Developing a Net Rate for Tour Operators

Do you understand the term ‘net rate’ and have you got it right for your tourism business? In our experience, appropriate net rates can work wonders for your bottom line and business growth, yet only one in four SME tourism businesses that we meet are using net rates effectively, with 75% not using them at all, or using them in a way that is not driving them business. So, in the words of Julie Andrew’s let’s start at the very beginning…

What is a net rate?

A net rate is the price that you charge a reseller such as a travel agent without offering them commission. It is usually a fixed price and not a dynamic price (although it can have seasonal highs and lows) and it must offer the reseller a discount, enabling them to add their own margin while still remaining competitive. The simplest way to consider it is ‘wholesale’ and ‘retail’ pricing; you give the travel agent or reseller the ‘wholesale’ fixed rate for your product and then you sell direct to consumers at the ‘retail’ rate. 

Are they different from FIT rates?

You might have heard of the term ‘FIT rate’ or even be offering them in your business so how do they differ from net rates? Fundamentally, there is very little difference between them except that FIT specifically stands for ‘foreign independent traveller’ or is used interchangeably with ‘fully independent traveller’. While FIT represents a specific demographic, ‘FIT rates’ is often used interchangeably with the term ‘net rates’ because they are both rates provided to resellers and introducers to attract their customers to your product. 

How are net rates used and why are they useful?

Whether you are driving footfall to an attraction, developing and operating bespoke tours, or running a hotel, aside from having a quality product, perhaps the most important factor for success is keeping a healthy pipeline of enquiries and bookings. There are hundreds, perhaps thousands of tools available to drive business, including OTAs, social media, Destination websites etc. but they all rely on your time, resource and expertise to keep them up to date and effective. What if you could convince someone else to do all that for you, while you reap the rewards of more bookings? Trade resellers are exactly that – businesses that thrive on taking your product and introducing it to a new audience, either on its own or as part of a package.

This is where net rates come in. Net rates are a fixed price offer for your product or service, which offers the reseller a favourable rate at the same time as making you money. Net rates can have low, mid and high season rates as well as weekend and weekday rates, but they need to be straight forward, with limited options, a guaranteed fixed price and the ability for the tour operator or reseller to make a margin on top, while remaining competitive.

Net rates differ from a commission model in that the reseller requires a fixed price, and will not align with your dynamic pricing. This is because they usually have a more traditional business model, with brochures published with set prices for example. Instead, you make a fixed price income per sale, with limited administrative input on your part and you usually reach a new audience for your product such as visitors from overseas or those in a new target market for your product. You’re providing a fixed price to the experts in exchange for them securing the bookings and as an added bonus, resellers usually put through more bookings per year than your direct customers, so it is easier to build loyalty.   

So we’ve convinced you to have a net rate, now let’s take a look at the common mistakes businesses make…

There are lots of mistakes that a business can make when it comes to net rates, and getting it wrong undermines your opportunity for new and increased sales. Here’s some of the most common mistakes we see:

  • Not having a net rate at all. There are hundreds of resellers globally that might be interested in your product, but failing to operate a net rate process means you won’t attract any to your business. How many sales are you missing out on from potential resellers? We work with a client who has a very exclusive product offering and only works with 150 individual clients per year, yet during the 2019 season, that represented over 1,350 hotel nights booked or circa. 135 nights per year per selected hotel. Now think of that across 10 or 20 or 30 resellers and you’ve got a regular influx of business all at a regular rate! 
  • Insisting on dynamic pricing or a commission agreement. There are some resellers for which commission works – the likes of the Online Travel Agent websites for example. They however work on the basis of high volume, and they’re not usually providing a ‘service’ to their clients – more a booking platform. Net rates need to offer consistent pricing and a model that is simple to understand, enabling resellers to then package your business with others. They will also publish their prices for the whole year, months in advance, so they can’t risk fluctuating prices from their suppliers lest they make a loss.  
  • Having the same published price and net rateprice. We’ve seen businesses set the same net rate as their retail price, expecting the reseller to pay the same as your direct customer does. Despite being willing to have a net rate, it misses the point of them and no reseller will take you on if customers can pay the same directly with you. 
  • Pricing too high.Many businesses are worried about entering into a fixed price agreement ‘in case they undercut their own prices’, or they are concerned with squeezing margins by undercutting their own retail price. During peak season, you might be selling your service for £150 and in low season say £100. Many businesses therefore opt to give resellers a net rate of £150 so that they don’t ‘lose out’ during peak season. The problem with this is that resellers will usually package your product with others, so they also need to make money and your price can’t force theirs to be uncompetitive for most of the year. You need to set a price that makes you money, but don’t forget, you will be saving money on marketing and administration, and you should also be reaching a wider audience. It’s all about setting the net rate well, in a way that works for you and for your resellers. We’ve given some tips below.
  • Pricing too low.In the same way as pricing too high is not good, pricing too low isn’t either. We’ve seen many businesses set the wrong rate initially, pricing too low, before becoming resentful of the clients paying too little and struggling to make a profit if the reseller sells particularly well. Do it wrong once and businesses tend to say an outright no to doing it again. Just like with pricing too high, it comes back to appropriate margins, so take a look at our handy guide below.  

So, you know what to avoid, but how do you set a good rate?

A good net rate varies per business and there is no hard and fast rule of how to set a good net rate. It isn’t as simple as saying ‘take off 15%’, but there are some things you can consider to help set the right rate…

  • What does your service actually cost to deliver? Make yourself a list of all the costs that go into your product, including your time. It is also worth mapping any increase in costs seasonally – are your costs of service higher in the summer months or at weekends? You’ve probably done this already in order to set the price for your service. 
  • What costs can you cut? If a reseller is doing some of the hard work, what costs can you cut? Look at administration, marketing spend and any other costs associated with securing your custom. The reseller will be doing this bit for you, so know exactly what value they are bringing.
  • Review your competitors. How much are they charging for a similar service and is yours competitive? Again, this is something you are likely to already be doing to keep the business competitive, but your potential reseller will be too. They will look at your selling price and your competitors’ prices in order to set their own client price and they need to make a margin and stay competitive.
  • Network with resellers and ask them questions. You may not be able to meet resellers, but if you can, this is a prime opportunity to ask them questions including what margin they expect to make. As a general rule, most resellers will be looking for 20-35% per service, so calculate whether it is feasible to offer this margin and still make a profit for yourself? No reseller will ever consider less than 10% and if you do secure one happy to go that low, you will be lucky. 

Combine all these factors together and then hopefully it should be easy to see an appropriate price range that satisfies all parties. As a bonus tip: if you’ve done all the calculations and you can’t make it stack, look at creating an exclusive product just for resellers, either with lower costs or scope for higher prices, and / or look at whether you can offer the reseller exclusive added value items on your existing service.

Is it really worth it? 

If you do it right, then absolutely! There are lots of platforms which enable you to connect with resellers and it is also a national policy to promote the United Kingdom overseas. Visit Britain has a network which connects bookable products and services with overseas operators and there are so many opportunities you can take advantage of. A lot of the research and statistics around the benefit of net rates is unfortunately anecdotal, but the anecdotal evidence is strong. We for example represent a small tour operator who packages hotels and attractions together. This year, we did an experiment considering net rates versus dynamic pricing with hotels. 

Starting with the bookings, we mapped them against both the net rate and the dynamic rate for each date. Selecting specifically one location in Cornwall for example (which we hasten to add is representative of the norm and not a crazy data outlier) and the hotel opted to provide a 10% discount on the published rack rate. Flattened across the year for the purpose of package prices, this meant our client ‘should’ pay £125 per night per room for two people sharing a double or twin; however, they placed the hotel at the bottom of their accommodation preference list, to be booked only when others in the area were full. They placed 512 room nights in the town of which 178 room nights were placed with this hotel. This should have equated to c. £22,250 for the year not including on-site spend in the bar or restaurant. The hotel was adamant this was the ‘best’ rate for the room and that it wasn’t worth them standardising across the year. Enter dynamic pricing – which definitely works for the consumer market – and my client’s administrators got in the habit of checking all of the online booking portals for the price before making a booking. Over the course of the 2019 season, on average 4 in every 5 bookings made during the season could be purchased cheaper via dynamic pricing and the average rate paid for the room booked online was £91, making the total seasonal revenue £16,198. That’s a direct loss of £6,052 simply because the original rate wasn’t good enough to keep the tour operator on board, not to mention that only 34% of bookings in the area were made with this hotel. 

Let’s assume for a moment that everything stays equal and the hotel is still third choice. What would you rather? 178 bookings made direct and commission free at say £95 totalling £16,910 where you sometimes sell below your dynamic pricing but rarely, or 36 bookings at £125 and 142 bookings at £77.35 (after commission) totalling £15,438.70. Then assume that not everything is equal and this hotel offered a rate of £95 per room per night, but was the preferred supplier and was able to take 50% of the bookings made, the revenue would be £24,320 revenue, or 75% of the bookings would be £36,480. Can you really compare that to a direct customer who pays you £125 but visits only once a year?

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