The taboo around tour operator guarantees: 5 factors to consider

Guarantees can seem like deals made behind closed doors

This is not the first time I have heard someone speak negatively about a hotel’s guarantees with a tour operator. At first glance, they may seem like a poor idea, especially if we start from the premise that a revenue manager should strongly prioritise the direct channel. But guarantees are often discussed too casually.

For anyone more familiar with city hotels, here is a quick explanation of how tour operator guarantees work (a bit like allotments, but on a much larger scale). A tour operator normally commits to selling a certain number of beds, usually tied to a revenue target, over a season. For example, between 1 February and 31 October it might need to generate €400,000 in production. Based on the negotiated per-person rate, the parties estimate how many room nights must be sold. It is also common to set a minimum number of beds to be sold each day. That prevents the operator from selling everything in peak season and reduces the risk of sharp occupancy peaks.

Five factors to consider when assessing a guarantee

1. Seasonality. In my view, this is the key factor in negotiating a guarantee. In recent years, Spanish hoteliers have gained leverage in negotiations, to the point where many tour operators are competing for beds rather than prices, particularly in the Canary Islands. Under normal circumstances, we should favour the operator that gives us the most support in low season.
2. Owners and management. Revenue managers tend to be rational and can use data to support a no-guarantees strategy. But we are not the ones under pressure to pay wages, suppliers and utility bills—variables we do not always consider. We do not usually work with fear, risk or liquidity as inputs. I encourage owners and managers to share cost data with the revenue manager so those factors can be reflected in the pricing strategy. They should already be built into occupancy, RevPAR and ADR budgets, but knowing the costs can show how the same profit may be achieved in different ways.
3. Some tour operators work with you. In my case, I introduced monthly meetings with one operator to adjust the guarantees and make them more evenly distributed. Both sides benefit: the hotel avoids occupancy peaks, while the operator has a better chance of selling its guaranteed inventory. I understand that, after receiving my proposal, they began using this approach with other hoteliers too.
4. Never agree to a hotel-only guarantee. Do not sign one under any circumstances. A guarantee usually means a lower rate, particularly if it supports you in low season, but it should also include a minimum stay and be bundled with transport (usually air travel). This keeps the hotel price opaque. Your pricing strategy will have no effect until the operator has sold all its guaranteed inventory online, possibly by cutting prices. In practice, you will have no pricing strategy of your own; you will have to adapt to theirs.
5. They can reach markets you cannot access alone. This is closely linked to seasonality. When domestic demand is low, tour operators can work in markets where demand is stronger. They also have an established sales operation and customers who tend to be less flexible in how they book.

As a revenue manager, I consider these factors before making a final assessment. Even so, I sometimes wonder how strong our pricing strategy would be on its own if we had 100% of the inventory. Guarantees usually come at a lower rate, so we often raise online prices to meet our revenue targets.

That leaves a few questions: what would happen if the online rate sat between the current price and the tour operator’s rate? Would demand increase? Would it increase enough to replace the production brought in by the tour operator?