Travel distribution is a two-sided market in that it offers a service that benefits more than one party. But who or what should benefit most is something that travel marketers must constantly reassess, writes Tom Bacon in this exclusive guest article for EyeforTravel.com

Let us first define the term and then take a look at how this works for other markets. A two-sided market is a term used by economists for a service that represents value to multiple market groups; the value of each is in part interdependent.  The economics of serving the market is therefore dependent on the ability to meet the needs of both sides.

Also called ‘two-sided networks’, Wikipedia defines‘two-sided markets’as economic platforms having two distinct user groups that provide each other with network benefits. The organisation that creates value primarily by enabling direct interactions between two distinct types of affiliated customers is called a two-sided market.

Classic two- sided markets include TV or radio stations, newspapers, dating sites, retail malls, and software platforms:

                                One Side                             The Other Side

Market                     End-User                              Supplier/Retailer/Advertiser

Stations                   Radio Listeners/TV viewers  Advertisers

Newspaper               Readers                               Advertisers

Dating sites              Single women                      Single men

Malls                        Shoppers                             Stores

Game Platform         Gamers                               Game-makers

There are two sets of ‘customers’: the end-user and the supplier or retailer or advertiser. In all cases, a marketer needs both sides to have any value to either: dating sites need both single men and single women; malls need to attract enough stores to attract shoppers; newspapers and TV or radio stations are of value to advertisers only because of their reader or viewer or listenership.

As with any marketing, successful firms in two-sided markets target their customers – but in a two-sided market successful firms must target both sides. The pricing – and consequently the revenue shares - of each side of a two-sided market are not necessarily balanced.  Sometimes, one side gets a free ride (TV viewers, radio listeners, single women, shoppers) in order to attract enough of that side to extract healthy payments from the other side. There are often different pricing strategies in any one ‘market’:  in some dating sites, women must pay; in others, women are free; some newspapers are free to readers and some charge subscriptions; some TV is pay-for-cable.  This can change over time:  as the Internet has driven a reduction in newspaper subscriptions, newspaper companies are experimenting with free or for-fee access to news on the Internet.

A closer look at travel

Of course, travel distribution is also a two-sided market:

                               One Side                   The Other Side

Market                     End-User                    Supplier/Retailer/Advertiser

Travel Distribution   Travellers                  Airlines, hotels, other travel suppliers

Travel distribution includes all third party travel distributors:  traditional travel agencies, online travel agents (OTAs), and even the system that supports third party distribution (GDSs).

Travel agencies are a great example of how the revenue shares in a two-sided market can change over time.  Once airlines paid 10% commissions to agencies out of the airline ticket price and travellers paid nothing for the services of an agency; now agencies generally charge customers an incremental amount above the ticket for services rendered.  In some cases, at the extreme, the revenue share went from 100% supplier-sourced to 100% traveller-sourced.

The opposite is true for OTA’s (online travel agents).  Airlines and other travel suppliers pay the entire cost of Expedia, Orbitz and Travelocity (the traveller pays nothing for these services).  And GDS’s – the system behind OTA’s and travel agents that provide industry-wide pricing and availability – are disproportionately funded by airlines and travel suppliers.

Searching for the right answer

In testimony during the recent SABRE-American Airlines’ court case, it was pointed out that both sides are critical to success in travel distribution and that both sides have significant ‘market power’.  The distributors need travel suppliers – SABRE emphasised that travel agents need access to American Airlines’ flights in order to be of value to travellers.  American, on the other hand, focused on how dependent it is on travel agents to capture business travellers.  Despite the settlement reached between the litigants in that case, both sides of travel distribution will continue to exert their respective power in seeking better terms or lower costs.  Airlines will continue to seek opportunities for lower cost direct distribution; Southwest Airlines, Spirit Airlines and Allegiant are all less reliant on intermediaries. On the other hand, travellers, both corporate and leisure, will insist on easy-to-use sites that offer accurate and comprehensive industry information – essentially for free!

The current travel intermediaries have done a great job making travel planning easier and expanding the industry for all travel suppliers.  However, as in other two-sided markets, dynamics will continue to shift and the most successful travel distributors will adjust accordingly, properly balancing the needs of both sides.

This guest article has been produced exclusively by Tom Bacon, former airline executive and industry consultant in revenue optimisation. Questions?  Contact Tom at tom.bacon@yahoo.com.