In 1758, Cox & Kings became the first travel agency in modern history. Since then, the traditional travel agency model has grown and evolved into a $149 billion industry while the new online traveling agency model generates over $400 billion. It’s clear that this is a business model that has withstood the test of time. Let’s take a look at this business model, its advantages and disadvantages, how it makes money, and a few examples.
The Travel Agency Business Model
The travel agency business model is a framework that travel agencies use to provide travel-related services to customers. At its core, this model involves acting as an intermediary between clients and various travel service providers, such as airlines, hotels, and tour operators.
Travel agencies understand customer needs, preferences, and budgets to create personalized travel experiences. They leverage their expertise and industry connections to access information and deals not readily available to the public. Typically, travel agencies earn their income through commissions from the service providers they book with, service fees charged to clients, or a combination of both.
However, technology has expanded how this model works and how it generates revenue. No longer are commissions the only method by which agencies make money. As the world has changed, so has this model and its income-generating capabilities. Let’s take a look at a few different ways to make money from this model.
How Travel Agencies Make Money
Traditionally, the way travel agents generate revenue is the same way other businesses using the agency model make their money: through commissions. When an agent or agency recommends a hotel, cruise, or airline, they receive a commission from those entities. The size of the commission usually depends on the type of service purchased. For example, hotels typically offer a 10% commission per booking.
On the other hand, cruises offer up to 18% commission to agencies for vacation packages sold.
- Commission from bookings: Earn a percentage from bookings for hotels, airlines, cruise lines, and tour operators.
- Service fees: Charge for personalized services like itinerary planning, booking assistance, and on-trip support.
- Travel insurance: Sale of travel insurance to clients for additional income and enhanced customer service.
- Exclusive tours and packages: Organizing and selling their own tours and packages for higher profit margins.
- Travel-related merchandise: Selling merchandise related to travel.
- Strategic partnerships: Leveraging partnerships for mutual promotions and additional revenue.
Types of Travel Agencies
Traditional Brick-and-Mortar Agencies
Traditional brick-and-mortar travel agencies are physical establishments where clients can walk in and consult with travel agents face-to-face. These agencies offer a personal touch, with experienced agents providing customized travel planning services.
They are particularly valuable for complex travel arrangements, like multi-destination trips, cruises, or group travel. Traditional agencies often build strong local customer bases and can provide a level of detail and customer care that is hard to match online. They are ideal for customers who prefer in-person interactions and seek expert guidance and reassurance throughout the booking process.
Online Travel Agencies (OTAs)
Online Travel Agencies, or OTAs, operate strictly on the internet. Travelweb.com and Expedia were among the first online travel agencies that helped visitors find hotels and flights without working with a human agent. Sites like Travelocity and Orbitz soon followed. Eventually, those agencies were acquired by Expedia Group.
OTAs provide the advantage of easy comparison shopping, allowing customers to quickly compare prices and options for flights, hotels, car rentals, and more. They often offer competitive pricing and are accessible 24/7. However, they may offer less personalized service compared to traditional agencies. OTAs often make money using different pricing models.
Here are some examples of the different pricing models used by OTAs:
- Airbnb – Peer-to-Peer Model
- TripAdvisor – Advertising Model
- Booking.com – Agency and Merchant Model
- Travelocity – Merchant Model
Airbnb, which was once known as a rental company has pivoted into a travel agency.
Specialty Travel Agencies
Specialty travel agencies focus on particular types of travel or destinations. These agencies create a unique selling point by offering expert knowledge and specialized services. This category includes agencies that specialize in areas like luxury travel, adventure tours, eco-tourism, or specific regions of the world.
They cater to niche markets and provide in-depth knowledge and unique experiences tailored to their clients’ interests. For example, an agency specializing in safari tours would have detailed knowledge about various African destinations. They would also know the best times to visit and any unique accommodations. These agencies are ideal for travelers with specific interests or who are seeking an extraordinary travel experience.
Corporate Travel Agencies
Corporate travel agencies specialize in handling the travel needs of businesses and organizations. They manage business trips, conferences, and other travel-related needs for companies. These agencies are adept at navigating the complexities of business travel, such as corporate rates, expense management, and travel policy compliance.
They offer services like 24/7 support, travel risk management, and detailed reporting. Corporate travel agencies are essential for companies looking to streamline their travel processes, ensure the safety and comfort of their traveling employees, and control travel-related expenses. AMEX GBT and TravelBank are a few examples of the leading corporate travel agencies out there.
Pros of the Travel Agency Business Model
The travel agency business model, despite its challenges, offers several advantages that make it a viable and often preferred choice for many travelers. These benefits not only help travel agencies attract and retain customers but also provide them with unique opportunities to stand out in a competitive market.
Personalized Customer Service
One of the primary strengths of travel agencies is their ability to offer personalized customer service. However, this is true for brick-and-mortar agencies. OTAs have very few personalized services other than those recommendations offered by the site’s algorithms or targeting cookies.
Unlike online booking platforms, retail travel agents can provide a high level of personal attention. They understand that individuals have different preferences, needs, and budgets.
This personal touch allows them to craft travel experiences that are tailored specifically to each client. This can be particularly valuable for complex itineraries, special occasions, or for travelers with specific needs. The ability to offer bespoke travel planning and problem-solving during trips creates a customer experience that automated services simply cannot match.
Diverse Revenue Streams
One of the major advantages of the travel agency business model is the potential for diverse revenue streams. Travel agencies can earn income through various channels such as commissions from travel providers (like airlines, hotels, and tour operators), service fees for specialized itinerary planning, and the sale of travel insurance. This diversification allows agencies to maintain a steady income even if one particular source declines.
High Client Retention Rate
Travel agencies often enjoy a high client retention rate. In the hospitality and travel sectors, the typical client retention percentage ranges around 55%. By providing personalized service, expert advice, and hassle-free travel planning, agencies can build a loyal client base. Satisfied customers are likely to return for future travel needs and recommend the agency to others, which is invaluable for long-term business growth.
Scalability in the Travel Agency Business
Scalability is a standout advantage in the travel agency business model. Initially, a travel agency can start small, focusing on a niche market or a specific type of travel service. As the business gains a foothold, it can incrementally expand what it has to offer. This could include adding new destinations, diverse travel packages such as luxury tours, budget trips, or adventure travel, and broadening the range of services including corporate or group travel management.
Importantly, the scalability of a travel agency does not necessarily require a proportional increase in overhead or resources. This aspect allows for sustainable growth. As a result, travel agencies can scale up (or down) in response to market trends or economic conditions. This also means that they can pivot because of consumer preferences.
For example, in the 1990s Acapulco was a highly desired destination. However, in the 2020s travelers are flocking to Dubai for their getaways. Travel agencies can quickly pivot in order to give clients travel options while not needing to change their business operations.
Cons of the Travel Agency Business Model
One of the most formidable challenges facing travel agencies today is the heightened level of competition. With the advent of online booking platforms, such as Expedia and Booking.com, and direct booking options offered by airlines and hotels, traditional travel agencies find themselves competing in an increasingly crowded market.
These online platforms often provide customers with a convenient way to compare prices and book travel services directly, bypassing the need for an intermediary. Additionally, they are typically available 24/7, offering a level of convenience that traditional agencies struggle to match.
This shift has not only squeezed the market share of traditional travel agencies but also put downward pressure on their pricing and service fees.
Dependence on External Factors
One notable disadvantage of this model is the high level of exposure to external factors. Their operations and profitability are closely tied to global and regional dynamics. As most know, these can be unpredictable and highly impactful. Geopolitical events, such as political unrest, terrorism, or diplomatic tensions, can abruptly make destinations less appealing or even inaccessible. When these things happen, it can lead to a significant drop in bookings and revenue. Similarly, economic downturns can quickly change travel patterns, with people cutting back on discretionary spending like vacations, directly affecting travel agency sales.
Natural disasters, health pandemics, and environmental concerns also play a major role in influencing travel decisions. For example, during the first year of the COVID-19 pandemic, global road travel and commercial flight activity decreased by 50 percent and 60 percent.
Also, currency fluctuations and changing visa regulations can impact international travel trends. A strong currency in a key market can deter travelers. On top of that, stricter visa regulations can reduce the number of inbound tourists. These elements make planning and forecasting exceptionally challenging for travel agencies, requiring them to be adaptable and resilient in the face of constant change.
The travel agency business is characterized by relatively low profit margins, a significant con in its operational model. This challenge stems from several factors, including intense competition with online travel platforms and direct booking options offered by airlines and hotels, which often feature lower prices and more direct control over the customer experience. In order to remain competitive, traditional travel agencies are often compelled to offer compelling deals, which can further compress their profit margins.
Commission-based income, which is a primary revenue source for many travel agencies, presents its own set of challenges. These commissions, often a percentage of the total booking cost, can be modest, especially with suppliers increasingly reducing commission rates. Furthermore, the growing trend of suppliers offering the same or lower rates directly to consumers further exacerbates the pressure on profit margins.
The operation of a travel agency is often a time-intensive endeavor, which can be a significant downside of this business model. Crafting personalized travel experiences, which is a key selling point for many agencies, requires meticulous planning, extensive research, and constant communication with clients and suppliers. This level of customization and attention to detail is labor-intensive and time-consuming, especially when catering to clients with specific or complex travel needs.
Furthermore, the nature of the travel industry demands that agencies remain responsive to client needs around the clock, especially for clients who are actively traveling. Dealing with last-minute changes, addressing travel disruptions, and providing support across different time zones can be demanding and reduce the time available for other business activities.
For small or independent travel agencies, where resources are limited, this time commitment can be particularly challenging. Balancing the need to provide high-quality, personalized service to existing clients while simultaneously engaging in marketing efforts, business development, and administrative tasks can stretch resources thin. This time pressure can limit the agency’s ability to scale up, as acquiring new clients and expanding services requires additional time and effort that may not be readily available.
As we mentioned before, it appears that this is a business model that is here to stay. The travel agency model has many traditional elements of a successful business model but has also integrated modern methods with the advancement of technology. Entrepreneurs and business owners considering this model should take the time to understand the benefits as well as the risks involved.