Run away travel costs got you flying blind?
Ask a travel pro about the costs of business travel and the answer is a resounding, “They are enormous and out of control”! What is the solution, not to travel? While email contact and video conferencing may be an acceptable option in isolated cases, business travel for customers, suppliers, conventions, trade shows, and intra-company needs is not going away. On the contrary, burgeoning global commerce makes travel a more pressing need than ever before.
Professional purchasing management is the one stop solution to controlling the high cost of business travel and an under utilized resource.
Many companies are still using accounting departments to manage travel costs. This is managing costs after the fact. Finance professionals tend to accept price discounts offered by the providers and maybe some on line booking advice, but these suggestions are PRICE, not COST driven.
Purchasing pros are masters of sourcing, negotiation, and COST reduction. Suggestions from about on line booking, leverage from multiple client consolidation, and other price centered discounts do nothing to reduce the underlying costs, the root of high cost business travel.
How is Price different from Cost?
The Price paid to the supplier covers all its costs plus a mark. In competitive environments, the mark up is limited by the competition. So if we are to reduce the Price, we have two choices:
- Drive down the supplier’s price
- Wring costs from the system. Since Price is a function of Cost in most cases, this second option bears closer scrutiny.
The three main categories of suppliers
There are three major cost categories for travel, Hotel, Air, and Ground, affectionately called HAG. It is far better and cost effective to negotiate directly with the HAG groups or in concert with your chosen supplier partners than to accept perfunctory price discounts.
Professional purchasing negotiations conducted with HAG, either directly or in concert with your agency will yield far greater savings than can be achieved by beating on Price alone. Pro buyers understand negotiation for better than a finance pro and are far more expert in cost and price structures.
Hotels
In general, hotel chains use the Yield/Revenue Management pricing model developed by the airline industry. This is the reason retail buyers pay more for the same room when the hotel is almost full than when occupancy rates are low.
Hotel suppliers offer the unsophisticated buyer a discount off the rack rate. Purchasing pros negotiate deals that are based upon the cost up, not the price down. The savings harvested can be stunning.
Air
Air fare pricing systems are a mystery. An airline’s fare to the same designation and for the same date can change 40 times within one day and vary by 100%. The arcane system used by most of the major airlines is the Yield/Revenue Management model. Others may use Pricing Optimization. These systems force the walk up business traveler to pay up to ten times the super saver leisure travel fare.
Airlines are primarily interested in putting butts in the seats, raising seat occupancy ratios, and maximizing revenue miles. They will sell blocks of seats to “consolidators” at huge discounts just to raise the occupancy ratio. Buying pros know how airlines price their services and they know how the airlines calculate their costs. A buying pro can reduce the cost of airfare travel by multiples more than an unskilled negotiator beating on the Price alone. We routinely eliminate the penalties for walk up fares, last minute changes, and help the airline to meet its requirements at the same time.
Ground
The rental car industry observes many of the same practices as do their Hotel and Air counterparts. A skilled purchasing professional again ignores the “Price down” discount and negotiates on the costs. Not only will you obtain better rates, but you will eliminate drop charges, and most grievously, the outrageous add-on insurance paid by the retail buyer will be negotiated into the deal.
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