In a previous column, I argued from the perspective of a tour operator that it was time to level the playing field in terms of commissions. I challenged suppliers to start offering decent commissions to the trade across the board and move away from a strictly volume-based model. In this follow-up column I argue that a volume-based commission model harms emerging entrepreneurs and slows down economic transformation in South Africa.

It is clear that a volume-based commission model favours big players at the expense of smaller operators. What is less clear is that it actually works against the interests of suppliers. Think about it. A small, bespoke tour operator selling multiple destinations will never be able to send significant volumes of business to many different suppliers in all those different destinations. These operators will tend to avoid suppliers that offer poor commission in favour of reputable suppliers that are prepared to offer a respectable 30%, regardless of volumes. The combined effect of many smaller operators avoiding such suppliers who pay poor commission and sending their low volumes of business elsewhere, may result in their losing out on a significant number of bed nights over time, not to mention possible loss of goodwill from the many smaller players in the industry.

Some suppliers go out of their way to support their trade partners and will offer decent commission to smaller agents, regardless of their humble volumes. Boutique agents and operators who cannot produce impressive volumes will place most of their business with those suppliers. Other suppliers (typically the bigger chains, but not always) seem to stick rigidly to the volume-based model, thinking they can incentivise TOs and DMCs by insisting on certain targets or minimum volumes of business before offering decent commission. But it never works as an incentive. Put yourself in the operator's shoes. If an operator has to pay commissions to their agents abroad, and can already secure 30% from other suppliers, there is absolutely no incentive to use a supplier offering 20%. It makes no financial sense to the operator.

We talk about diversifying our offering and supporting new and lesser known products instead of the same old itineraries that everyone offers. And we need to do this – there are some fantastic hidden gems all over our country waiting to be added to the itineraries we market to tourists. But how will this happen if most suppliers want to start an operator on 20% or even 15% the first time they approach them? What incentive is there to consider new product if the STO contract is volume-based?

This discussion also ties in to the subject of transformation. Economic empowerment and transformation cannot only be the government's agenda. It needs to be every South African's goal to see our fellow citizens succeed and escape the clutches of poverty. Our education system is failing to do that, and it is up to each industry to play its part by developing skills, empowering people and helping to create opportunities for emerging entrepreneurs to enter the market.

For a small start-up operation, there are two major obstacles. The hardest part is of course the challenge of finding clients. But the next biggest challenge for an emerging entrepreneur is finding suppliers who are willing to work with a small operator and offer decent commissions and STO rates that allow the start-up to compete on a level playing field with existing operators, even when their volumes are non-existent.

Picture an emerging entrepreneur starting out as a small DMC or inbound operator, meeting with some agents at Indaba and finally getting their first business from an overseas agent. They have to put an itinerary together and send a quote to the agent, who will then compare it with quotes from other companies. This hard-working, enthusiastic entrepreneur may have done their tourism diploma or perhaps attended an introductory tour operator course. They are keen to enter the market and start tasting the fruit of economic freedom and financial independence. Our aspiring businessman or businesswoman does not want any handouts from anyone, will not grab land from anyone nor demand to be given things free by the government. They want to pitch their own tent.

They begin to make enquiries with suppliers and quickly find out that because they have produced no volume, they are being offered very poor STO rates by suppliers.  The best they can get is 15% or 20%, while their competition is working on 30% or even 40% in some cases. Their overseas agent demands their own 15% or 20% commission, but our entrepreneur fails to secure STO rates that would allow them to offer the agent decent commission. Finally they decide to offer the agent a nett rate that is 10% below rack, in order to keep at least a 10% margin and not have to mark up the rack rate. Let's ignore for now the problem of not being able to secure competitive merchant facility fees, also due to poor volumes, meaning they stand to lose another 4% per credit card transaction, which cuts their margin to 6%. Predictably, the agent does not accept their quote and ends up booking with an established DMC who is able to offer the agent 20% (because that DMC gets 30% or more from their suppliers – again thanks to the volume-based system).

Of course, this is real life, not some charity event, and all of us have had to negotiate those difficult early days. Perhaps established operators should be happy that the barriers to entry are high and it is not easy for new competitors to enter the market. We might advise our young entrepreneur to join an amalgamation to secure better initial STO rates (but which would still not secure 30% at most suppliers, as the amalgamation takes their cut).

My point, again, is that the playing field is not level, and the volume-based system benefits the big, established players who can produce high volumes, while harming emerging entrepreneurs and slowing down transformation of our industry.

The usual argument by the big fellas is that they need more commission because they have higher overhead costs. But as I argued in a comment on my previous column on this topic, the idea that bigger companies need higher commissions because they have more expensive infrastructure and overhead costs is completely false. On the contrary, to compete, small companies need to spend almost the same on marketing and advertising, technology and infrastructure, but it ends up being a much bigger slice of their revenue compared with bigger companies. Economies of scale mean that big companies spend a lot less per million of turnover on office infrastructure and said budgets. For example, they can afford to employ their own staff to handle their IT, networking, web development, content design, social media, ad campaigns, etc. Small companies have to outsource all these functions which is far more expensive. Small companies, to compete, still have to invest in technology and integration, SEO, trade shows, advertising and marketing, and the cost of any of these things, while scaled to some degree, is proportionately much higher for small operators, as a percentage of their operating budget. So in my view this is a false argument often put forward by the big players to justify their higher commissions. From my own experience I know it is much more costly to generate your first R10m than your next R10m in turnover.

A second common objection is that many operators are selling direct and don't need to pay commission to agents, so they really don't need 30%. The place an operator occupies in the value chain is of some relevance, but this has become much less defined compared with 20 years ago, with more overlap. Many operators today act as wholesale tour operators, DMC, direct online booking agent, as well as ground-handling agent or ground operator with wheels. This diversification further escalates costs, because the operator has to pay, for example, for its fleet (as ground operator), for SEO and technology integration (as direct online operator), for B2B marketing and trade shows (as wholesale tour operator) and they have to send their staff on regular fam trips to grow their destination knowledge (as DMC). A certain percentage of their business might come from overseas agents, some from other local or wholesale operators, and a certain percentage might come from direct bookings. So one can't easily base the commission level on their place in the value chain.

Moreover, the big OTOs and OTAs that are completely outside the value chain and only rely on direct online business, arguably need the lowest commission levels because they have no commission to pay up the line, and very little overhead costs. But they're getting the highest commissions because it is all based on volume.

The heart of my argument therefore, is that we need to do away altogether with the volume-based model that protects the big players at the expense of the small boutique operations and emerging entrepreneurs. The contribution of the many small players in the industry, although they each contribute small volumes, is as valuable as those producing higher volumes, and they need access to a level playing field, for multiple good reasons, not least of which is to encourage transformation and entrepreneurship in this beautiful country of ours.