Categorized | Destinations

To Be or Not to Be…a Commodity?

Posted on 23 August 2009

August 22, 2009 – Southlake, TX – DMC owners and professionals have lamented for quite some time that meeting planners and corporate clients view their products and services as a commodity. Over the years I have spoken with my clients, numerous other DMC owners, corporate meeting planners and clients, to examine the rationale for such an anomaly.

 

Now, more than ever, empirical evidence indicates planners and corporate clients are adding to this belief by going direct to the vendors/suppliers of DMC’s in an attempt to reduce their costs.

 

Let us begin with a common understanding what is a commodity.

 

When an economist, economics professor, or economics textbook talks about a commodity, they mean a good that possesses the following properties:

 

  • Usually produced and/or sold by many different companies 

 

  • Is uniform in quality between companies that produce/sell it. You cannot tell the difference between one firm’s product and another.

 

Lumber, oil, and electricity could all be considered commodities, while Levi’s jeans would not be, as consumers consider them to be distinct from jeans sold by other firms. Economists call this distinctness “product differentiation”.

 

In textbook examples commodities are usually sold for their marginal cost of production, though in the real world the price is often higher, due to factors such as barriers to entry and firm specific talents (perhaps one firm is more adept at growing oranges than another).

 

Marginal costs are the costs a company incurs in producing one additional unit of a good.¹

 

One of the causes of the commodity perception is that DMC’s provide services which are usually performed by a vendor/supplier. Therefore, making it easy for a meeting planner to form the opinion that there is little or no barriers to entry (going direct to a vendor/supplier), and/or there is very little or no value added provided by the DMC.

 

A good example of what planners and/or corporate clients view as a commodity is transportation services. A vast number of DMC’s do not own their own fleet of motorcoaches or vehicles, and, as such, usually retain the services of a local transportation or limo company. There are usually one or two reliable transportation companies in a destination and their vehicles are usually viewed as a commodity by the DMC. Vehicles usually have a published rate which are available to anyone who calls for a quote. Most likely, all of the DMC’s in a destination use the same transportation or limo company. A motorcoach or limo is, after all, a vehicle that moves people from one location to another…again a commodity. The perceived added value; Are the vehicles clean? Do the drivers know the destination? Are the drivers courteous? Does the company and the drivers have the appropriate licenses to operate the vehicle? Do they speak English? One would have to agree…not much value added.

 

Do planners and clients view transportation as a commodity? Yes, because transportation is perceived as being uniform in quality between companies that produce/sell it, and a client cannot tell the difference between one firm’s vehicle and another. As I stated earlier…most DMC’s in a destination use the same transportation company with little variance in pricing.

 

However, I would argue transportation should not be viewed as a commodity (considering the definition above) because a DMC does attempt to add value or differentiate its services.

 

What about the management of the arrival and departure (A&D) manifest with the transportation company? We all know that most, if not all, transportation companies do not want all of the A&D updates…they only want the last update prior to arrivals! They do not want to search through the A&D manifest updates to find that one change which is not normally highlighted! The transportation company dispatcher does not have the resources, nor the time, to manage all of the individual changes to an A&D. What about last minute changes? What about the dispatching of “meet and greet” personnel to match these changes?

 

The management and coordination of transportation services can and does require many hours…the larger the group…the larger the effort. In addition, local experience and knowledge of the airport is paramount. What about the impact of local events (i.e. sporting events which use a large number of vehicles). What about any coordination with local police? What about off-site parking of vehicles? What about the early departures from an element of the program (i.e. dine arounds)? Also, what is the impact of leaving the VIP sitting at the airport curb waiting for a limo to arrive? Most corporate meeting planners, who have worked through third parties in the past, have not had to directly coordinate or manage a transportation company.

 

Today, in many destinations, transportation companies are being hit hard by the same economic downturn (plus fluctuating fuel costs) that DMC’s are experiencing. Therefore, it is not surprising to hear about some transportation companies looking to expand their revenues by providing services directly to the corporate meeting planner and/or client. These transportation companies are hiring local “field staff” to fill the “meet and greet” services required by clients. They are essentially becoming new entrants in the market and competitors to DMC’s.

 

My advice to any transportation company is the same I provide my hotel clients wanting to transform their concierge desk into a DMC…stick with your core competencies.

 

On the other end of the commodity spectrum is a themed event. Much like the Levi jeans analogy used in the commodity definition above, this is an excellent circumstance whereas a DMC can differentiate itself from its competitors.

 

Although individual components are normally supplied by numerous vendors/suppliers, the DMC provides its intellectual property in the design, production, coordination, and management of themed events. From an entrance, to staging, to lighting, to decor`, to talent, to table and chairs, to chair covers and linens, to center pieces, etc…a DMC’s creativity, coordination, and management skills are at the forefront.

 

The success of an event is sometimes measured by the thorough coordination with a local hotel. Food service, as well loading in and out all has to be coordinated. Turnaround of a ballroom can sometimes be very critical to the hotel and client…especially when money is involved! Some destinations require permits and/or the use of union workers, and these must be understood and coordinated.

 

Critical to the design of a successful event is what works in a destination. Some destinations have themes that are inherent in their culture (i.e. a Mardi Gras parade in New Orleans, Luau’s in Hawaii, etc.). However, most DMC’s have worked tirelessly to design very specific and unique event for the client. These unique events are the intellectual property of the DMC and every attempt must be made to protect these designs.

 

Do clients view themed events as a commodity buy? By definition they should not, however, I believe they do. Why? Because events are also designed, coordinated, managed, and produced by other DMC’s in a destination (competitors). In order to move away from being viewed as a commodity…more distinctness or “product differentiation” must be communicated and demonstrated by DMC’s to clients. The ultimate question a DMC’s must always ask is; What is my value added and have I communicated it effectively?

 

Another factor is the marginal cost associated with decor`. Planners believe that if used once and greater than twice…the marginal cost for props, chairs and covers, linens, decor`, and other event components should be significantly less since they have been used previously (sometimes numerous times). What planners fail to understand are the sunk costs (in terms of resources, both human and financial) which are irretrievable and included in the original production.

 

Sunk costs are costs which have already been incurred, are considered irretrievable, and are thus irrelevant to current decisions, because they cannot be avoided regardless of the course of action selected. Although sunk costs are a major component of the total costs recorded on a firm’s books, they are excluded in the context of economic costs.²

 

Some planners and clients are willing to throw reason/caution into the wind in an effort to receive a low bid/price! They should be reminded that when something looks too good to be true, it most likely is. Why should the planner or client be willing to place the success of a program in jeopardy in an attempt to save a $1 or 2? My rationale; maybe they are trying to justify their own existence!

 

Creating a strategic partnership relationship with a planner or client is the most significant differentiation a DMC can offer.

 

Strategic Partnership…Typically two companies form a strategic partnership when each possesses one or more business assets that will help the other but that it does not wish to develop internally.

 

Firms taking advantage of strategic partnerships can utilize other company’s strengths to make both firms stronger in the long run.³

 

I hesitate using strategic partnership as a descriptor as some individuals lack an understanding the term. These individuals believe DMC’s are at the end of the “food chain” spectrum and provide little or no value added or differentiation. A quote often heard from these individuals…”I pay you to do what I tell you to do”.

 

However, there are many planners who understand the definition of a strategic partnership (above) and how they work. They depend on the DMC for coordination, management, and communications. Additionally, I would suggest DMC’s seek strategic partnerships with their vendors and suppliers. It could eliminate the conflict of them becoming a strategic competitor!

 

I recommend DMC’s do the following in an effort to dispel the commodity tag;

 

1)     discuss and explain the value added you provide

 

2)     create product and service differentiation

 

3)     explain and create strategic partnership with clients, vendors, and suppliers

 

To be, or not to be…is really the question!

 

¹Dictionary of Economics Terms

² Economic Resources

³ Wikipedia

 

Doyle J. Girouard is a business consultant and coach, frequent speaker, and author. With 13 years of knowledge and experience in the Travel Industry he assist DMC’s, Incentive Companies, and Hoteliers achieve strategic competitive advantage.

 

Doyle J. Girouard

CEO and Senior Managing Partner

The Cypress Group

Email; doyle@thecypressgroup.com

Blog; www.TravelKeyNote.com

Twitter: http://twitter.com/doylejgirouard

Phone; 817-421-4774

 

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