Fred Olsen justifies decision to cut agent commission

Nathan Philpot, Fred. Olsen Cruise Lines sales and marketing director, explains why the cruise line has decided to cut agent commission to 10% for 2013 sailings…

"Mrs Jones sees an ad in her local paper from ‘Agent A’ for a £1,000 cruise. The ad sells all the benefits and she has not just the interest, but the real desire to take the cruise and is happy to pay the £1,000. On the way to ‘Agent A’, she passes local ‘Agent B’, who is offering ‘discounts off any cruise’ in the window. Mrs Jones pops in, the agent spends time talking her through the cruise and offers her – without her asking for anything – a 5% discount on this cruise, as is their policy (giving away £50 of their £100).

Mrs Jones’ mind has now been shifted into ‘negotiation mode’ – she initially had no intention of negotiating the price, but now asks if they can do a 7% discount, to which they agree (giving her £70 of their £150 earnings) but she does not commit. Mrs Jones instead goes to ‘Agent C’ next door, saying she can get 7% at ‘Agent B’, but may give them her business if they better it. ‘Agent C’ goes for the close; they offer her a coffee and a 10% discount (giving away £100 of their £150).

Mrs Jones eventually arrives at ‘Agent A’ and talks about the ad which inspired her so much. She says she loves the cruise, but will only book it with them for £900. ‘Agent A’ states that they do not discount, so Mrs Jones returns to ‘Agent C’ and is delighted when she pays £900 rather than £1,000.

The following week:

– ‘Agent A’ does not advertise, as they are not getting bookings from their ads.
– ‘Agent B’ gets no business because noone is advertising.
– ‘Agent C’ has closed because it is not earning enough from commission to pay its bills.
– Mrs Jones has lost a service (i.e. a shop) in her high street.

The moral of the story is that agent discounting is a ‘zero sum’ game. It drives profits, business and service down for everyone. What the cruise industry needs is a thriving retail sector that inspires and services its customers – selling at a price that is fair to the customer, agent and cruise line. To quote a cruise retailer and entrepreneur I have a lot of respect for: "Anyone can sell £1 for 90p, but it takes skill to sell £1 for £1.10".

At Fred. Olsen, we have spoken to our partners and just about everyone has said that they would stop discounting tomorrow if only, using the example above, ‘Agent B’ didn’t discount. And ‘Agent C’ says it would stop discounting if only ‘Agent B’ did, and so on. So the will to change is undoubtedly there, it’s just that no one is prepared to go out on their own and stop this ‘no-win’ game. That’s what our new plan is trying to do – we hope to facilitate that change so that everyone can make money.

We hope to help eradicate a culture of discounting that erodes profits – where discounts are not required or even asked for by the consumer. Of course, we appreciate that the consumer wants a deal and we, as a cruise line, will supply deals if the market requires them – we will set competitive prices that drive demand – allowing agents to reap the benefits of their investment in promoting Fred. Olsen cruises, rather than a competing agent taking that benefit from them. Furthermore, we know that more people are booking deals, so we have increased agent earnings when selling deals. For those agents who do not discount already, their sales should improve further, as they already offer a competitive advantage, other than discounting, which is driving sales against a backdrop of discounters.

The cruise industry offers amazing products for everyone, whether big ship or small ship, luxury or value. It’s a very good product that the consumer wants and will pay a very good price for – if we can change the mentality. Let’s create a virtuous circle or, in the case above, let’s try and keep prices ‘up with the Joneses’!"

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