Challenges of customer acquisition costs
Date: 1. August 2016
Managing customer acquisition costs is more than a simple channel shift, says Horwath HTL Australia and New Zealand’s WIM RUEPERT in an exclusive column for HM as first published in HM Magazine August 2016
A study by the Hospitality Asset Management Association (HAMA) released in 2014 across 468 upper-midscale to luxury hotels in the USA showed acquisition costs were rising at two times the rate of revenue growth. Total customer acquisition costs in the North American market ranged from 15 to 25% of revenues. No recent data is available for the Australasia market, but anecdotal evidence clearly indicates similar trends.
The increasing influence of Online Travel Agents (OTAs) and other booking brands like Google and TripAdvisor is dominating discussion in our sector these days. Apart from the risk of commoditising the hotel product, putting downward pressure on room rates, hotels see a significant increase in the costs of commissions and booking fees on top of existing customer acquisition costs driven by the hotel and brand’s sales and marketing activities.
Here’s the problem: other than efforts to increase direct bookings by the larger hotel chains, most hotels in our region still lack the razor sharp focus on fully understanding customer acquisition costs and driving the most profitable revenues. Are hotels maximizing net revenue contribution? Do they consider the different costs of customer acquisition by market segment and distribution channel in their daily revenue management decisions? Is your hotel performing well in this area or can it do better?
Traditionally hotels focus on driving Revenue per Available Room (RevPAR) and their Revenue Generation Index (RGI) as key metrics for revenue generation and market share. These metrics effectively place the same value on a room sold directly to a customer than to a room sold at the same price through an intermediary with a 15% commission.
More recently we see the use of Gross Operating Profit Per Available Room (GOPPAR) to assess the overall profitability of a specific piece of business, including ancillary revenues such as F&B spend. Neither of these however specifically address the issue of total customer acquisition costs nor, more importantly, the efficiency of the Sales, Marketing and Revenue management resources. Apart from commissions, customer acquisition costs include expenses related to Global Distribution Systems (GDS), marketing, advertising, promotions, national and global sales offices, loyalty programs, local sales staff, and other sales and marketing expenses.
Based on the widely accepted principle that you can only manage what you measure, it is time that hotels start using some more specific metrics and benchmarks to monitor these costs and their effectiveness. In the absence of any such metrics being included in the latest edition of the Uniform System of Accounts for the Lodging Industry, which most hotel management agreements use as the standard accounting and reporting format, the following metrics suggested by the HAMA can be a good starting point. They are: Net RevPAR: calculates the net revenue per available room, after the costs of acquisition is removed from the P&L revenue. Equals P&L revenue – (commissions & transaction fees + sales and marketing costs) / available rooms; RevPAR Capture: indicates the percentage of revenue retained by the hotel out of the amount charged to the customer. Equals Net RevPAR/Gross RevPAR; and Net Sales and Marketing efficiency: shows how much net revenue is generated for every $1 spent in Sales and Marketing. Equals (P&L Revenue – commissions & transaction fees) / total sales and marketing costs.
The objective is to increase net revenue contribution, a metric that will resonate strongly with owners, management and brands. Being able to compare to a benchmark group of similar hotels adds even more power to these metrics. They serve as a guidepost at the hotel, regional and corporate levels since often there are so many members of the team involved in various aspects of the revenue strategy. Once hotels actively measure and manage these costs, they will find ways to lower them.
Lowering customer acquisition costs and maximizing net revenue is more than the simple decision to lower OTA and raise ‘brand.com’ volume. It involves determining the right channel and segments to drive revenue by season and day of week, not just considering RevPAR/RGI but Net RevPAR. Hotels need to focus on building strategies around segmentation by customer type and geographical market with margins tracked by channel, segment and even down to account.
To achieve the required level of focus, it is important to have an agreed set of metrics and a clearly documented set of objectives and actions that can be articulated both internally and externally to owners and other stakeholders. Then, somebody has to take responsibility for efficiently generating revenue.
Hotel management will also benefit from conducting a detailed analysis of the acquisition costs and ancillary revenues associated with each channel and segment. Team members involved in revenue generation must have a good understanding of the general profitability and RevPAR capture by segment and channel which can then be taken into account in their day to day decision making.
Today’s marketplace may also require a fresh reassessment of the allocation of resources to traditional sales channels versus marketing channels. The crucial decision made by hotels and hotel companies is about how much to spend and where. The new reality also calls for greater involvement, and where required upskilling, of the hotels’ finance teams in analysing and monitoring revenue planning with a focus on business acquisition costs and sustainable profit.
Then there are several tactical levers, that can be pulled to grow profitable revenues, such as managing the Global Distribution Systems, maximizing traffic to the hotel’s own website, improving sales and reservation conversion, customer retention, gaining advantage on marketing content and promotions, growing ancillary revenues and up selling, to name just a few.
Despite sometimes strict contractual obligations to OTAs, hotels nevertheless have a number of options to maximize non-commissionable revenues during high demand periods. Customer acquisition costs should be a major discussion point between owners and operators. The hotel General Manager, being responsible for profit optimization, needs to ensure sales, marketing and revenue management functions are yielding based on profitability and not just revenues.
Fully understanding and tracking the costs of customer acquisition should be a priority for every property. It is not about avoiding OTAs. They are a fact of life and here to stay. It is about creating business acquisition strategies and tactics that deliver sustainable profits for hotels. For the major brands it is important to deliver non-commissionable revenues, as without this ability their economic value will decline. For owners it is making sure to optimize net revenue that contributes to profits and return on their investment.
Contact: Wim Ruepert