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