeting departments. As a result, third-party vendors have moved in to fill that void.
Also, since the recession and the post-9/11 slide, corporations found that they could subsist on smaller meeting budgets. “Now, that is an ‘Industry Beware’ kind of message,” Moskovitz says. “The rollicking days of the 1980s — we're not going to see those again.”
Moskovitz understands that all parties involved, not just DMCs, are under the same pressures she is. “[Third parties] have budget restraints as well. They have to start looking for other sources of revenue. It's the same story with hotels, who are feeling the crunch. The thing that makes this a problem is that we're still not really out of a tight market, and everyone is looking at cost cutting, where in the past we could have added an extra markup or taken a little more profit.”
The bottom line, however, is that third parties and hotels want their DMC partners financially healthy, because, she says, “if we go out of business, there is no one out there to perform these services for their customers.”
Yet, with increasing demands for commissions and fees — and to keep prices low — staying afloat is becoming more difficult. As she puts it: “The question becomes, ‘At what point are you actually losing money on business?’”
How Do DMCs Charge?
According to Pat Schaumann, DMCP, CMP, CSEP, president of MAC Meetings and Events in St. Louis and president of the Association of Destination Management Executives, there are several ways DMCs price events, including:
PER PERSON — the total cost with a markup; it is divided by the number of attendees.
MENU — now the most popular method; it is used with larger, more complicated events where costs are broken down item by item with markups included.
COST-PLUS — the actual cost for services, plus a separate fee that can be calculated as a percentage, an hourly or daily rate, an arbitrary management fee, or a combination of these.
FLAT MANAGEMENT FEE — the least used method of budgeting, a fee-based pricing of services is agreed to prior to program development, and is based on certain calculations such as staff hours and profit margin.
An Industry in Transition
Despite fears that fees are putting too much of a dent into the bottom line of the typical destination management company, Pat Schaumann, DMCP, CMP, CSEP, president of the Association of Destination Marketing Executives, believes her industry as a whole remains strong.
One sign is that ADME membership is on the rise. Membership had remained stable at around 175 for several years, according to Sam Thompson, ADME's past president, but has now increased to more than 200. Schaumann also points out that the industry for the first time hit the billion dollar mark in 2004.
The DMC industry is also in the middle of a generational change. “Most of the original operators are retiring, or selling,” she says. “There are a lot of different, new people coming in.”
This generational change and increased competition — and issues such as commissions and fees — mean that DMCs are “becoming more resourceful,” Thompson says. “They're adding to their services, and improving what they are already offering. And they are becoming more creative than ever.”