The corrosive effect of commissions on the meetings industry

The corrosive effect of commissions on the meetings industry

Let’s talk about the corrosive effect of commissions on the meetings industry.

Our industry is abuzz about the news of Marriott’s decision to cut third-party commissions for group bookings by thirty percent. And the response has been “harsh“, especially because of the extremely short notice (it will be going into effect on March 31, 2018) and once it became known that four large site selection firms would be “granted a temporary exception“.

Marriott’s announcement sparked the potential of a commission war (some independent properties are raising group booking commissions). It led to fear of further reductions or elimination of commissions by other suppliers in the future. Taking a wider view, let’s talk about the corrosive effect of commissions on the meeting industry.

(I think the following points are pertinent to any industry that pays commissions, but that’s a topic for another post.)

Why are group booking commissions “corrosive”?

Let’s go back to basics. When a supplier pays an independent agent commission on a group booking, the agent benefits financially. This financial transaction does not directly involve the agent’s client (who may not even be aware of it). The agent, then, is not depending solely on client fees for income.

Who is the agent’s customer? Ideally it would be 100% the client. From the client’s point of view, the agent’s job is to find the venue that best meets the client’s needs. But when commissions enter the picture, the question arises as to whether the commission-paying supplier is now the customer too. After all, the agent provides a service (a sale!) for the venue — and receives payment for it. And that leads to concerns that should be on the mind of any client who is aware of that commissions will be paid. Did my agent steer me to this property because they stand to make money from recommending it, rather than because it’s the best choice for me?Can I continue to trust this agent to act in my best interests?

Remember one of Jerry Weinberg’s ten laws of trust: “Trust takes years to win, moments to lose.

The real-estate industry, which works solely on commission, is upfront about brokerage commission fees, which, though sometimes negotiable, are typically uniform and clearly included in client-broker contracts. The meeting industry does not generally match such levels of uniformity or transparency. For example, I often negotiate with non-traditional meeting venues. None of them have ever offered me a commission (and I would have been surprised and declined if they had). In my experience, commissions can range between 0 – 15%.

Of course, experienced clients are aware of the existence of commissions, and ethical agents disclose them. Nevertheless, commissions tie intermediaries to vendors who pay them, obscure financial transparency. Commissions muddy the waters as to whether the agent is solely acting in the client’s best interest. A naive client may see an agent receiving commissions as less expensive than one who is totally fee-based.

To summarize, group booking commissions are corrosive because they reduce clients’ trust in the impartiality of meeting planners, and they hide and/or distort the financial considerations underlying a booking.

Why trade associations are silent

Compared to the strong response from independent planners, trade associations have been “largely silent” to the Marriott announcement. The few official responses provide excellent examples of how to issue a statement that says nothing substantial.

This is not surprising, due to the financial model adopted by these associations. Kyle Hillman points out that it relies on supplier financial support to an extent that they will not say anything that might offend suppliers.

“…stop looking to the trade associations for help. It isn’t that they are bad, they are just not setup to be independent voices here. Their entire financial structure is based on supplier funding.No matter how egregious a situation is for planners or industry professionals, they can’t get involved without risking their primary revenue source.On internal issues within the industry – trade associations are not our advocates…”

“…I think we romanticize MPI, PCMA, ASAE as our champions when that isn’t their role. Their role is to provide enough value to members so that they can facilitate sellers soliciting their goods. They were never designed to be advocates for buyers.”
Kyle Hillman, Facebook Industry Friends Group

As a side observation, at least MPI and PCMA do not claim that they only represent meeting planners, but ASAE — the American Society of Association Executives — does not have that excuse if its name correctly portrays the people they claim to represent!

For this article I researched the relative numbers of buyer versus supplier memberships at MPI, PCMA, and ASAE but found nothing on their websites (feel free to share in the comments if you know). And unfortunately, these organizations’ annual 990’s do not break out buyer versus supplier support, though the program income figures are interesting and shown below {the 2015 returns are the most recent I could access}.

corrosive effect of commissions on the meetings industry
ASAE 2015 program income
corrosive effect of commissions on the meetings industry
MPI 2015 program income
PCMA 2015 program income

Regardless, intermediaries have no major association to represent their collective concerns. (Senior Planners Industry Network {SPIN} has published a petition demanding equal commissions from Marriott for all intermediaries.)

Corrosive conclusion

The upheaval caused by Marriott’s abrupt unilateral decision to slash intermediary commissions has created consternation for third-parties who have relied on these commissions for a portion of their income. Is this is the beginning of a trend like the one begun in 1995 when airlines capped and eventually cut commissions to travel agents? We can, however, take some encouraging lessons from the travel agent industry which, in response, reinvented its business models and, though the number of agencies has shrunk by two-thirds, is perhaps the healthiest it has been in years.

Paradoxically, those intermediaries who work solely on a fee-basis and do not rely on venue commissions are in a good position to increase their business as a result of Marriott’s decision, compared to other agents who may now need to find additional revenue sources, or perhaps even leave what is a demanding and difficult business. Ultimately, intermediaries relying less on commissions’ contribution to the bottom line will reduce the corrosive effect of commissions on the meetings industry.

Associations exist only in the mind

Professional, trade, and public interest associations are significant businesses. In the United States alone, associations employ more than 1.6 million people, and generate an annual payroll of ~$50 billion.

Yet, ultimately, associations exist only in the mind.

Stay with me! I’ll tell you a story that may convince you of the value of this strange point of view.

Fifty years ago, every business wanting to offer credit to its customers needed its own independent system. Individual banks were trying to encourage merchants and customers to adopt newfangled things called “credit cards”, but they failed to solve the chicken-and-egg problem that consumers did not want to use a card that few merchants would accept and merchants did not want to accept a card that few consumers used.

Then in 1966, a man named Dee Hock had the vision, determination, resources, and a little luck to break this logjam. Dee described his journey in a fascinating book he wrote after his retirement in 1984, intriguingly titled: Birth of The Chaordic Age. Dee was the first CEO of what became the mammoth multinational financial services corporation VISA, a company with a current market capitalization of over $200B.

What has this to do with associations? Well, VISA has never issued cards, extended credit or set rates and fees for consumers. The company is, in structure if not in capitalist terms, an association of tens of thousands of member banks. They offer VISA-branded credit, debit, prepaid and cash-access programs to their hundreds of millions of customers. While competing with each other for customers, these banks agree to honor each other’s trillions of dollars in transactions annually across borders and currencies.

A set of agreements

At its core, VISA is a set of agreements between its members. The company’s value to its owners and customers is created from the mutual agreements its members have made. Without those agreements, VISA would not exist. We would return to the pre-VISA world, when every financial entity needed its own system of offering customer credit.

VISA is an atypical kind of for-profit organization. But its core purpose is essentially identical to that of trade and professional associations. Associations are society’s instantiations of communities of practice, groups of people who share a common interest, profession, or passion and agree to actively engage around what they have in common. That leads us to Dee Hock’s (and my) view of organizations like VISA and associations:

“…organizations exist only in the mind; they are no more than the conceptual embodiments of the ancient idea of community.”
—Dee Hock, Birth of The Chaordic Age

When associations go astray

This perspective is extremely important because it’s easy for associations to forget their initial and continued reasons for existence. Every association is created when at some moment in time a group of people with something in common wants to further a particular profession and/or the interests of those engaged in a profession and/or the public interest. Typically, the community already exists informally. Its “members” want to create a formal, legal structure to support, deepen, and widen its reach.

Associations can, however, lose sight of this primal and ongoing purpose. When this happens, they concentrate on self-perpetuation and/or expansion at the expense of supporting the community of practice for which they were created. Remembering that an association is, at its core, a set of agreements in people’s minds about the instantiation of a community that is important to them is key to keeping the association relevant to the community it serves.

So remember that associations exist only in the mind. Keeping an association’s purpose foremost, is key to maintaining its community of practice’s core reasons for being.