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:
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…
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?