Over the past few months I’ve been compiling ideas for a white paper on yield management for adventure travel.  A great pricing discussion at a recent ATTA event inspired me to put some of my thoughts in a blog post.

First, I should clarify what I mean by yield management.  Yield management (also referred to as revenue management or price optimization) is the act of manipulating prices in order to maximize revenue.  We can thank revenue management for the ubiquitous “last minute travel deal.”  Robert Crandall, former Chairman and CEO of American Airlines, has called yield management “the single most important technical development in transportation management since we entered deregulation.”

Even the high end operators are offering great deals.

Also, in the spirit of full disclosure I should clarify that my company Travari.com is in the business of marketing discounted adventure travel packages so it is clearly in my best interest if more companies start offering promotional packages.

The State of Adventure Travel?  On sale.

“What is the state of adventure travel in 2009?  It’s tempting to answer, ‘It’s all on sale.’” – Everett Potter

Last year I contacted a number of respected adventure travel companies to hear their thoughts on the idea of a ‘deals’ oriented site for the adventure travel industry.  One interesting response came from the CEO of a high-end tour operator and member of The Adventure Collection who said, “you’ll NEVER see a luxury adventure business like those in The Adventure Collection offering a discount – that just doesn’t fit with our brand.”

A lot has changed since that phone call.  Within the last two months I’ve seen at least half the Adventure Collection companies offering deals (and some are offering VERY deep discounts!) These are some of the smartest and most sophisticated operators in the business and they’ve decided that the benefits of yield management outweigh the costs.

Don’t just take my word for it.  Check out great blog posts from Everett Potter and Norie Quintos listing some unprecedented deals being offered by the adventure travel indsutry.

Yield management is about INCREASING revenues

Yield management is not just a recessionary tactic that will fade away when the economy recovers.  The current economic climate has provided tour operators with an incentive to develop more sophisticated pricing strategies which are resulting in increased revenue.

Even when the economy recovers why would an operator discontinue a strategy that has been shown to increase profits?  I’m sure we’ll see fewer discounts after the economy recovers but I’m betting (literally!) that discounting will stick around for good.

Pricing analogs.

Some have argued that because DeBeers Diamonds refuse to offer discounts tourism businesses should follow suit and stick to their pricing guns.  While I see the point of the analogy I think there are far better pricing analogs than DeBeers diamonds.  Here are some other industries that might be a better analog to tourism.

• The boutique and luxury hotel markets are a great comparison for adventure travel as they face similar brand management issues.  These markets are both offering great deals and I don’t think the deals are simply a response to a recession.  The fact that it is  possible to get a great deal on a night at the Four Seasons doesn’t necessarily cause me to think any less of them as a luxury brand.
• The Wine Industry is a fascinating example of “price as a signal of value.”  If a bottle of wine is priced at $4 I’ll assume it’s lousy wine but if it’s priced at $40 I’ll assume it’s great wine.  Truth is, I might not be able to tell the difference in a blind taste test.  If you were buying a bottle of wine you knew nothing about would you rather purchase the $10 bottle that is 20% off or the $8 bottle?  Price sends a signal to the consumer about what they should expect – just be sure your offering is a great value vis a vis your price.
• In some ways adventure travel is a consumer facing service business.  Adventure travel is often compared to health care but I don’t think that is a great example due information asymmetrys and the existence of insurance.  There are a number of other service businesses that are better example because they deal with a price-sensitive consumer.  It isn’t at all surprising to see discounts on accounting services, auto-maintenance, computer repair and catering.

Best practices in yield management.

All of the debate about yield management centers on the concept of brand erosion.  Companies say things like “offering discounts doesn’t fit with our brand” or “we don’t compete on price.”  These are valid points and I want to share a couple of ideas to help you maintain your brand and margins but still reap the increased revenue made possible by yield management.

• Don’t discount haphazardly. If a client wants a guaranteed spot on a popular trip during high season make sure they’re paying the full price.  Discounts are meant for seats that might be difficult for you to fill at full price.  This means avoiding the all too easy “10% off all trips on all dates” promotion.
• Don’t offer so many discounts that customers can game your system. If a customer is certain they can get a deal by gaming your system your full-price seats will be cannibalized by discounted seats.  Once again, save the discounts for specific spots.
• Help the customer understand your motivation to discount. Savvy travelers understand your motivation to offer discounts for early bookings, late bookings or off-season trips.  If you offer some insight into why you’re offering the discount the consumer won’t think of you as a ‘discount brand.’
• Avoid discounts specifically for returning customers or new customers. Repeat customers are a key part of your customer base – they shouldn’t need a discount to sway their decision.  Conversely, offering discounts to new customers could annoy repeat customers.

Good places to discount.

Here are some obvious places to offer discounts without cannibalizing your prime customers or hurting your brand:

• Shoulder season discounts. Most tourism businesses experience seasonal slowdowns.  Special promotions can be an easy way to fill trips during slower months
• Discount for early bookings or late bookings. If you can fill every seat on a trip with some creative last minute discounting you’ve likely provided a big boost to your bottom line.  Some companies also use early booking discounts to build momentum for a trip that is still several months away.
• Offer discounts for groups that are likely to be price sensitive. Consider offering special pricing for students or families.  These are groups that might not be able to afford your trip without a discount.
• Occasionally offer unexpected great deals. If you very occasionally offer trips at 30-50% off you’ll get significant buzz online and you’ll get customers constantly returning to your site to watch for the great deals.  Sometimes a big discount event can build a lot of momentum for other trips.

Additional Resources

Great article from Business Week about discounting.
A previous post from the adventure business blog.
A compelling and well written counterpoint to my thoughts - Why Discounting Won’t Work to Survive this Recession.

This is a followup to my last post about PPC and the importance of tracking advertising.

As old media outlets continue to go belly up it is worth asking ourselves: “Have we have been overpaying for advertising all along?”  Think about it – the NY Times is a great newspaper with an absurd amount of traffic but they can’t develop a profitable monetization strategy.  Ten years ago The Times was profitable with an ad-based business model, so what has changed in the last decade?  Clearly marketers have found better ways to track the success of ad campaigns and thus rewrote the conventional wisdom about how much to spend on impression-based advertising.

That leads me to another point that I’ve been thinking a lot about lately – how many more years are we going to be suffering through the same generic branding advertisements I see everywhere?  (I’m looking at you Travelocity, P&G, Orbitz and Corn Refiners Association.)  Generic platitudes about Tide are not going to convince my generation to spend an extra $0.01 on your detergent.  Time to rethink that strategy.

Here is one of Travelocity’s recent commercials.  While it’s an okay commercial I have to ask – wouldn’t it have been smarter for Travelocity to spend the money (I’m sure this was multi-million dollar ad campaign) creating a fantastic customer experience that would likely be talked about online?  Or at least invested in a trackable PPC campaign that delivered consumers to relevant travel products?

A recent tweet from @travelmuse really sparked this whole rant.  “Customer service is the new marketing.”  In the year 2009 your customers are talking about their experience with your product and your business.  Wouldn’t you be better off spending money providing an incredible product and great service than spending millions on a super-bowl ad?

Edit: appropriate on a number of levels check out this great article from yesterday’s NYT.  Courtesy of my good friend @KathyDragon.  My favorite part:

“a direct marketing mailing cost $15,000 and brought in 200 new customers; a billboard ad cost $7,500 and won 300 new customers; and tweeting the promotion on Twitter attracted 1,800 new customers.”

There are three main internet advertising models in use on the internet:

• Pay per click (PPC) where the advertiser pays whenever a prospect clicks an ad.
• Pay per action or affiliate model where the advertiser pays when a prospect purchases something after clicking a link or advertisement.
• Cost per impression (CPM) is a holdover from old media when advertisers pay based on the number of eyeballs viewing a certain ad

From my viewpoint as a startup in the adventure travel industry I’m very biased toward PPC (both as an advertiser and a seller of ad space!)

Here are some of the reasons I prefer PPC when investing in advertising:

• Trackability: As an ad buyer I want to spend my limited budget on advertisements that I can track.  With PPC I know exactly how much I’m paying for each lead and it is easy for me to track my conversions.  Why would I invest in CPM ads when I have no idea how many of those eyeballs become customers?
• Insightful metrics: PPC really lends itself to insightful business metrics.  The crudely stated goal of most travel websites should be “get the average revenue per site visitor to be higher than the average cost to acquire a site visitor.”  PPC makes this calculation easy.  When a company gets this formula right they’ve found the money machine.
• Low overhead, easy implementation: The travel industry is full of successful affiliate programs but affiliate programs are pretty challenging to administer.  The technical challenges are not trivial and for smaller advertisers the costs of implementing an affiliate program are typically higher than the marginal revenue generated by the program.

Why I prefer PPC as a seller of ad space:

• I want people advertising with me to feel like they are making money on their advertisements.  Marketing should be a revenue generator not an expense! If the PPC rates I’m charging aren’t a cash machine for advertisers I want to understand why and adjust my model accordingly.
• In the travel industry (particularly in the adventure travel segment) prospects will look at a trip dozens of times before actually booking (and oftentimes that booking still takes place over the phone!)  I may have sent that prospect on their first visit – how will I get paid with an affiliate program?
• I can’t optimize your website for conversions.  I can however send you qualified traffic.  As a seller of ad space I don’t want to be penalized because you need to do some work on your user interface.  (As a conscientious business partner I’m happy to offer advertisers advice about user interface or conversions but I don’t want my ad revenue to be held down because of things beyond my control.)

There is a second part to this post where I rant about the futility of expensive old-school branding and why we may have been overpaying for old media advertisements all along.  Stay tuned!

I’ve got a launch coming up in the next few weeks and consequently I’ve been paying particular attention to all the PR stunts and elaborate launches that have been taking place in the travel industry.  A few that I found particularly interesting:

• Leading Hotels of the World offered a promotion where 80 hotels would be priced at $19.28 for 80 minutes.  Unfortunately they ran into technical difficulties.  Thrice.  This promotion garnered LHW plenty of (mostly negative) publicity but it might have provided a traffic bump.  They may regret ever trying the promotion.
• LastMinuteTravel.com is currently offering a promotion where, for 15 minutes every day, hotels will only be $1.  Because the exact 15 minutes is a secret they probably won’t have the same scaling issues as LHW.  The discount pricing is accompanied by some YouTube videos that are actually relatively well done (although they look expensive to produce!)  This looks like a high investment promotion but I’m guessing it’ll pay off in terms of a tremendous traffic spike.
• LowCostTravel celebrated their relaunch by releasing video of their CEO driving around London in a bed.  Seriously (video below.)  The video can’t have been cheap to produce and has so far garnered nearly 600 views.  I bet the marketing department doesn’t want to calculate the cost-per-viewer metrics for that video.
• Not sure if this should be filed under PR stunt or stupid mistake but Activities Abroad recently sent out an e-mail promising “Chav-free Holidays”.  (For those of us not from the UK “Chav” is a derogatory term for white working class folks.)  Clearly this is pretty offensive but maybe all press is good press?  The jury is still out as to whether this will be a positive or negative for Activities Abroad. (*See clarification at end of post.)
  

I find the above examples pretty entertaining but I question the return on investment for these projects.  The problem I see with each of the above cases is that the promotion doesn’t match the firm’s value proposition.  After I book a hotel room for $1 how likely am I to go back to LastMinuteTravel.com for future full price bookings?  Clearly some consumers will become loyal customers but that number is going to be a very small percentage of the total promotion participants.

Call me old fashioned but I feel like any promotion or viral marketing campaign should be communicating a firm’s value proposition.  I’m also a big believer in building a great product/service, finding loyal customers who love the offering and helping those loyal customers tell their friends about the product.  (I guess that theory is why I’ll never be a creative director at a giant consumer products company!)

This is an issue I’ll continue to wrestle with over the coming weeks.  Obviously great companies use big launches and PR stunts because they create a massive traffic spike and often pay off.  On the other hand, as a bootstrapped company, I can see real benefit to slow organic growth of the user base and continued investment in product quality.

Here are a couple of the YouTube Vids referenced from above.  (Maybe you should do the LowCostTravel marketing department a favor and watch their vid twice to get views up to 600!)

CEO on a bed:

One of LMTClub’s $1 hotel videos:

*Update: as Alistair McLean mentions in the comments section – they never mentioned working class in the promotion.  Because I’m not familiar with UK slang I was basing my definition on the Wikipedia entry.  Also, interesting to note Alistair’s comment about the added traffic as a result of the controversy.

Apropos to my last post I just read an interesting NY Times article “Low-Cost Options on High-End Tours”.  The article has some interesting examples of luxury travel operations offering lower-cost options.

Another interesting tidbit from the article:

“Whenever there’s a blip in the economy, we do well,” said Darrell Wade, chief executive of Intrepid Travel. In October, when most high-end tour operators were reporting declines in bookings, his company was up about 10 percent, he said.

Intrepid offers a compelling price point so it makes sense that their numbers are up during a recession.

Conventional wisdom has always asserted that high-end and low-end products tend to fare well in a recession while middle-tier products are more susceptible to economic conditions.  The reasoning behind this is that the wealthiest consumers aren’t price sensitive in a downturn while all other consumers get increasingly price conscious.

The thing that fascinates me about this recession is how much of the conventional wisdom is getting thrown out the window.  There are a number of clear signs that the luxury markets will be anything but resilient this time around.  The biggest reason is that many of the world’s wealthiest individuals have lost 30%-50% of their net worth in the past 18 months.  Losses like that can curb the spending of even the most dedicated luxury consumer.

I’ve been thinking a lot lately about how this shift is going to affect the luxury adventure travel companies that focus on the luxury niche.  Like all recessions we’re going to see some companies go out of business but those who make it through the next 18 months will come out stronger (and have less competition!)  Here are some things the luxury operators need to keep in mind if they want to be around 18 months from now.

• Your greatest asset is your customer list. Call some of your repeat customers and ask them what it’ll take to get them on a trip this year.  Use that as a jumping off point when revamping itineraries.
• Stay true to your brand. Yes you’ll need to offer some lower price points but remember your customers are accustomed to a luxury experience.  Even if you are changing the price points do what you can to still offer the luxury experience associated with your brand.
• Develop new trips at a lower price point. The obvious way to do this is to offer slightly shorter trips but there are other ways to alter itineraries to be profitable at a lower price point.
• Yield management and price discrimination allow you to reach consumers in multiple price points without lowering overall revenue.  See my revenue management post for ideas.
• Don’t cut capacity too much. Luxury operators are in a more challenging position than most tour operators because of a greater reliance on trained staff and larger capital invesments (e.g. helicopters and lodges).  Small capacity changes are in order but make sure your revenue is sufficient to keep your assets and key employees.

**Image courtesy of Train Chartering, Private Hire Trains & Rail Cars’

Sorry about the posting hiatus but I promise I have some good excuses:

• Travari is getting closer and closer to being ready to launch (although we’re nearly a month behind schedule!)  Keeping my eye on all the moving parts has kept me a little distracted from the blog but I’ve learned some real lessons in project management.
• Great holiday ski trip to Utah and Idaho.  I spent a few days touring the backcountry and visiting family.  I was able to get some work done from the mobile office but participating in adventure travel seemed a lot more exciting than blogging about adventure travel.  Here are couple of pictures of me not blogging:

Bluebird powder day. Not a track in sight.

N. Utah scenery

With my excuses out of the way here is some actual content.

I’ve been inspired by a couple of really interesting posts offering predictions for what will happen in the travel industry in 2009.  I know I’m about 8 days late but here are my predictions for the adventure travel industry.

• Adventure travel will be hurt less than traditional travel. Intrepid Travel even reports increased bookings during recessions.  I think the main driver of this trend is that laid off professionals suddenly find themselves with spare time to pursue their dream trips.  Companies like Intrepid or G.A.P. offer interesting trips that aren’t overtly luxurious.  Adventure travel numbers will be down overall but not as much as the rest of the travel industry.
• Tough times will force tour operators to develop more efficient and sophisticated strategies. Many adventure travel businesses have lagged behind mainstream travel in terms of adopting new ideas.  This includes better yield management, better websites and more efficient marketing strategies.  Companies that fail to adapt won’t be around in 2010.
• Deals, deals, deals. I can’t open a news site without reading about all the great travel deals out there.  I’ve ranted at length about the need for better yield management in the adventure travel industry and I think we’ll be seeing a lot more companies jumping on the yield management boat this year.
• High-end operators will take a big hit, mid-tier operators will benefit. The very wealthy are still going to travel, but they might be less likely to spend $10,000 – $30,000 on a Lindblad trip.  These consumers will likely scale down a bit and look into a mid-tier trip (further boosting bookings for companies like Intrepid and GAP.)
• Service provides will need to sell on the basis of short term ROI boost. Companies like Adventure Central and TourCMS will need to make a compelling case that they offer real ROI if they want to continue to grow.  This will also be the greatest challenge for Travari – convincing customers that we will provide a real ROI in the short term.
• Advertising will move online. Advertising should pay for itself.  My personal advertising philosophy (in all economic environments!) is to NEVER spend money on ads that cannot be tracked.  That mantra will be even more important this year.  Nothing is easier to track than online advertising and smart operators will focus on advertising outlets that can deliver clear ROI.

Hopefully I’ll be on a more regular posting schedule now that I’m back in the office.  Feel free to let me know your adventure-specific predictions for 09.

I’ve been doing a lot of research lately about network effects. Specifically I’ve been reading through a bunch of ultra-dry Harvard Business Review articles and HBS case studies. Hopefully I can provide a brief overview of the more interesting aspects of network effects and save someone the effort of reading 12 case studies.

The classic example of network effects is the fax machine. The first fax machine was worthless because it couldn’t send a fax to anyone. The second fax machine was worth something because it could communicate with the first fax machine. Every new fax machine put into use increases the value of all other fax machines. This network effect takes place in many modern business models and presents both challenges and opportunities for startups.

Successful businesses in the information economy are more likely to benefit from economies of networks than from economies of scale. Economies of scale are supply driven (cost savings due to mass production e.g. Toyota) and economies of networks are demand driven (the larger the network the higher the demand e.g. Craigslist).

One particularly interesting component of networks is the positive feedback loop. More users on one side of the network attract more users to the other side of the network which in turn attracts more users to the first side. So many of the major players in the travel industry have benefited (nay, relied on!) network effects:

• Every company listing product on Priceline provides additional value for those consumers searching Priceline for travel deals. Every additional consumer searching for travel on Priceline increases the likelihood a company will list travel products on Priceline.
• Where would Travelocity, Orbitz, Expedia etc. be without network effects?
• Emerging companies in the adventure travel space (e.g. Adventure Central, TourCMS etc) are currently in the challenging part of creating a network. Every tour operator listing on Adventure Central adds value for the affiliates, and every affiliate adds value to the tour operators.
• Economies of networks typically scale further than economies of scale. Eventually Toyota won’t be reducing cost with every additional unit of production, but the value of the Adventure Central platform will continue to rise as long as more tour operators and affiliates are signing up.

The HBS articles I read were pretty weak on actual tactics for securing early users for a network-based business model (insert joke about academia.) Here are some ideas I have been thinking about:

• Incentivize early users: this is the obvious solution. Xboxes are sold below cost to get them to users. This gets the product out and creates demand for games (the place Microsoft makes the most money from the Xbox). Epinions even PAYS community members to write reviews.

• Provide a product/service that is useful without the network: Delicious was very successful with this and I think Travelmuse (who is creating a delicious-like bookmarking tool for travel) is onto a great strategy here. Their bookmarking tool is useful without the network, and the social networking aspects become useful after many users have implemented the application.

• Free stock?: This idea reeks of dotcom bubble, but Travelzoo actually gave users 6 shares of company stock if they signed up for the company distribution list. This idea sounds completely nuts, but it seems to have worked out as Travelzoo survived the bubble.

• Convince the right people to make the leap: I’m not going to get any say in what the next DVD format will be (not that I give a damn.) The future format will be determined by some large group of influential businesses who band together to throw support behind a specific format.

• Broker a deal with a large crowd: One of the world’s busiest ski forums (← don’t click that link unless you have two hours to waste) actually got its start when a large crowd decided to abandon their existing forum.

This morning I stumbled onto this article on the Portfolio website: When Newspapers Get Lazy.  The author goes on a rant about how newspapers have gotten lax in their fact-checking.  In the article he criticizes a WSJ article that (correctly!) refers to the Adventure Travel Industry as a $75-$100 Billion market.  Here is the ingenious back-of-the-envelope reasoning the author uses to discredit that market calculation:

Let’s put those numbers in perspective: according to its annual earnings report, Walt Disney’s global revenues from all its parks and resorts in fiscal 2008 totalled $11.5 billion. So I’m pretty sure that Doyle was talking in millions, not billions: 10,000 people each spending $10,000 will add up to $100 million. Which means that the WSJ is three orders of magnitude off.

Did you just try to make a case that the worldwide market for adventure travel is approximately 9% of Walt Disney’s revenue?  Really?  And you write for a business magazine?

Maybe the faulty logic is particularly egregious to me because I spend so much of my time thinking about the adventure travel industry, but if the author had taken ten seconds to Google Adventure Travel Market Size he would have seen a page full of resources referencing a market size in the billions.

Suggestion – if you’re going to call out the WSJ on their fact checking and “lazy journalism” do ten seconds of research to back up your claim that their numbers are off by three orders of magnitude.

Intrepid Travel is now running a promotion where anyone who can prove they have recently lost their job gets a 15% discount on all trips.

I’m not sure a lot of people are going to go through the effort to get documentation of their layoff in order to save some money on a vacation – “Hey boss, since you just fired me in the midst of the worst job market my generation has ever seen, could you provide me with some documents so I can save some cash on my safari?”

While I doubt many newly laid off people are going to be jumping on this (I could be wrong!) it was a great PR move – this promotion was interesting enough to show up in about 20 different news outlets!