How Free Tours Have Become Big Business

By Dustin Walker on 15/Dec/2014

Photo by Mark Ahsmann

Imagine having to pay your boss in order to come to work.

And when you hit a slump, you might even end up owing the company more money than you earned that day.

Sound like a strange way to earn a living?

It’s actually the norm for about 200 freelance tour guides who are working under this model for Sandemans New Europe Tours, which provides both paid and free walking tours across the globe.

And apparently, the system works. Though not without controversy.

This unique structure helped the company grow from a no-name start up in 2004 to a major player in the tourism industry today. Sandemans has expanded to 18 cities across Europe, the Middle East and the U.S.

Some observers say they’re revolutionizing the guided tour industry with their system for offering no-charge walking tours. The guides keep all the tips and Sandemans makes money by promoting its paid tours along the way.

But what makes this model really interesting is that the guides must pay a per-person fee regardless of how many tips they collect. So in theory, after putting in an entire day of work, they could end up in the hole.

This employment practise has sparked plenty of debate, especially as hundreds of other free-tour operators have tapped into this market with their own no-charge products.

Some business experts say this style of tourism is a “win-win” for both the tour providers and the consumers, as the top-quality guides are rewarded and the slackers are squeezed out.

Others are sceptical. Critics question whether the ‘free’ label is really being fair to both the customers and the guides themselves.

But no matter where you stand on issue, one thing is clear: this model gets results.

How the business model works

Sandemans generates revenue from their no-charge walking tours by converting first-time ‘free’ customers into regular patrons of their paid tours.

“In essence, the free tour acts as a high-volume selling platform for other products and services,” said David O’Kelly, chief executive for Sandemans New Europe.

O’Kelly says their free tours convert at an average of 45%, which drives the overall business model.

The gratuity-based free tour concept marks a “paradigm shift” in tourism, he added.

“Traditional tour operators expect customers to trust them by charging a fee upfront. We have reversed this dynamic by placing trust in the customer and the free tour is so appealing to travellers because it makes it possible for them to support and reward only high-quality service.”

O’Kelly says about 70% of Sandemans’ first-time customers have never done any kind of tour before in their lives.

“They come on the free tour not because it is monetarily free, but because it is risk-free.”

Guides that work with Sandemans on a gratuity basis pay a “nominal marketing fee,” for which the company publicizes their tours. This rate varies based on a number of factors, including the city, season, the guide’s performance, and the number of people on the tour. The average rate is 2.20 Euros per person.

“This marketing fee is a regular business expense for them, and all revenues in terms of gratuities belong to the guide,” said O’Kelly.

Every guide that joins Sandemans gets to first try guiding two tours without having to pay the per-person marketing fee. This gives them time to evaluate how much they can earn under this model.

Before the tour begins, a staff member from Sandemans welcomes participants at the tour meeting point and does a head count of all the travelers who are taking part. This is so the company knows how much to charge each guide.

This gratuity-based model has much in common with how the taxi industry operates. Unless they own their cab, drivers are charged a daily rate by the taxi company for using their vehicles. The drivers must also cover fuel costs and pay about one-third of their gross fare income to the company.

And because of these expenses, a month of low tips can translate to a meagre pay cheque.

Within the travel industry, this model is unique. But Sandemans didn’t always operate this way.

‘No grand concept’ in the beginning

Chris Sandeman just stumbled onto the free walking tour idea.

After losing his job as a Berlin tour guide in 2004, he needed cash to pay his rent. So he hit the streets offering tours for tips.

“In the beginning there was no grand concept or big business plan,” he told the travel blog Aim To Travel in a video interview.

Sandeman said he grew the business through networking, soon establishing the largest walking tour company in the city within six weeks. After six months, Sandeman says he had 50% of the market – competing with established tour companies that had been in operation for more than a decade.

He maintains that the local operators didn’t lose any customers as a result of his business.

At first, the guides weren’t charged any type of per-person marketing fee.

“However, within the first six months or so, it became clear that the company was growing very quickly and needed funds to remain sustainable and to grow. It was then that a per-head marketing fee was introduced,” said O’Kelly.

And grow it did. Over the next decade, Sandemans expanded to 18 cities across Europe, the Middle East and the U.S. Plus, there are now more than 300 different free tour companies across the globe, many of which were inspired by the Sandemans model.

And the rapid growth of this model has brought plenty of controversy with it.

‘Free’ comes under fire

Critics have blasted some tour companies for both the way they market the free walking tours and how they compensate guides.

For example, travel blogger Caitlyn O'Dowd criticized companies that call the tours free, but do not make it clear that the guides survive off tips and must pay the companies a per-person rate.

“I have had it up to here with ‘free’ walking tours. The label should be banned Europe-wide, as it is nothing more than a scam, where the losers are the ones actually presenting the product; the walking tour guides themselves,” she wrote on her blog Olympic Wanderings.

The article showed how divisive this issue is, with comments on the article and on Reddit highlighting both sides of the debate.

O'Dowd says she believes that the average traveller knows very little about how free walking tours work.

“I work in the industry and still didn't realise it until I talked to one such guide,” said O’Dowd in an e-mail.

In 2010, German TV news magazine ‘Frontal 21’ targeted Sandemans for charging guides the per-person marketing fee and for allegedly not informing travellers about how the guides are compensated. The news station claimed that it amounted to exploiting tour guides and deceiving customers.

Sandemans shot back in a detailed refute of Frontal 21’s coverage, which also highlights the careful line that Sandemans must walk when disclosing details about their product.

Back in 2007, a court case was brought against Sandemans in Germany regarding the legitimacy of how the company marketed the free tours.

The judge ruled in Sandemans’ favour, stating that freelance guides should not inform customers about their marketing costs if they wished to call the tour ‘free’.

“The travelers are not informed about the cost associated with promoting them to attend a tour as it would create an unfair pressure on them to engender a tip,” reads Sandemans’ refute of Frontal 21’s coverage.

“The guides are only required (by law) not to draw attention to their cost structure associated with promoting the free tour, nor to suggest an appropriate amount to be tipped by their clients at the end of the tour."

The judge also ruled that calling the tours ‘free’ was accurate.

Sandemans suggests that its freelance guides mention to those taking the tours that they work for tips. This fact is also reflected in the company’s marketing materials.

Free tours help non-profits

US Senators John McCain, Chris Murphy and Ron Johnson explore Sofia on a Free Sofia Tour.

There are different types of free walking tours.

Some are commercial enterprises like Sandemans, while others are operated by community groups or governments and are considered by some people to be ‘truly free’.

Free Sofia Tour is one example of a non-profit walking tour organization that has found success.

Vanya Nikova wanted to get more travellers excited about her hometown of Sofia, the capital of Bulgaria.

This city has a rich culture and history, but isn’t well known as a destination. So Nikova co-founded Free Sofia Tour four years ago, which provides free walking tours that reveal the hidden attractions and ‘secrets’ of Sofia.

The tours are designed to help the city – and Bulgaria overall – become a more popular travel destination. Plus, the volunteer-run tours have also provided a way for young people to become more engaged in their community, said Nikova.

“Doing this as not-for-profit allows us to look beyond the monetary aspects and concentrate on what really matters for tourism in Bulgaria,” she said.

The tours are operated by the non-profit 365 Association and are also backed by the local municipality.

Those who take the tours can leave a donation afterwards, which is split between the guides and the 365 Association. The money is used to sustain Free Sofia Tour operators while also supporting other projects that the organization is working on.

The success of Free Sofia Tour is clear: they’ve held steady as the number one Sofia activity on TripAdvisor and have provided English-language tours to more than 55,000 travellers so far.

“We do the tours because we want to do them,” said Nikova. “We don’t tell the people (who want to be tour guides) during the training that they’ll receive any money from the guests. So they do it from pure enthusiasm and this adds an additional flavour to our tours.”

But for Vanya, it’s not about whether you’re a non-profit or profit-based company. She sees free walking tours as one way that small, independent operators can compete with larger corporations.

No-charge tours a ‘messy situation’

Although the free walking tour trend began with Sandemans, there are countless other companies that have taken this model in different directions.

It really depends on where you go and who you tour with. Some operations are run by certified travel professionals that provide a quality product and state up front that tips are encouraged but not obligatory.

But there are also less scrupulous operations, where travellers are subjected to constant pitches for paid tours or even guilt trips designed to squeeze more tips out of them.

American guide book author and TV personality Rick Steves was so torn on how to handle the free walking tour issue in his books that he reached out to his readers for input.

“Trying to be impartial, I write up the ‘free’ tours along with the expensive standard private guided options in my guidebooks. It’s a messy situation,” Steves wrote on his website.

“For example, aggressive new companies promote ‘free tours’ that start at the same time and place as standard, higher-class tours, and then fight turf wars right there with the professional guides while groups stand by helpless, waiting for their tour to start.

“These ‘free’ tours have admittedly shady ethics, but provide nearly free entertainment. How should I handle these issues?” he asked.

Judging by the comments on his article, there’s no clear consensus.

Also, established tour operators in some cities, such as Jerusalem, have said that free walking tours represent unfair competition. Critics have also charged that some companies use guides that don’t yet have their official Tourism Ministry license.

Sandemans requires its guides to comply with local laws, including any special licensing laws for tour guides.

Paul Fidgeon, an associate professor at the London School of Hospitality and Tourism, says the free-tour dilemma shows that there needs to be a pan-European regulation regarding the licensing of tour guides.

“Such an initiative should include in any licensing agreement certain minimum standards with regard to subject knowledge, customer service, marketing and distribution and presentation skills,” Fidgeon said in an e-mail interview.

“I am a big believer in free enterprise and the market economy. However, I do recognise that unlicensed operators could potentially undermine other more established and reputable companies.”

Do free tours ‘empower’ the consumer?

The rise of free walking tours mimics the trend seen with other successful “free market” online travel companies like Airbnb and Uber, says one tourism expert.

Gary Gagnon, assistant professor of marketing and hospitality services at Central Michigan University, added that these “unregulated” companies are changing the travel industry in a way that “empowers the consumer.”

“My belief is that this is the way to price everything,” said Gagnon. “It forces the hand of the tour provider, the individual. They have to give a good presentation and they have to bring their A-game every day.

One tourism economics expert says the rise of free walking tours mimics the trend seen with other successful “free market” online travel companies like Airbnb.

“In the end, it’s a win-win situation with both the consumer getting a better service and the provider earning more money.”

But he admits there are some challenges in getting the business model right. For example, cultural differences in how people tip will influence how much tour guides get paid. Gagnon said this can be remedied by educating or “training” the consumer on what the standard is.

Overall, he sees free walking tours appealing to two of the biggest demographics in the travel industry: Millennials and baby boomers.

More baby boomers are looking for non-traditional or independent experiences while Millennials love “one-to-one heartfelt” adventures.

However, not all travel industry observers agree on future of free walking tours.

Dr Simon Hudson, a professor of Tourism and Hospitality at the University of South Carolina, says that although the free tours may offer perceived value for money, which in turn makes them popular, the concept doesn’t appear to be sustainable.

“Tourists are increasingly looking for authentic, unique, customized experiences, and they are not likely to get these from a standard (free) guided tour,” said Hudson.

He said that more travellers are likely to seek out adventures on their own, or with a personalized tour, to get the engaging, memorable experience they want.

Fidgeon also echoed concerns raised by a few travel bloggers about the quality of some free tours. He says that just because a guide is legally able to work in a community doesn’t mean they have the skills to provide a great experience.

He stressed that it’s essential guides are properly trained, preferably through a recognized guiding course.

Sandeman’s free walking tours, however, have fared quite well in reviews on TripAdvisor. Many of the company’s tours have received grades of above 90%.

What does ‘free’ really mean?

Is ‘free’ really an accurate description of what travellers are getting from these walking tours?

Perhaps in some cases. But many travel writers, tour guides and tourism experts have questioned whether the ‘free’ label is a fair description of a business model that is heavily reliant on gratuities.

Gagnon says some tour providers may want to re-frame their services not as “free” but instead as a “pay what you think it’s worth” model.

Hudson says offering “free” tours is fine as long as the company is explicit in their promotional material so that customers understand a tip is to be paid.

But it really comes down to what the consumer is comfortable with. And for now, the expansion of these tours shows that travellers are enthralled by “free.”

Even if, at some point, there’s still a price to be paid.

By Dustin Walker on 15/Dec/2014

Tagged as: free tour, sandemans