Travel Industry Following Trend for Subscription Services

More and more businesses are moving away from the traditional product economy to the ‘subscription economy’. Within the travel industry, this typically involves the consumer paying a monthly or annual fee to subscribe to receive access to a product, service or exclusive membership benefits, such as perks and discounts. Some companies integrate subscriptions to their mix of revenue streams, while others will go to market with subscriptions as its foundational offering. Some of the best-known examples of brands operating within the subscription economy include Uber, Amazon Prime, Spotify and Netflix. The basic premise of the subscription model is that customers are not just seen as one-off sales, but a long-term investment.

Subscribers will generally be able to access discounted prices for holiday products, such as accommodation, car rental, sightseeing activities, foodservice and more. Schemes are particularly appealing to those who travel a lot for leisure or business. As the premise of the subscription model is to develop long-term relationships with customers, this type of service typically sees a transactional relationship being replaced with a more personable one. Subscribers will generally benefit from more personalized and tailored holiday content as well as being able to save time booking holidays.

A subscription service may position itself in a niche segment, such as luxury or eco travel. This can introduce travelers to a likeminded community and/or save them time when booking holidays.

Travel Subscription Market Insights

COVID-19 saw demand for travel and tourism plunge. With the wide-scale lockdown measures, border closures, and travel restrictions being introduced around the world, international departures fell by 69.0% YoY in 2020. Demand for domestic tourism similarly plummeted. As COVID-19 spread globally, all travel activity came to a virtual standstill by the end of March 2020.

As a result, companies operating across various travel industry sectors saw revenues drop significantly. According to GlobalData’s Company Profiles, China Southern Airlines’ revenue dropped 40.0% YoY, while easyJet’s revenue fell by 55.6% YoY in 2020. As hotel occupancy rates reduced, Marriot International saw its revenue fall by nearly 50% YoY and Accor’s revenue fell by close to 60% YoY. Within the online travel agent (OTA) sector, Booking Holdings experienced a 54.9% YoY drop in revenue, Expedia’s revenue fell by 56.9% YoY and Trip.com’s revenue dropped by 48.7% YoY. As such, COVID-19 has highlighted the need for a more predictable and recurring revenue stream.

As the worst effects of the COVID-19 pandemic ebb, most indicators point to travel coming back with a vengeance as people look to reconnect, explore new destinations, or revisit reliable favorites. A GlobalData poll reveals that in the next 12 months 44% of respondents will consider taking a domestic trip, while 29% of respondents would consider an international trip to the same continent and 37% an international trip to a different continent. Meanwhile, GlobalData forecasts expect total global departures to achieve a CAGR at 19.4% from 2021 to 2024. Furthermore, a McKinsey survey reveals that traveling is the second-most-desired activity among respondents with dining out in first place. Despite, GlobalData’s poll also showing that 29% of respondents are not currently willing to travel, within the next twelve months, there is evident demand for travel. Consumer desire to travel paired with growing confidence in the act of traveling and the pandemic boosting the shift to the subscription economy means that there is a unique opportunity to reach an audience that is eager to purchase. Travel brands can capitalize on this by introducing a subscription service into its product offering.

Surge in travel subscription offerings

Over the past few years, there has been a seismic shift in growth strategies for business, brought about by a growing preference on the part of both businesses and consumers, for subscription services. According to McKinsey, subscription businesses in the e-commerce market grew more than 100% annually between 2013 and 2018. COVID-19 has further accelerated the existing demand for subscriptions as more consumers have become accustomed to the reliable and time-saving benefits of subscription services, which travel companies can capitalize on as travel demand returns. However, subscription and membership-based platforms within the travel industry is a relatively nascent trend with just a few incumbent and travel startups offering subscription and membership programs.  Nevertheless, in 2020, prior to COVID-19 disrupting global travel Skift Research identified subscriptions as a ‘megatrend’ in travel with these strategic initiatives accelerating as subscription is seen as the next frontier of loyalty in travel. This stems from subscription and membership platforms representing a compelling way for travel companies to create lasting relationships with travelers and to generate a stable income stream. Given this, it is likely that subscription-based travel platforms will increase in popularity.

Patent Activity has increased

Demonstrating the shift from the traditional economy and mainstream shift from loyalty points to subscriptions, is increased patent activity for subscriptions (CAGR 2016-19: 13.1%). According to GlobalData’s Patent Analytics, subscription related patents have continuously increased even during COVID-19. A total of 2749 publications were made in 2020, representing a 1.9% YoY growth. This comes as GlobalData’s Q4 2021 Consumer Survey demonstrates that booking via an online platform (24%) popularity far exceeds that of in-store booking (7%) when consumers were asked what they used the last time they booked a holiday. Travel companies investing in subscription services will emerge from the pandemic in a strong position to attract the tech savvy and deal finding traveler.

Subscriptions could be a key differentiation point for hoteliers

Cost reduction remains one of the primary objectives for hoteliers as the travel and tourism sector grapples with the effects of COVID-19. Subscription services provide an opportunity for hoteliers to boost visibility to travelers online often without having to pay commission as it is the travelers who pay the subscription fee, not the accommodation provider. This is an attractive offering for the industry considering decimated revenues in 2020. Membership-based hotel provider, Bidroom charges no commission, instead hoteliers make one flat membership payment per year. The annual fee ranges from EUR100-6,000 ($113.4-$6,800.6) dependent on the rooms sold and revenue delivered and begins after a minimum of EUR1,500 ($1,700.1) in revenue has been reached. Regenerative Travel, a membership collection of values-aligned independent hotels, charges a sliding scale annual fee structure which is used for cross-channel marketing. Meanwhile, Tripadvisor has a lower-than-market-average commission of 10% but 15% is recommended for maximum visibility, making these bookings more efficient (less expensive) than OTAs. Hoteliers typically incur significant costs through both online distribution and third-party commissions when working with OTAs. However, by signing up to subscription services, this could help reduce such costs. As such, subscription platforms are a key differentiator within a highly and saturated competitive marketplace and if successful could challenge the likes of leading OTA's Expedia Group and Booking Holding's in post-pandemic travel.

Travelers have increasing expectations and personalization

One of the biggest trends in the travel and tourism industry that has emerged from the digital revolution is that of personalization. Loyalty to a particular brand is increasingly being replaced by travelers’ loyalty to their own preferences. As per GlobalData’s Q1 2021 Consumer Survey 53% of global respondents were ‘always’ or ‘often’ influenced by how well a product/service is tailored to their needs and personality. A further 26% of global respondents reported that they were ‘somewhat’ influenced. Furthermore, GlobalData’s Company Filing Analytics shows that ‘personalization’ has been mentioned 805 times by leading travel and tourism companies throughout 2021 (as of December 20, 2021). These figures reflect the expectation of personalization and the importance of incorporating personalization into traveler booking experiences. According to research from McKinsey & Company, 22% of subscribers value personalized experience. Meanwhile, Epsilon found that 80% of people are more likely to make a purchase if a brand offers a personalized experience, and Deloitte discovered that 20% are willing to pay a premium for a personalized product.

As travel subscription services generally have a closer relationship with its customer and a wealth of information regarding its user preferences, this type of service is best placed to capitalize on the growing expectations for a personalized service and tailored recommendations. When done right, personalization can also yield higher customer satisfaction rates, generate customer engagement and increase brand loyalty. Company leaders within the personalization theme will engage with its consumers, connect disparate data sources and data-driven insights to understand more about each individual and its target market. Machine learning can then be leveraged to drive personalization and targeted content. For instance, subscription-based travel platforms can provide real time personalization which considers the user’s context, behavior, device, location, time, past searches and journeys to show them the right set of flight, hotel, activity or itinerary recommendations based on past behavior and behavior of other similar users. Nevertheless, while consumers have heightened expectations for personalization, privacy is also a priority. Consumers are becoming increasingly conscious of how businesses are using their personal data and are demanding the highest standards of privacy.

Subscription economy already enjoys widespread buy-in among younger generations

According to research conducted by YouGov and Zuora, roughly 9 in 10 UK citizens have at least one subscription, with the popularity around this type of service growing. Generational data also reveals that the younger generation is especially accustomed to this type of service, with 79% of millennials owning six or more subscriptions. Growth in the subscription economy is a small part of a much larger phenomenon that experts are calling the “post-ownership economy”. Where previous generations would purchase outright, it is becoming increasingly popular to rent goods and services. Designing systems and platforms that can offer a well-positioned and valuable subscription service is more important than ever. Without doubt, the subscription business model has been accelerated by the pandemic and is only going to grow in importance across industries. The cultural shift in buying behavior and the desires of younger generations mean that more travel companies will follow suit and adapt its product and service offerings to their needs. However, the challenges are numerous: consistent and attractive design and personalized messaging, a flexible technical architecture and data security are just a few of the areas that will need to be successful within the subscription economy

A subscription model is a more resilient stream of income

Subscription models have the potential to completely transform an industry that faces challenges such as seasonality and the boom-or-bust cycles of bookings and commissions by ensuring a relatively predictable and stable revenue stream. Given this context, subscription-based travel companies are gaining significant traction and incumbent travel companies like InterContinental Hotels Group, Marriott and Accor have all launched or are considering monthly subscription plans. Going forward, travel companies can reorient themselves towards new sources of recurring revenue that are both sustainable and predictable and better brace them for fluctuations in demand and turbulent events.

Niche segmentation are embracing subscription services

Highlighting the momentum of subscription-based travel, startups and niche tourism segments have begun to embrace this model. For instance, Inspirato has focused on the luxury tourism segment and integrated the sharing economy model into its subscription model. Whereas, Regenerative Travel has developed its subscription platform to focus on the principle of regenerative tourism. Going forward, there are further opportunities to capitalize on growing demand for other niche segments, or in some cases, create demand. Furthermore, there are more opportunities for travel subscriptions entering the market, which specifically target a segment of the market, such as women, families or LGBTQIA+ travelers. The benefit of niche segmentation is that it has the potential to build a community of likeminded travelers, deliver well-tailored travel products and advice, as well as focused and targeted marketing and promotional activity.

Potential supplier issues and operational challenges to overcome

If the travel subscription is not being offered inhouse, the feasibility and success of establishing a travel subscription program relies heavily on partnerships with hotels, airlines, sightseeing providers and car rental companies. Serving as a prominent case of this is Tripadvisor, which after just three months of launching its Plus subscription plan was forced to revise and modify its program after receiving pushback from large hotel chains. The dispute centred around the initial model displaying upfront discounted rates on hotel rooms, which hoteliers feared would violate “rate parity,” in which hotels offer similar rates on various platforms including OTAs, Booking Holdings and Expedia Group. Effective as of Q4 2021, Tripadvisor Plus had to shift to a cash-back benefit for subscribers. However, a significant attraction of the initial model was that hotels would not have to pay commission, which can be as much as 30%. Meanwhile, the new model requires hotels to pay commission on the bookings, a portion of which is then transferred to its customers as a cash-back option. The pushback and modification received led to a drop in TripAdvisor's share price. As such, this serves as a reminder that establishing a good relationship with travel suppliers is key to a well throughout and superior subscription plan. Evidence of a more harmonious relationship is evident with eDreams’ partnerships with easyJet and Travelport, and Regenerative Travel’s ongoing value added to its hotel suppliers.

Subscriptions and memberships represent a compelling way for travel companies to create lasting relationships with travelers as consumers who buy into subscription services are committed beyond just a one-time purchase.

The value and convenience enjoyed by members has the potential to outweigh a monthly subscription or membership fee as travelers can access instant savings, discounted stays and personalized travel advice.

Subscription models have the potential to completely transform an industry that faces challenges such as seasonality and the boom-or-bust cycles of bookings and commissions by ensuring a relatively predictable and stable revenue stream.*

* MarketLine Analyst Insights, January 2022