guest acquisition costs
3 years ago
 

Study: At upscale hotels, guest acquisition costs are devouring room revenue growth

Guest acquisition costs are escalating at the same clip as room revenue growth, according to a new, multi-year study of upscale and luxury hotels in North America.

If other hotel industry costs, such as labor and interest rates, also begin to rise sharply, the industry could face some severe erosion in margins.

The white paper analyzed the financial results of 104 boutique and luxury hotels that are affiliated with national brands in the US and Canada between 2009 and 2012.

Since the 2008 market crash, room revenue growth at the studied upscale and luxury hotels recovered 23%.

Yet the cost of acquiring guests, such as retail commissions, transaction fees, and sales-and-marketing expenses, rose at just under 23%, too.

The report may fuel the hotel industry’s growing firestorm of anger at the amount of money hotels are giving to third-parties, such as online travel agencies.

The white paper was paid for by the Hospitality Asset Managers Association (“HAMA”) and written by consultant Frank Camacho.

Tracking a metric that few hotels track

The study is notable because most hotel owners are failing to track the “cost of guest acquisition” metric, because the metric is based on data scattered across their profit-and-loss sheets.

Many hotels only look to the sales-and-marketing line item, which hasn’t been escalating as rapidly and which doesn’t reflect the entire picture.

Guest acquisition costs for upscale hotels vary by property but typically ranged from 15% to 20% of room revenue.

For reference, the average customer acquisition costs in comparable industries, such as airline and car rental, are below that level.

The study focused on major North American brands, which have the power to negotiate discounts on commissions and related charges by third-parties, so the guest acquisition costs may be higher for non-chain properties.

Experts say the guest acquisition costs may be also be higher for many hotel brands in Europe and Asia.

Between 2009 and 2012, North American brand allocations grew by 37% and third-party commissions by 34%, while local property marketing (including property specific internet and paid search) increased by only 6%, or less than 2% per year.

(Hotels were reducing local sales-and-marketing expenses to compensate for rising brand costs.)

Franchised properties may be even more in trouble. Per HAMA’s study:

Room revenue of franchised properties grew by just under 22% during the 2009-2012 time frame, but their total acquisition costs rose by almost 27%, driven by increases in commissions of 48% and brand allocations of 36% and mitigated by on-property spend of only 15%.

Key assumptions

The report defines guest acquisition costs, which covers both attracting and retaining customers, as:

“…the external costs of brand allocations (for marketing, advertising, major promotions, national and global sales offices and loyalty programs) and third party commissions (for group and transient bookings), as well as the internal costs of marketing and sales programs, including local marketing, sales staffing and other expenses, including reservations staff.”

The report focuses on room revenue growth, which doesn’t include ancillary revenue streams or true total revenue. It is based on the profit-and-loss sheets provided by hotel groups.

Not an outlier

The HAMA white paper appears to be the most comprehensive look of the issue yet released by any source. Its conclusions also dovetail with earlier, smaller studies that Tnooz has been able to review.

One study recently found that the retail commission portion of hotel expenses has recently been rising at twice the rate of overall revenue gains.

Spending on commissions by a set of US hotel groups rose 38% between 2009 and 2012 (the most recent period of data available), compared to a 20% gain for total revenue gains in the same period, according to a study that was presented to members of the Hospitality Asset Managers Association.

That study was based on data from about 500 hotels run by about 25 hotel ownership groups in North America. The data was collected by Cindy Estis Green at consultancy Kalibri Labs.

The spending on commissions was also growing faster from a 2009 base than the expenditure on sales and marketing.

Commissions are what were paid out to travel agencies or meeting planners after a guest stay, for instance; wholesale commissions were not reflected in the above statistics.

Retail commission costs are very property-specific, though. To return to the major HAMA study released today, retail commission hikes for the top 10 upscale brands included ranged from a low of 10% to a high of 72%.

Sales and Marketing = S&M

It would not be easy for luxury hotels to loosen the fuzzy handcuffs of the sales and marketing (S&M) relationship with third-party intermediaries like Expedia and Booking.com.

Upscale hotels haven’t figured out how to optimize their revenue strategies for each channel.

Boutique brands are also struggling to drive demand for their hotels through their own digital marketing efforts without duplicating third-party expenditure.

An ideal outcome: Spend less, earn more. For one thing, hotel owners will need to rebalance their spreadsheets by changing the incentive structure for employees and adding new training efforts, say experts.

Too often, individual hotel workers are incentivized to put heads in beds by any method, even if the method, such as an online travel agency or a mobile-first platform channel, has the highest guest acquisition cost.

Luxury hotels may face a third-party threat

Today’s report focuses mostly on diagnosing that there is in fact a problem, rather than prescribing solutions. However it does finger a few of the usual suspects as potential causes.

The hotel distribution model has evolved in the digital era. Hotels have been ceding control of sales and marketing to a host of third parties. Today, third-parties control 56% of the marketing spend of the 104 upscale hotels measured in the study.

A spokesperson for the industry described the dilemma of third-party power this way: “If you don’t pay your exorcist, you get repossessed.”

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Sean O'Neill

About the Writer :: Sean O'Neill

Sean O’Neill had roles as a reporter and editor-in-chief at Tnooz between July 2012 and January 2017.

 

Comments

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  1. Nick - Appy Hotel

    OTAs are a necessary evil these days as travel agencies were several years ago. With such high and unavoidable guest acquisition costs hoteliers are finding it vital to focus on REVPOR and up-sell products and services to guests via their personalised hotel apps.

    It may cost more to get guests in but there’s nothing to stop you from making the most revenue from them once they’re through the door.

     
  2. Thomas A. Gardiner

    NOW, the Genie is out of the bottle… OWNERS are PO’d with the state of BRAND MANAGEMENT of their Lodging Assets ROI. OTA’s are really not the problem, having provided a SOCIAL NEED, a better mousetrap, with the problem the result of complacency. Hospitality not being ‘close to the customer’ lost their business to emerging 3rd parties, now being held financially hostage by the 3rd party OTA-Metasearch Digital-Xpertise.

    GREAT reality-check from this White Paper Author-Consultant Frank Camacho to the HAMA, providing real-world fuel for the “firestorm of anger” that is the raging ROI-FIRE.

    Pinpoint a MasterCard Company has pioneered innovative and proprietary multi-channel media marketing directed to participating Bank’s Credit Card Members (BCCM) for DIRECT BOOKINGS with Hospitality Merchant Partners (HMP) with the CONTAINED 5% COST… 5% to access-acquire and reach-retain NU CUSTOMERS within the security of the proprietary Bank Partner’s DBASE.

    No longer the ‘sleeping giant’, Hospitality may have ‘snoozed and loozed’ to the CASE for Mobile and SMARTphone ‘SoLoMo’ Social-Local-Mobile engagement. CASE being TAG acronym – Cultural And Social Evolution.

     
  3. Vikas Bhakta

    Hey Sean – Thank you for bringing light to these numbers. Hotel owners have another option, RoomKey by Ve-Go. It’s time to put an end to the downward spiral business practices of OTAs.

     
  4. Anil Varghese

    “If you don’t pay your exorcist, you get repossessed.” – that beautifully sums up the hotel’s situation with OTAs. But truth be told – most hotels invite this situation on themselves.

    Their focus is only short-term ‘heads-to-beds’, with scant regard to cost of booking/acquisition. We are amused, every time a hotelier fills our calculator [ http://hotelmarketingclub.com/profit-leak-calculator/ ] to find how much they are losing out to third parties. Investing a small part (of the commission they lose) on growing direct bookings can pull them out to profitability over time.

     
    • Jase Rodley

      Couldn’t agree more with you there Anil! It is an easy option to switch on when bookings are low or when starting the hotel, but long term it hurts the business significantly. OTA’s don’t mind which hotel’s rooms they are selling, lose traffic to them and you lose the ability to remarket to potential guests. You are helping to build the OTA’s brand, not that of your hotel, unfortunately.

       
 
 

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