For many years, incentive firms and other
third parties hired by companies to create and handle their
incentive programs charged for their services in one way only: It
was a package deal. “We shared two prices with clients: airfare and
land,” says Jonell Cella, senior director of business development
and 20-year veteran at Minneapolis-based incentive and meeting firm
Carlson Marketing Group. The land prices, she says, included items
such as hotel accommodations, food and beverage, transportation,
signage and pre-trip communications, along with Carlson’s fees,
“but we’d quote it as one big price.”
Today, however, it’s a different world, as Cella and her
counterparts at other incentive firms readily can attest. Most such
companies and, increasingly, other third parties are electing to
price their incentive programs in a way that best complies with
their clients’ accounting practices. And that means they are
unbundling those package deals of yore and allowing for more
transparency in what the different elements in a program actually
cost, as well as what the firms charge for their services.
Market drivers
The influences that have lead to more transparent pricing bear
explanation. Incentive experts point to several factors.
" The power of procurement. According to Steve
O’Malley, vice president, financial sector, at Fenton, Mo.-based
incentive firm Maritz Travel, the increased role of corporate
procurement departments which typically require planners to get
bids from several sources before they can select a supplier for
their programs is the main reason more firms want line-item
pricing.
Kari Vrba, director of business development at Carlson
Marketing Group, agrees. “In the past, a package price was fine for
people in human resources and marketing, but with procurement, they
want to see transparency,” she says.
" Government and/or industry oversight.
Beginning about 10 years ago, says O’Malley, “it was the
pharmaceutical sector that said it needed transparency, due to the
amount of federal regulation that industry is under.”
Now, he says, it’s the financial industry’s turn: “The National
Association
of Securities Dealers is really going through everyone’s practices
with a fine-tooth comb.” This includes those companies’ sales and
incentive practices, he adds.
And with the introduction of the Sarbanes-Oxley Act, which was
enacted by Congress in 2002 to increase corporate responsibility
and curtail accounting scandals, even more industries are affected.
“We need to show [client companies] we are getting the best value
possible and that we are buying well for them,” says O’Malley.
Though incentive firms and destination marketing companies now
are creating pricing models that better meet the needs of their
clients, not all methods are alike. Some corporations have their
own set pricing models, and a number of incentive firms, including
Carlson and Maritz, will customize pricing options for their
corporate clients.
What follows are descriptions of four basic pricing models
available today.
THE TRANSPARENT DMC
While some destination management companies remain leery about disclosing their prices, one firm, LSO International, is embracing the trend. Based in Sophia-Antipolis, France, LSO revealed a new pricing strategy earlier this year: Henceforth, all subcontracted services used by the company for an incentive program will be budgeted and detailed, item by item, at cost price.
LSO president Lenny Spangberg, right, explains why: “More and more, corporate clients are looking to claim value-added tax back. In order for them to do so, we needed to show what the actual costs for [subcontracted] services were and what our fees were for every single supplier invoice,” he says.
LSO typically charges a handling fee for creativity, search and other services rendered, or a fee based on the time spent organizing and carrying out the program. In the past, companies only could reclaim VAT for LSO’s fee; now, says Spangberg, firms can get the full VAT rebate (which comes to 19.6 percent in France) for all aspects of the program they are entitled to.
Is the new pricing system paying off? “Obviously, we are losing a certain amount of profit,” notes Spangberg, “but I believe once this pricing method becomes accepted, we will make up for it in volume of business.” -- L.G.
Weighing the options
Clients that want an unbundled price structure have several options
to consider.
" Cost-plus pricing. This method reveals the
actual cost for basic services and elements of the program say,
meet-and-greet, room rates, the final night gala, etc. The
incentive house’s or destination management company’s service fee,
typically calculated as a percentage of the overall program cost or
based on an hourly or daily rate, is listed separately.
The benefits of this pricing method, says Bill Boyd, CMP, CMM,
CITE, president and CEO of Irving, Texas-based Sunbelt Motivation,
is that it can be easily massaged. “There is more leeway for
negotiation, and nothing is hidden,” he notes.
" Menu pricing. The most detailed and
transparent model available, the menu method lists prices for every
individual element of a program. For example, the bill for a gala
dinner would further break down expenses for entertainment, decor,
table linens, food and beverage, etc. The incentive firm will
either include its fee in each item, or make each item net and
place its fee at the bottom of the pricing menu.
“In this manner, the incentive firm provides prices for
everything requested in the RFP. Then planners can go through it
and pick and choose what they want,” says Boyd. “They might not
want pre-trip materials, because they can provide those on their
own, but they might want us for our trip directors, who run
programs on site.”
Craig Ardis, director of global special events and corporate
travel for Ada, Mich.-based Amway Corp. and Quixtar (Amway’s
domestic division), says his company favors this method when
seeking out DMCs for incentive programs. “We have our own RFP for
clients in the menu format,” he says. “We want a line item for each
expenditure, and we are very specific about this in the RFP and
interview stage.”
Ardis adds, “We did package pricing many years ago, but for the
past 10 years, we have driven for detailed, line-by-line
explanations for elements of the program.”
" Fee-based pricing. Under this method, the
third-party firm gets a flat fee, agreed upon in advance with the
client, for its services regardless of the final group size (which
might influence the third party’s profits) or extra costs that
might be incurred during the program. On top of that, hotel, air
and other vendors are paid their direct costs by the client. The
service fee typically is presented as a dollar amount, although
some firms might charge a percentage, say, 15 percent, of all costs
of the program. Prices generally are presented as one cost that
includes all components of the program.
The benefit for corporate planners is they know what they are
paying for up front. And some incentive firms prefer this method,
too. “I like to work on a flat fee because it’s easy; it’s very
difficult to keep tabs on hours, labor, etc.,” says Elaine Macy,
vice president of sales for Ambassadors, a meeting and incentive
firm based in Newport Beach, Calif.
The downside, says Bill Boyd, is the third party has no
incentive to further negotiate costs for the client once the deal
is signed. And, particularly when the service fee is a percentage
of the program’s total cost, there’s actually a benefit to the
incentive house when prices for hotel and other components are
high.
" Package pricing. This former standard still
exits, and most suppliers offer it as an option. The package model
is, obviously, the least-transparent pricing method. It lumps
together multiple services, vendors and costs, and typically is
budgeted out for a minimum and maximum number of participants
(which might vary, depending on the format of the incentive
contest). Finally, the package is presented at a price per person
i.e., the XYZ Corp.’s Winner’s Circle Quest for Cancun will cost
$2,200-$2,700 per person, based on a group size of 150 to 250.
The benefit of package pricing is it is very simple for both
clients and third parties to use. The obvious downside, however, is
the client contact or third-party meeting planner really has no
idea how much or where the incentive firm or DMC is making a
profit, and it’s very difficult to compare pricing on an
apples-to-apples basis.
Another drawback to the package pricing model, notes Carlson’s
Jonell Cella, is that it makes it much more difficult for incentive
planners to pick and choose the elements they want in a program
they must continually go back to the incentive house or DMC to
gauge the impact of making any changes to the program’s
components.
Getting a better deal
Transparent pricing models do more than offer better insight into
where corporate planners’ dollars will be allocated. Such models
also enable planners, particularly those who must operate in
compliance with corporate or industry guidelines, to show that they
and the third parties they worked with got the best prices for
their programs.
At their clients’ request, incentive firms say they are willing
to share the various bids they’ve received from suppliers for
different elements of the program, even in the preliminary request
for proposal stage.
At Ambassadors, for example, “We narrow down the choices [for
elements such as hotel or transportation] to four or five and send
the contracts out to the client,” says Elaine Macy. That way, she
notes, clients can choose what they think is best and sign the
contracts themselves.
Even once RFPs are accepted, third parties might be able to
improve the deal for their clients. Maritz’s Steve O’Malley says
it’s not unusual for four incentive firms to jockey for the same
piece of business and get price quotes from the same hotel during
the RFP process. At this point, the hotel generally provides only a
ballpark figure, he says, “so once our RFP has been selected by the
client, we go back to that hotel and further negotiate prices
down.”
Some incentive companies, including both Carlson and Maritz,
continue to look for ways to shave costs throughout the
program.
“We have to show where we provide financial value,” says
Carlson’s Cella. “Now, we give clients a sheet to show how our
negotiations saved them money throughout the program. It starts
with an outline, what our own procurement savings are [i.e., what
deals Carlson makes for bulk business from hotels and airlines],
then we track savings during coordination of the program, such as
on-site negotiations for food and beverage guarantees, through our
final billing, where we can negotiate penalties after the program
has ended.”
DMCs weigh in
Just as incentive firms are adapting pricing models to meet the
market’s call for more transparent pricing, other third parties
chiefly destination management firms who work with corporations
either directly or as subcontractors to incentive houses are being
asked to follow suit.
“From the RFP stage, we ask them to break down their prices as
far as they can with as much transparency as possible,” says Amway
and Quixtar’s Craig Ardis. This can even include requesting what
the incentive supplier’s own profit margins are. “They are in the
business to make money,” Ardis acknowledges, “but the more they
tell me, the more we can make intelligent decisions and the more
likely they are to get our business.”
At the same time, incentive firms that subcontract with
destination management firms for portions of incentive programs
also are looking for more transparency from their partners. For
instance, Kari Vrba says it is not unusual for Carlson to ask third
parties to disclose what they are paying for different elements.
“We need to have the details, even though the clients may not be
asking for them,” she notes.
How are DMCs reacting to the demands of their clients? “We are
all being put to task on pricing and disclosure,” says Pat
Schaumann, CMP, CSEP, DMCP, president of both the Dayton,
Ohio-based Association of Destination Management Executives and St.
Louis-based MAC Meetings and Events. “For sure, more and more
clients want a menu of costs listed item by item, with a flat
management fee for our services.”
In the past, says Schaumann, 99.9 percent of DMCs charged a per
person, per program rate. But now things
are changing. “Planners have become more accountable in their own
firms. They need to demonstrate to their higher-ups that they are
saving money and getting the best deal,” she says.
At ADME, “Many members are confused by the pricing game,” says
board member Madelyn Marusa, DMCP, who also serves as vice
president of industry relations for Carlsbad, Calif.-based PRA
Destination Management.
“We are under the same pressure as incentive firms,” Marusa
adds. “We are asked to make pricing more transparent.” She notes
that DMCs typically will separate their fees from program costs
when clients request that form of detailed pricing.
But some DMCs question just how transparent they need to be.
“When a DMC is asked to disclose supplier invoices, we must keep in
mind that we buy into our destinations on a quantity basis for all
the business we plan to manage that year and those rates are
confidential,” says Marusa.