Monday, October 8, 2018

Can you get rich, and do good, by giving away 50% of your top line revenue?

I was looking through the archives and WHAM! this jumped out at me. On point for TALENT SEARCH WEEK at New Savanna. Crazy? I suppose so. But we need this kind of crazy right now.
Sometime last year – late Summer or early Fall – my friend Zeal handed me a roll of papers, telling me it was the business plan for the World Tourism Foundation & World Tourism Network (alas, the link is now dead). It was the darnedest business plan I’d ever seen, large-format pages (perhaps 18 inches by 24 inches), lots of prose in columns and boxes, boxes connected by arrows so they looked like flow charts, but nowhere an executive summary. Looked like I’d have to go through the whole thing just to get a flavor for it.

I was not a happy camper. But Zeal wanted me to do read through it. So I scratched my head, rolled up my sleeves, and unrolled the WTF/WTN business plan.

It turned out to be crazy, but also freakin’ brilliant. So I ended up helping the founders of the WTF/WTN, [the late] Ed Beauchamp and C. J. Duffy, write an executive summary for their plan. The general idea is to give travel intermediaries, such as Expedia and Orbitz, some serious competition while making a healthy profit and goosing the world-wide tourist industry. The key to the whole plan is to take 50% off the top-line revenue and put it into a non-profit foundation – the World Tourism Foundation.

Whoa there, son! You said 50% off the top? They’re going to give it away? There’s no profit in that, no sir!

That’s what I said, 50% off the top. My reaction was like yours at first. I didn’t believe it. Sure, I saw the numbers in the business plan . . .

Now, son, I’ve seen lots of business plans. Everyone knows those numbers aren’t real. Why . . .

I know, I know. Those pro forma financials aren’t about predicting the future. They’re there to show that the entrepreneur can add, subtract, multiply, and divide and that they know what a profitable business looks like on paper. If you can’t show a profit when you’re allowed to make the numbers up, you sure as heck aren’t going to show a profit when reality has a say in the numbers.

As I was sayin’, 50% off the top. To understand why that works you have to understand a thing or two about the intermediary segment of travel business. First, advertising costs are high. Beauchamp tells me that Expedia, for example, spent 44% of their revenue on advertising in 2006 on advertising and 34% in 2009. What if you could drop that to zero?

What, no advertising! Are you nuts, son? Are you outa’ your ever lovin’ mind?

Hold on old man, hold on. We’ll get there in a minute. A few more facts. Here’s what Beauchamp tells me about the deals Expedia cuts with suppliers (airlines, hotels, etc.):
They have three primary Business Models:

a) Commission Model for hotels, car, attractions, etc. (some airlines) at 10%. [Tour operators offer 5-15+%.]

b) Merchant Model; where Expedia negotiates a volume-buy price and marks it up to consumer.

c) Affiliate Program; where they resell Supplier inventory to traditional Travel Agents. The objective here is to enhance their “perceived clout” with Suppliers. The Program has not been very popular among traditional Travel Agents!

Whereas the Commission Model costs a Supplier 10+%, the Merchant Model costs a Supplier 18-38%; which in essence wipes-out ALL profitability of a booking. The Affiliate Program is basically just a 50-50 split of the Commission, or 5-10% if inventory comes via the Merchant Model.

Expedia’s Net Earnings, historically, are directly proportionate to the Merchant Model. Interpretation: The only way Expedia can make a profit, is by squeezing the profitability (via “perceived clout”) out of the Supplier.
With a business model like that, one would think that the suppliers would jump at a chance for a better deal, no? Fact is, one major supplier has already jumped. Late in 2009 American Airlines announced that it was opting for 100% direct distribution of their flights. They’re pulling out of the Sabre distribution system. Talk about irony, AA created Sabre back in the early 1960s and spun it off in 2000. And now the child has gotten so greedy that the parent has decided to disown it.

OK, OK, so the travel industry is plagued by greedy middlemen. So, what? How’re you gonna’ fix that situation by giving away 50% off the top?

Hold on just a little longer. We’ve established that advertising costs for these intermediaries are high, and that they’re gouging their suppliers. Presumably one reason for the gouging is to cover those advertising costs. If we can drive those costs down, we can offer a better deal to suppliers. How do we do that?

There’s another piece to the puzzle.

The travel world is awash in organizations that exist to market specific geographic destinations – cities and towns, states, regions, countries – to the world. These are variously called chambers of commerce, travel bureaus, visitor’s bureaus, etc. Generically we can call them destination management organizations (DMOs). Almost all these DMOs have websites, and, collectively, those sites generate terrific traffic from travelers – much more than the travel intermediaries such as Expedia and Orbitz. Why not market airline flights, hotel reservations, train tickets, car reservations, museum tickets, etc. through the DMOs?

That is to say, why not let the DMOs be your advertising and marketing arm? After all, they’re already out there selling their locations?

It’s a good idea. But there’s a problem. DMOs are almost all run as not-for-profit enterprises. And, as such, don’t want to have anything to do with the for-profit world. They don’t want even slightest hint of a suggestion of an intimation of being tainted by almighty greed. The travel intermediaries keep approaching the DMOs and the DMOs reject them.

Right, I hear you son. And between BP killing off the Gulf of Mexico and those Wall Street wackaloons wrecking the world economy so’s they can have gold-plated fixtures in their marble-tiled bathrooms, greed ain’t looking too good these days.

Nope, Gordon “greed is good” Gekko’s been caught with his pants down. Those flashy suspenders don’t hold up anymore.

Did I ever tell you about my buddy, Ronald "Gator" King? Gator was the hard chargin’ CEO of Mega Manufacturing, Ltd. Penny pinching SOB he was. But his wife wanted to go to the society balls, so he joined the board of the Museum for Ancient Needlecraft. When he entered that boardroom, it’s as though money didn’t exist anymore and the bottom line didn’t matter. Red ink? Heck, it’s so colorful, made the Museum’s balance sheet look real pretty.

Right. We’ve got two different cultures. The for-profit world of business and industry, and the not-for-profit world, very different mentalities. Except that, more and more, they're getting mixed together. Some hospitals are not-for-profit, but more and more they’re for-profit. Same with colleges. The for-profits are growing. And public-private partnerships are all the rage real estate development, except, of course, when they don’t work.

In any event, that’s what Beauchamp and Duffy have in mind, a strategic linkage between a for-profit corporation, the World Tourism Network, and a not-for-profit corporation, the World Tourism Foundation. The relationship is structured so the WTN can, in effect, outsource its marketing and advertising to the DMOs.

Thus driving their marketing costs to zero. It’s brilliant! I don’t believe it, but tell me more.

Participating DMOs will have a WTF (the non-profit) icon on their website. When a traveler clicks on the icon, she’ll be taken to all the travel services available for their destination. When the traveler makes a choice – a train ticket, a room reservation, whatever – the for-profit WTN processes the choice through to the supplier and splits the small transaction fee 50-50 with the WTF.

The WTF, as a not-for-profit foundation, then distributes money back to the DMO in the form of grants. The DMO can then use grants to improve its services and operations. At the same time, the WTF will be generating daily intelligence about travel and travelers, and supplying that to the DMOs, who can, in turn, share it with politicians, governments, academics, media, and suppliers.

The beauty of this is that the WTN doesn’t have to build a marketing organization. That organization already exists. Already exists. Almost. That is, the DMOs have been up and running for decades, and they are trusted by travelers. The WTF just has to affiliate with them and, voila! the WTN has a public face for its backroom services.

Not so fast there. That’s a big job, getting the DMOs to affiliate with the some new organization no one’s ever heard of and that has no track record.

Yes, it’s a big job. And Beauchamp and Duffy have been at it for over a decade. They’ve talked with many DMOs and have been warmly received. The DMOs are interested.

OK, you got me interested. I mean, I sure as heck am not going to stick the grandkid’s college fund into this venture. But you got me thinking.

That’s all I want to do, get you thinking. 50-50, that’s the way to go.

2 comments:

  1. If it can work for Tourism, why couldn't it work for other industries? What if Microsoft or Google had started out this way? Google and its branding to the world, might be ten times larger than it is today!

    This 50-50 thing is cool. Good business sense. Could Greenpeace, Red Cross, the Museum for Ancient Needlecraft, or whatever non-profit, display a icon and get grants from this WTF? Don't they all have potential travlers?

    This could be a possible new model for global commerce. Our existing greed-based system seems to have a few problems with it!

    Watch-out Wall Street.

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  2. I’m not sure a tenfold-Google would be a good idea.

    Yes, I think this general strategy – coupling for-profit and not-for-profit enterprises – is worth exploring. But it’s not clear to me that there’s an obvious way to generalize the WTN/WTF scheme. That scheme DOES NOT depend on some kind of good will WTN generates by giving half it’s revenue to WTF. This particular scheme depends on the PRE-EXISTENCE of a large network of self-sufficient destination management organizations. The WTN uses those DMOs as its marketing arm, so there’s no capital cost in creating a marketing organization, etc.

    I don’t see how, say, Microsoft could have used this scheme? What pre-existing network of organizations could it have “converted” into its marketing arm? Specifically, just how could a software start-up utilize the 50-50 dynamic?

    Note that in the software we do have something very interesting going on, open source software, but that’s not about giving top-line revenue to a closely-related foundation. Rather, open source depends on the fact that lots of highly skilled programmers are willing to donate their time to work on projects of their choice, using their favorite tools, on their own schedule. (And there’s a growing free culture movement that runs on a similar premise.)

    So, the world of post-capitalist (beyond greed) business has at least two strategies up its sleeve: open source and the 50-50 model. What’s a third strategy? A fourth?

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