The digital marketplace is ever changing with constant disruption. Newspapers, digital photography, retailers and financial services have undergone massive changes as a result of consumer behavior. The hotel industry is no exception. Hotel selection happens much deeper in the sales process because consumers are gathering travel information on aggregator sites like online travel agencies, Google and TripAdvisor well before narrowing down to a shortlist. By the time the consumer decides to make a hotel purchase, he or she may have touched seven to 10 sites and been directed or diverted by the search or information site based on which hotel(s) have a more prominent listing or a higher ranking for the destination.
Managing Acquisition Costs – the Marketplace
The bifurcation of brands in hospitality into booking brands and stay brands has been a driving force behind the escalation of customer acquisition costs. Hotel operators along with corporate and regional teams, have to navigate the digital marketplace with a new imperative to modify revenue performance evaluation. Supplementing the traditional methods of tracking operating margins and market share, managing gross margins (revenue – cost of sales) may prove to be a key to success in a dynamic and turbulent online arena.
What does this mean for hotels going forward? Some argue that third-party aggregators and search engines will ultimately control the consumer path and hotels are going to be commoditized and passive recipients of business as they pay third parties for traffic and then pay again to compete with each other on the stay experience.
The first industry study examining customer acquisition costs was completed in 2014 for the Hospitality Asset Managers Association (HAMA). HAMA collected data from almost 500 member hotels for the period from 2009 to 2012, and found that commission costs for the hotels were rising at two times the rate of revenue growth.
A Kalibri Labs study conducted on 2012 data in New York City indicates the estimated range in acquisition costs (retail and wholesale commissions, transaction fees and sales/marketing expenses) in the North American market as ranging from 15 percent to 25 percent.
By contrast, the airlines have a “maniacal” focus on distribution costs as described by Tom O’Toole (CMO, United Airlines; ex-CMO, Hyatt), speaking recently at an industry conference. He said if the airlines spend $1, they feel that is $1 too much (not figuratively, literally). Tom shared the anecdote that the airlines are like the guy who had two near-fatal heart attacks and decided to start exercising and completely alter his diet, and by comparison hotels are like the guy who casually decides to make a new year’s resolution to try to go to the gym a little more and cut back on potato chips and french fries.
The hotel industry’s triple threat for increased dependence on third parties is brand dilution through commoditization of hotel rooms, increased costs with little control over the shopping and buying process and a diminished relationship with the customer. Brands have a dual challenge: generate demand for their hotels without duplicating third-party costs, while at the same time managing to differentiate the brand booking and/or stay experience in the eyes of their consumers.
Beyond brand strategy, there are tactical issues in the world of rising acquisition costs. Many would like to think they can price optimize their way out of higher acquisition costs. While rate and inventory levers are important, a successful hotel will have to do more; it will have to find ways to efficiently deploy resources to achieve an optimal channel mix – not just invest in brand.com (including mobile), but also business triggers (including social and metasearch) that can be tapped to influence not only brand.com, but also voice and other direct channels. Conversion, retention and ancillary revenue will also play into a hotel’s results as well as closely managing traditional wholesalers.
What changes are needed? Legacy sales and marketing infrastructure is due for a fresh evaluation. Piling on incremental new opportunities, however compelling, may push costs to a level that is unsustainable. What can be eliminated without diminishing the foundation of any given hotel’s demand? Establishing a cap on acquisition costs will be essential and will vary based on the hotel’s position in its marketplace including factors such as physical condition, brand (large, small or independent), the intensity of competition and location.
You can only manage what you measure. The industry knows how to manage operating and labor costs and now it’s time to put a maniacal focus on acquisition costs. Here be dragons. It’s time to face down the danger in this new territory we call the digital marketplace and pursue the opportunities.
Cindy Estis Green is CEO and co-founder of Kalibri Labs, a company that offers an analytics platform that enable hotels to plan and monitor profit contribution by channel and segment. A 35-year veteran, she is co-author of the industry bestseller, "Distribution Channel Analysis: A Guide for Hotels," published by the HSMAI Foundation and AH&LA.
