Hotel marketers and revenue strategists need to keep tabs on their costs to attract customers and to adopt strategies that maximize efficiencies in their distribution processes.
REPORT FROM THE U.S.—Since not all hotel reservations are equal, hotel operators and revenue strategists are increasingly focusing attention on what it costs to secure a particular reservation and what value that business produces for the hotel over time.
As more hotel distribution flows through alternative channels, such as online travel agencies, hoteliers become concerned with their costs of customer acquisition.
“You want to make sure you’re bringing in a guest without spending all your profit on bringing that body in. Otherwise, you might be better off by letting that room sit empty,” said Henry Harteveldt, founder of Atmosphere Research Group. “If you must spend $40 to acquire a customer, is that worth it? It might not be worth it for a roadside budget hotel with an average stay of one night. However, it might be worth the expense for a five-star resort where length of stay is several nights and where guests check out with bills that resemble the (gross domestic product) of small third-world nations.”
And while it has become increasingly important to understand costs of customer acquisition, sources differ on what should be included in the calculation and what are acceptable benchmarks for the metric.
At Red Lion Hotels Corporation, the goal is cost of sales between 10% and 12%, said Jason Thielbahr, SVP, revenue optimization and distribution services. He said achieving that benchmark differs by type of property and market location.
“We’ve established that as a baseline and evaluate it market by market, and while I’d love to say the cost of sales for the Disney mega-market around Anaheim (California) always comes in at 10%, the competitive landscape always doesn’t allow for it,” he said. “In other markets, however, like Wenatchee, Washington, or Redding, California, or even Tempe (Arizona), market conditions often allow us to come in at the 8% to 10% range.”
Thielbahr said Red Lion’s cost of acquisition calculation includes three primary factors: distribution channel costs (such as OTA commissions), search engine marketing costs and search engine optimization costs.
“For example, if we have (search engine marketing) deployed on Google and a customer sees (the ad), clicks through but then uses a phone to call our call center, the cost of that transaction to the call center, plus the SEM necessary to generate the call, is all included in the calculation,” he said.
Robert Cole, founder of consulting firm RockCheetah, said in its basic form the cost of customer acquisition is what a hotel spends over time to attract customer divided by the number of customers acquired.
“That’s a simple statistic, but it goes much deeper than that,” he said. “And while the what-you-spent calculation involves a lot of things, the other side of the equation is also loaded: What kind of customers do you attract? Are they first-time guests; are they here for the second time, which is very important; or are they repeat customers who have drunk the Kool-Aid?”
Just as the elements of customer acquisition costs are varied, so too are the variety of ways to control these expenses, sources said.
Effective channel management
The key to controlling acquisition costs is effective management of distribution channels, said Cindy Estis Green, CEO and co-founder of Kalibri Labs.
“The real solution to managing these costs is to manage the mix of channels to get what we call the optimal channel mix for a particular hotel,” she said. “Every hotel gets business from a mix of many channels so (hoteliers) need to consciously think about and decide how much they want to get from each channel, knowing how much revenue each channel can generate and how much cost is associated with getting that revenue.”
She suggests using sensitivity analysis to balance a combination of channels and their associated costs with the nature of demand in your market. She said while a hotelier might want more business from a particular channel, it might not be an option if the volume of business doesn’t exist.
“I’m suggesting hotels become more proactive and consciously target an optimal channel mix and consciously assign a certain amount of spending per channel and then continually test to see how they can move the needle to shift things accordingly,” Estis Green said.
The role of OTAs
Hotel marketers need to understand that OTAs aren’t the enemy, Cole said. However, marketers need to leverage the power of OTAs to produce incremental business.
“The OTAs have a business model that works and that hotels are willing to pay for at scale,” he said. “They create zero-doubt risk for hotels. Where else can you generate business which you only pay for when it is delivered, with no risk”?
Cole recommends marketers define the “personas” of guests they want to attract and use OTAs, as well as hotels’ own marketing apparatus, to identify and market to these groups of potential customers. However, it needs to be incremental business, he said.
“Paying commissions to an OTA or other source to get that corporate guest who always stays at your hotel is bad business,” Cole said.
One important way hotel companies and individual properties can reduce their acquisition costs is by turning first-time guests into loyal customers who might book directly rather than through OTAs or other channels.
“From a cost-of-customer acquisition standpoint, it is the centrifuge of everything we do,” Thielbahr said. “Our Hello Rewards members are our highest-value customers and the cost of acquisition is the lowest. These customers stay longer, stay more and pay more, so the value of a stay is greater than the single transaction.”
As the company continues to grow its loyalty program database, he said, marketing costs can either be reduced or channeled into other sources of customer acquisition or new segments of customers.
At Destination Hotels, capturing guest data is a priority function that helps the company build repeat business and reduce acquisition costs, said Jon Lazarus, assistant VP of distribution. The company provides incentives to front desk personnel to gather guest email and physical addresses and offers gift cards to food and beverage or spa outlets to guests to convince them to provide the data.
“We use the information to promote to these guests to let them know what is going on at our properties,” he said. “We do it through email blasts, postcards and our Destination Delivers (frequency) program to drive as much business as possible through our direct-booking channels.”
Cole said calculating the lifetime value of guests requires tracking how often they stay, how much they spend per stay, what is the profit margin of that business and what are the distribution costs associated with it.
“Breaking down the personas of your guests and tracking their lifetime values can be the easy part,” he said. “Then you get into how you actively apply your marketing spend. What a lot of hotels don’t do but they should is aggressively track the spend of their guests and the attribution of that spend to the various personas that represent their base of customers.”
Loyalty programs aside, hotel operators need to make it attractive to consumers to book directly, Estis Green said.
“Some consumers are dedicated brand.com buyers and some are dedicated OTA buyers, and there are a whole bunch who go back and forth and are somewhat agnostic to which channel they choose,” she said. “As a result, you have to make it attractive to book directly. It can be value-added benefits such as options for early arrival or late departure or better choices of rooms, or other things. It’s a matter of what is a more attractive path, and consumers will take the path that is more attractive to them.”
Many revenue strategists face a dilemma with the growing usage of mobile computing among travel bookers, said Julie Cary, EVP and chief marketing officer for La Quinta Holdings.
“As more consumers shop on mobile, costs are going up because levels of conversion are significantly lower,” she said. “For us, the best strategy for mobile is app-based.”
La Quinta’s mobile app includes an Instant Hold option that allows consumers to hold a room reservation for up to four hours by providing their mobile phone number.
“You want customers who are using mobile to be on the app because it delivers the vest experience, has the best information and conversions are much higher because the booking process is easier,” Cary said.