Global DMOs Operate with Dysfunctional Funding Models

If destination marketing organisations, DMOs, are to receive funds derived from private sources, there would need to be a mechanism by which the city imposes a levy or tax and then provides the resulting funding to the DMOs. That could be through a hotel tax, a district levy, or a district tax increment financing mechanism. Hotels might consider supporting a special purpose tax or levy if the proceeds were exclusively used to help build their business.

• In a sense, international destination marketing organisations operate with dysfunctional funding models.
• The big new thing in the US is Tourism or Business Improvement Districts (TIDs or BIDs).
• It is arguable that the most challenging part of forming an improvement district is the legislative part.

At a recent international conference, I stood in front of a room full of people from convention bureaux and asked them to raise their hands if they had more money than they needed. Yes, the question was rhetorical, and while a communal chuckle went up, no hands did.

Had I asked that question in the United States, there might have been a different reaction. Every year in the US, bureaux receive millions of dollars in new funding overnight. Sometimes, it’s like the dog catching the car – what now?

Naturally, when a bureau gains a large funding increase, it will seek the most effective ways to invest those resources. But sometimes, the funding comes so fast that no fully developed plans exist. How is that possible? More on this later.

We tend to have the opposite problem in the rest of the world. If our convention bureaux are surprised by changes in their funding, it’s usually a source of great disappointment. That’s because most bureaux outside of North America operate hand-to-mouth. The government is the hand that feeds, and when governments encounter budget problems, DMOs are often first-in-line targets for cutbacks. With international DMOs, most of us “dogs” are endlessly chasing, but we never get to catch the car.

Globally, DMO funding models are irrational  In a sense, international destination marketing organisations operate with dysfunctional funding models. Bureaux are left begging for budgets yearly from politicians who don’t understand or adequately value our industry. Policymakers generally don’t associate quantifiable returns on investment with the promotional funding they deliver. So, it’s a matter of faith that there’s a correlation between sales and marketing and resulting business levels. Without strong faith, there’s limited appetite for making greater investments and frequent motivations for reducing them.

Internationally, market success doesn’t tend to correlate with market resourcing. It can even be so irrational that the policy calculus can be “business is so good, the destination marketing organisation doesn’t need all the money they have.” After all, governments are fundamentally problem solvers. So, if there’s no problem, why spend money on it?

Is America showing the way?  Most convention bureaux in the US have a rational funding model called a dedicated hotel room tax. If bureaux help build visitation, the tax collections rise and their budgets grow. That all started about 50 years ago, and American convention bureaux grew accustomed to dependable revenue streams and healthy budgets, in many cases in the tens of millions of dollars. But to return to the “hands in the room” metaphor, unless they’ve recently gotten a large boost in funding, most bureaux in the US would say they need more. After all, they do operate in an intensively competitive domestic market. So, in the past ten years, over 200 of them have figured out a way to get more.

The big new thing in America is Tourism or Business Improvement Districts, TIDs or BIDs. The concept is relatively simple. Define a district, for instance, a central tourism district or a convention precinct with many hotels around it. Work with the hotels to see if there’s an appetite for a joint promotional effort. The motivating factor is for them to increase their RevPAR. In a progressive hotel community there is usually an openness to collaborate on building a more robust business environment.

What are the advantages of a TID?

• They provide a stable funding source for tourism promotion.
• They are designed and created by those who pay the assessment.
• They are governed by those who pay the assessment.
• Funds cannot be diverted for government programs.

How Boston went from an $8 million budget one year, to $32 million the next  The key to an improvement district is that the funds can be generated from hotel guests rather than the hotels themselves. The usual funding mechanism is a one-per cent or two-per cent levy on guest stays. So, by agreeing to participate in the cooperative marketing program, hotels can benefit significantly and not even have to invest. 

The key to creating an improvement district is having enabling legislation for a local municipality, state or province to implement the levy because of the practical need for a “collection authority.”

However, the other key is enabling legislation to require that the hotels that support the levy have control over the use of funds. It can be accomplished by the bill specifying where the proceeds go. Depending on local practicalities, that’s usually an independent incorporated hotel marketing alliance or a specific destination marketing organisation.

So, the joy of an improvement district is that it can generate a large and dependable revenue stream for building tourism and/or convention businesses, and the hotels don’t even have to pay for it. That’s why hotels in the US have so consistently supported these levies.

The hardest part of forming an improvement district is the legislative part. However, the US had a lot of success because local citizens were not being “taxed”, and the hotels helped lobby for the levy. Boston is an example of a recent new TID city. Two years ago, the bureau’s annual budget was about $8 million. A year later, it had a TID, and its budget went to $32 million.

Start with a few; the rest will follow  Is the TID or BID model replicable internationally? I guess that it will be a challenge. But the rest of the world might be able to follow the American example. It started with one bureau in California; the other Californian cities wanted it, and the rest of the American towns wanted it. In the US experience, once a few were accomplished, there was a massive chain reaction.

Could improvement districts be a new frontier of rational promotional funding where DMOs don’t have to do the annual dance with policymakers? Can a few global leaders start a chain reaction? If so, it would transform our industry.