How can lodges and hotels generate more business from the many smaller players in the inbound travel trade? One answer may be for revenue and sales managers to rethink traditional volume-based STO structures – and, in particular, the assumption that offering smaller operators 15% STO is commercially sensible.
It often is not. In fact, it can achieve the opposite of what was intended.
When a supplier offers smaller agents and operators 15% STO while its largest trade partners receive 30% or even 35%, it does more than create a heavily skewed rate structure. It sends an unintended message to the many smaller entrepreneurs in our industry: your business is not particularly valuable to us.
After more than two decades as a small inbound tour operator, STO rates remain one of the recurring topics in our supplier discussions. Smaller, owner-run operators frequently struggle to secure net rates that allow them to compete effectively.
Many suppliers still rely heavily on volume-based structures, rewarding operators with progressively higher commission according to the number of bed nights they produce. There is nothing inherently wrong with rewarding volume. The problem arises when the spread between the bottom and top tiers becomes so wide that the lower tiers cease to be commercially viable.
The economics of the long tail
A system in which dozens or hundreds of smaller operators receive 15%, while a handful of very large operators earn 30% or 35%, risks becoming self-defeating. The supplier protects percentage margin on each booking but may sacrifice considerably more in potential booking volume.
This is where the collective value of smaller operators becomes important.
Individually, a boutique operator producing 10 or 20 bed nights may appear insignificant on a revenue manager’s spreadsheet. But there may be hundreds of such operators selling the destination. The relevant question is therefore not simply “How much business does this operator give us?” It is also “How much business could this entire segment of the trade represent if our rates made us commercially attractive to them?”
Here’s a simple hypothetical exercise to illustrate this. Let’s assume that a supplier on 15% STO is supported by only 20 out of every 100 small operators, each producing on average 10 bed nights per year. The others are not interested due to the poor STO rate. If the commission was 25% instead of 15%, far more small operators might now be interested in supporting the lodge, each producing perhaps 20 bed nights per year. Let’s assume 80 out of 100 small operators are willing to sell the supplier on 25% STO. The individual volumes are nothing spectacular but the combined booking volume is significant and far outweighs the extra 10% percentage points of STO margin lost.
The figures are deliberately illustrative. No supplier can assume that increasing STO will produce this level of additional demand and, during periods of very high occupancy, some bookings may simply displace business that could have been sold through another channel.
But the underlying commercial question remains valid: How much incremental booking value would be required to justify moving small operators from 15% to 25% STO?
Surprisingly little.
At 15% STO, the supplier retains 85% of the selling price. At 25% STO, it retains 75%. All else being equal, gross booking value therefore needs to increase by only about 13.3% for the supplier to recover the difference in retained revenue. Anything beyond that becomes additional retained revenue before allowing for variable costs and displacement.
Seen this way, a more competitive STO rate for smaller operators is not necessarily a concession or a favour to the trade. It can be a distribution strategy. R16 million (US$990 400) worth of bed nights at 25% STO is far more profitable than R2 million (US$123 800) worth of bed nights at 15% STO.
Why volume targets fail as an incentive
For smaller specialist operators, volume targets often do not work as an incentive at all. They become a barrier.
Consider an operator selling hundreds of lodges, hotels and experiences across Southern and East Africa. Such an operator cannot realistically chase volume targets with every individual supplier. Even when a property is well regarded and frequently recommended, it may receive only a handful of bookings from that operator in a particular year.
No volume target or encouragement to produce more volume changes that reality.
In my experience, STO levels have a direct and noticeable impact on quoting behaviour. Suppliers offering 25% STO or more are naturally easier for consultants to prioritise, particularly when preparing B2B quotes or choosing between several comparable properties. Once STO drops to 20% or below, a property becomes considerably harder to support. At 15%, it may barely be considered at all. Suppliers on 15% STO are not even loaded on our system.
This is especially true for B2B business where the inbound operator must still pay commission to the overseas travel agent. But, even on direct bookings, a 15% gross margin can be too thin once payment costs, staff commissions, marketing expenses and the cost of servicing the booking are taken into account.
Most tour consultants are incentivised through sales commission or gross profit targets. They therefore have a rational reason to favour products that generate sustainable margins. A consultant may genuinely like a lodge and want to recommend it but, if comparable alternatives offer substantially better commercial terms, the rate structure inevitably influences what is quoted. What consultant will consider a property on 15% STO while the equally lovely lodge next door offers 30% STO?
This is not lack of support for the supplier. In many cases, the operator would like to sell the property more often. The supplier’s own rate structure makes doing so difficult.
A more commercially balanced structure
There is a better way that would likely lead to higher overall occupancy and revenue. A supplier could, for example, start legitimate trade partners at 25% STO while continuing to reward major producers with 30% or 35%. High-volume partners would still receive a meaningful advantage but the gap would no longer be so large that smaller operators are effectively priced out of selling the product.
Offering commercially viable STO rates gives the supplier a better chance of being quoted, recommended and booked. It also allows smaller operators to compete with larger operators, OTAs and direct booking channels while preserving rate parity.
Small operators may absorb credit card merchant fees of 3% or more while providing destination advice, itinerary design, personalised service, booking administration and post-booking support. They also invest in marketing and sales activity from which suppliers benefit. A reasonable commercial margin sustains that work.
Without it, the operator must add fees, become uncompetitive, sell a better-margin alternative or pool buying power through a consortium simply to obtain workable net rates. None of those outcomes necessarily benefits the supplier.
The principle is simple: evaluate smaller operators as a segment, not only as isolated accounts. A long tail of modest producers can add up to a substantial source of business. And the best way to access this business is to offer competitive STO rates with a smaller spread between the top and bottom tiers.
Volume should absolutely be rewarded. But volume is not the only measure of a trade partner’s value. The more useful question for suppliers is whether 15% STO encourages smaller operators to sell more or simply encourages them to sell something else.
