Charlie Funk
I moved to Nashville in 1972 and have witnessed major changes. At the time, Opryland had just opened, an event that triggered forecasts of (gasp!) 3,600 more hotel rooms in the area to handle the visitor influx.
Eleven airlines served Nashville, including the "seven sisters" carriers (American, Delta, Eastern, Pan Am, Braniff, TWA and United), to bring those visitors to Music City. The more than 100 travel agencies in middle Tennessee were all ARC appointed. The leisure cruise industry was in its infancy, and there was no such thing as a cruise-only agency in the city. In fact, tour operators and other suppliers paid commissions only to ARC agencies.
Nashville continued to grow, joining several other cities that in many ways were melting pots, including Columbus, Ohio, and Kansas City, Mo. Indeed, Nashville today tops a list of the top 25 consumer-product test markets in the country, according to Smallbusiness.com. A product that tests successfully in Nashville has better than an 80% chance of success when rolled out nationally.
A demographic and psychographic segmentation study of our agency's database in 1994 to determine who was taking ocean cruises was an eye-opener. It identified the residents of specific zip codes most likely to yield the best return on marketing dollars by specific cruise lines and for those lines' offered itineraries.
We used that study as the backbone of our marketing efforts for years, and it stood us in good stead. Our business tripled in nine years, and it was only with the advent of aggressive direct-booking activity by some cruise partners that we began to see slower growth and in some cases retraction.
In 2003 I developed an algorithm that took into account changes in seven key economic factors to aid in forecasting call volume some six months in advance.
Suffice it to say that the algorithm was about as accurate as chimpanzees throwing darts at a wall; that is, until I realized there was one variable that seemed inordinately influential. When I adjusted to make that factor the most important one, the predictability jumped to better than 60% accuracy.
That factor was the price of gasoline. In our marketing plans for 2007, we bluntly told mass-market cruise lines that a gasoline price of $2.25 per gallon would begin to squeeze the market and $2.50 a gallon would stifle demand.
In that same marketing plan, we stated that cruise lines should focus on past passengers because the number of first-time cruise passengers as a percentage of the cruising population was going to decrease. That prediction was based on a precipitous drop in birthrates beginning in 1973. Our estimate was that the percentage of first-time cruisers would not begin to increase again until 2015.
There were other dynamics at work as well. In the early days of leisure cruising, when capacity was a fraction of what it is now, in-the-know cruise passengers booked in September and October for the coming year or risked the ship selling out. This was particularly true for exotic destinations, longer cruises and itineraries that were unique or repeated only a few times.
As cruising grew in popularity in the '80s and '90s, Wave season became the new norm for measuring activity. Bookings in January and the first few weeks of February set the tone for the year, with some agencies reporting 65% of bookings for the year were made in those two months. Marketing, consumer events and other promotions focused on this brief time.
It turns out that regional diversity and being an excellent test market for consumer products makes our area the canary in the coal mine for changes in the economy. We didn't need eminent economists to tell us at the end of 2008 that the U.S. was in a recession. We saw it begin in 2007.
When gas prices jumped more than a dollar a gallon, it meant the typical two-wage-earner household was spending around an additional $1,500 a year on fuel. Given that the average vacation expenditure in 2009 was $1,600 (it dropped to $1,400 by 2014), it didn't take a math wiz to figure out that a lot of people weren't going to be taking a vacation.
As the recession deepened, suppliers began discounting heavily in an effort to shore up bookings. Cruise prices plummeted to the point where it was possible at times to find a seven-night cruise for $199 plus taxes. Travel retailers were confronted with a no-win situation, because with prices so low there was little if any profit margin.
Consumers became accustomed to waiting until the last minute to book because they suspected (and most often they were right) that the supplier would drop prices at the last minute. It was a monumental game of chicken, and consumers learned early on that suppliers, particularly cruise lines, would always blink first.
Dropping prices until someone buys something is known as the "price to fill" model, meaning that at some point someone will buy a cruise because it is cheaper than staying home. The inherent risk and reality is that having dropped prices, it was extremely difficult to raise them.
About four years ago, several cruise lines, led by Celebrity with its 123 Go program, began offering packages that enabled passengers to pay for various onboard amenities in advance, including them in the commissionable portion of the price. These programs, for the most part, have been hugely successful. Travel retailers were able to use their skills to encourage clients to prepay for beverages, internet access and more, demonstrating to suppliers that the retailers did sell value and would respond to opportunities to increase earnings.
About the same time, Regent Seven Seas and Oceania adopted a business model known as "market to fill," meaning that sailings would be promoted frequently, mostly by direct mail, with the intent to be in front of someone when the thought of taking a cruise manifested itself.
Now, let's fast-forward to August 2015. We had a record booking month, larger even than January and Wave season, followed by a record September. But when I analyzed our Q1 2016 results, bookings were off slightly compared with prior first quarters. It was only when my wife, Sherrie, suggested comparing the results from the prior August through the end of the first quarter with a similar time period for the previous year that I discovered that bookings were up substantially.
September 2016 was not only a record for the month but larger than either January or February 2016. We had an exceptionally strong October as well. November and December were similarly strong.
Another interesting thing happened. A client of some 20 years who was notorious for waiting until the last minute to book reserved a Panama Canal cruise for this October, more than a year in advance. Because it was remarkable, I called to ask what had prompted her to book so far in advance. Her answer: "The cruise line had a beverage-package promotion that expires at the end of October, and I didn't want to miss out on it."
We have had several other clients make decisions earlier than they would have a year ago because they wanted to be sure they had an amenity that was offered. We've seen other signs of a changed business as well:
• The number of first-time cruise passengers started coming back in 2015 and grew substantially in 2016.
• Clients we hadn't sold to in eight to 10 years are coming back. Maintaining marketing efforts is paying off.
• A rapidly growing part of our customer base are millennials, and we may have to develop a different marketing strategy/business model for them to operate alongside the one that has served us well.
• Changes in housing starts were one of the factors in my algorithm. Millennials don't see owning a house as a priority.
• Changing gas prices were the major factor in my algorithm, and increasingly millennials don't see a need to own a car just to get around. That's what Uber and Lyft are for.
• Wave season is not the harbinger of business for the year that it once was, because promotions are successfully pulling bookings back into the September/October time frame we experienced years ago.
It's like this. Absent some dreadful event or silly political shift, 2017 is going to be a boom year for vacation travel, but we're going to have to go about getting in front of it differently than we did before if we're to maximize our benefits. In the meantime, I have work to do on my algorithm because of those pesky millennials changing the dynamic on me.