In a similar way, powerful clients can leverage their bargaining power by pushing prices down, demanding higher product quality or more added services, etc. In the tourism industry, buyers are FIT, outbound tour operators, internet portals, travel agencies, corporate clients and sometimes also DMCs. However, every tourist sector may have a different buyer structure (%FIT, TTOO concentration, relevance of corporate clients and associated clients). Tour operators can be identified as the main buyers of most tourist products. Buyers have negotiating power when:

  • There is higher concentration in the buyers’ side than in the suppliers’, or the business volume of the buyers is significantly larger than their suppliers’. In this respect, there has been an increasing concentration of the outbound tour operators in the major outbound markets, especially in the sectors with the highest concentration of travelers.
  • The products tend to be commoditized. That occurs with destinations that do not care for their heritage and do not foster their culture as an essential part of the experience, in those sectors that are not culture focused.
  • There are few or no switching costs for customers. Switching costs are barely ever relevant apart from residential tourism (when the tourist own a property in the destination).
  • Customers may seriously threaten with backward integration to take a stake on suppliers’ business. Some outbound tour operators buy hotels in the destinations and set their own inbound travel services.
  • Buyers have very good information about the demand, prices and the supplier. In the tourism industry it is not easy to hide information of the suppliers.
  • If the utility of the product is low for the buyer, this will be more likely to press the prices down to compensate the low utility. This is unlikely to happen in the tourism industry.

Instead, buyers are weak if:

  • Producers threaten with forward integration, acquiring the distribution channel. This happens when accommodation operators market their services directly to the client, usually through the internet. It could also happen that these operators create packages including transportation and activities and market directly to the final customer through the internet, travel agencies or its own retailers.
  • Significant buyer switching costs. Only in the case of residential tourism.
  • Buyers are fragmented. This is the case of FITs and sometimes small tour operators.
  • Producers supply critical portions of buyers’ input distribution of purchases. This refers to the uniqueness of the accommodation or activities operator as a supplier within the tour operator package.

A buyer group is price sensitive if:

  • The purchased product accounts for a significant proportion of the procurement budget. Accommodation is usually the most significant fraction of the package, along with transportation depending on the length of the trip.
  • The customer is under pressure to reduce its costs due to low profits, tensions in the cash flow, etc. This happens quite often with the tour operators when negotiating with incoming services suppliers.
  • The product object of negotiation has little impact on the buyer’s product quality. This cannot happen in the tourism business, as all the main components are clearly visible to the final customer.
  • The product has little impact on the customer’s other costs. This is not likely to apply to the tourism industry. Only in very special cases.

Many producers try to counter the channel power with exclusive deals with specific distributors or simply by selling directly to final customers through their own channel.

Through a series of mergers and acquisitions, a few tour operators control most of the sales outlets today. Operators such as Kuoni are also in a position to centralize purchasing for an entire brand in all European countries. A common complaint by hoteliers is that if the requested price is not given, tour operators have the ability to take their clients to another destination. Tour operators identify new destinations with low startup costs and compete with existing destinations which are then forced to reduce prices. Certain European charters recently pulled out citing price issues.

Would you add more considerations on analyzing the power of buyers in destinations?

Posted by Jordi Pera

Jordi Pera is an economist passionate about tourism, strategy, marketing, sustainability, business modelling and open innovation. He has international experience in marketing, intelligence research, strategy planning, business model innovation and lecturing, having developed most of his career in the tourism industry. Jordi is keen on tackling innovation and strategy challenges that require imagination, entail thoughtful analysis and are to be solved with creative solutions.

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