Hoteliers have complained for years about paying commissions to site selection companies. Now, Ritz-Carlton has taken action by capping commissions. Will other hotels follow suit?
In a move competitors call "gutsy" and planners call "bold," Ritz-Carlton cut commission payments to third-party site selection firms to 3 percent in November.
The proliferation of intermediaries earning 10 percent commissions to bring meeting clients to meeting properties prompted Ritz-Carlton to make the change. Ritz will continue to pay 10 percent commissions to full-service meeting planning companies, which it defines as those who "conduct on-site inspections, event planning, on-site meeting management, and are responsible for ensuring payment."
JoAnn Kurtz-Ahlers, Ritz-Carlton's vice president, sales and business development, says that the creation of two commission levels reflects Ritz-Carlton's judgment of the value of the services provided by different types of intermediaries. "We recognize that site selection companies have a value to the end user and to us," she adds. "If there wasn't value, we'd be saying we're not paying any commission."
Test Case? The move sparked a wave of speculation across the industry about whether others would follow suit and, particularly, if Marriott, which owns Ritz-Carlton, was sending out the small, high-end brand as "the scout to the battlefield and waiting to see if it comes back riddled with arrows," in the colorful analogy of one hotel company vice president.
"Ritz operates as a separate hotel partner within the Marriott family," says Mark Sherwin, Marriott's vice president, segments, products, and promotions. "Their decisions do not necessarily reflect the thinking of Marriott as a whole."
Nonetheless, Sherwin adds, Marriott has been and will continue to "look at the growing trend of third-party intermediaries and try to determine the value these firms create, who the value is created for, and who should compensate them for that value." At this point, Sherwin says, "Marriott will not make any bold moves like Ritz-Carlton. It would be difficult for us to even enforce compliance, and we will not implement any policy that we cannot enforce consistently." Marriott's 500 full-service hotels are 64 percent corporate-managed and 34 percent franchise-managed.
Four Seasons, a hotel company closer in size and market positioning to Ritz-Carlton, is not following suit at this point. "We will pay up to 10 percent to all qualified third parties, including site selection companies, with full disclosure to the end user," says Tom Hubler, vice president of sales, North America.
Dave Scypinski, vice president, industry relations at Starwood, notes that while it will be somewhat instructive to observe the impact of the Ritz-Carlton move, "it will not be suggestive of what would happen if Marriott or Starwood or Hilton did it. On a larger scale, it would require more diligence. At a company like Starwood, with such a diverse portfolio, we have to be much more cautious. For Ritz-Carlton, a select, high-end product with limited distribution, this move doesn't really hurt them that much."
Indeed, Roger Helms, president and CEO of site-sourcing company HelmsBriscoe, the fastest-growing of the fast-growing segment, says Ritz-Carlton represents "less than one percent" of the nearly 10,000 meetings HB associates booked in 2000.
While stating that he has had "wonderful conversations" with Ritz-Carlton since the announcement and that HB and Ritz "are finding ways to be strategic in how we work together," Helms stands by his company's initial value proposition: "How have we grown 30 to 40 percent a year?" he asks. "Clients love the service. Why? It makes up for inefficiencies in the industry. We respond, we're consistent, we're not consolidating. It's the way clients want to buy. They want our procurement power. We purchase better than the full-service companies do, because we do more meetings."
Helms points out that even "full-service" meeting planning companies often do only site selection because that's what their clients want. In those cases, says Ritz's Kurtz-Ahlers, the firms will be entitled to a 3 percent commission. The policy, she explains, is service-based rather than company-based.
Among the newest players in the 10-percent field are Internet-based site-sourcing companies such as EventSource, which would be affected by the Ritz-Carlton decision as well. EventSource President and CEO Ed Sarraille emphasizes that "online" doesn't necessarily indicate a lack of service. In fact, he says, EventSource representatives bring benefits to both the occasional meeting planner and to hotels "who have neither the bandwidth nor the marketing dollars to reach that occasional planner."
E-Fees Still, EventSource is looking at changing its revenue model, at least with its new corporate product, Compass, an Internet- or intranet-based meeting tool designed to help companies track meeting activity and spending across all of their divisions and departments. Hotels may pay a "transaction fee" rather than a commission for business booked through Compass.
Value Judgments Steve Armitage, vice president/managing director at Hilton Hotels Corp., splits the "10-percenters" into more than two categories. At one extreme, in his view, are the full-service "soup to nuts" meeting planning companies; at the other are the Web sites offering hotel databases and electronic RFPs. In between are at least two other categories: firms retained by clients to do site selection and contract negotiation and "pure site selection" firms that simply present meeting site options to the client. A range of commissions might be allocated to these different types of intermediaries, Armitage suggests. And even within a category, he adds, some firms may offer more value than others. For example, Hilton may value more highly a piece of business from a third party that is "established, has a big account base, knows our product, works with us on selling that product, and can get us market share."
Hilton is actively working on the commission issue, Armitage says, with an eye toward "recognizing where our customers see value."
Ty Helms, vice president of sales at Hyatt Hotels Corp., believes the Ritz announcement will have little real effect. At Hyatt, decisions are made at the property level about whether or not to accept a piece of business and how much to pay for it. "We factor in all the costs and revenues involved and make the best business decision. It comes down to each one of our hotels and each piece of business," he says.
"The issue has always been a lightning rod," says Marriott's Sherwin. "Ultimately, the people who continue to create value to both sides of the transaction don't have anything to worry about."
- No Way, We Won't Pay If other hotels follow Ritz-Carlton's lead, and site selection companies react by switching to a fee-based pricing system, Cheryl Russell, director, conventions and meetings, for the American Speech-Language-Hearing Association, Rockville, Md., says she'll think twice about using site selections companies. "It's a nice service to have," she says, "and it sometimes helps us, but I would not pay a fee for it.
We'll just do it ourselves."
- Playing Fair "We have enjoyed a profound customer loyalty, and if they [my clients] want Ritz, they got Ritz," says Elizabeth Daniel, owner, Convention Company Inc., a Coronado, Calif.-based site selection firm with mostly medical meetings clients such as Pfizer, Forest Pharmaceuticals Inc., and the American College of Cardiology. "My take is that 3 percent is better than nothing, and we'll just have to do more business to make up for it."
- Mind-Boggled "They targeted only site selection companies and lumped us all together, and it's not a black-and-white thing," says Laurie Mirman, who founded one of the first site selection companies 16 years ago. Site Services in Irvine, Calif., which specializes in association clients, offers full meeting management in addition to site selection. Mirman charges hotels commissions for site selection, although sometimes additional services are fee-based, paid by her clients.
"Who is Ritz to judge what I have spent 16 years building? To suddenly have a hotel chain make a move like this is boggling. If [site selection] was easy, everyone would be doing it."
- Is Housing Next? "I'd love to see this commission cut happen for housing companies," says Dave Scypinski, vice president, industry relations at Starwood. But Scypinski, who has been outspoken for years about his frustration with housing companies that charge hotels commissions, says it's not the Ritz move but evolving technology that will move the housing market to a transaction fee-based business model.
He names Passkey.com Inc., an online group housing service, as an example. Passkey.com charges hotels a flat fee for each room night booked.