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Hotel Profit Leaks: Effectively Manage CAC and Employee Turnover

18 May 2023
Many hoteliers only focus on what is in the hotel Profit & Loss statement. If an item has a cost attached to it, it could undoubtedly be scrutinized and cut. Managing costs in a hotel is the easiest job in the whole world. Once the costs are reasonably under control, the marginal impact of continuing to work on reducing costs is not making much sense. Additional cost-cutting will upset guests and employees, leading to bad guest reviews, fewer returning guests, lower productivity, and higher employee turnover. Once hoteliers have managed to balance costs in their hotels, the entire focus should be on the top line, where the hotel can potentially increase profits.
However, there are invisible costs that do not show up in the Profit & Loss statement. These costs are, therefore, more challenging to manage and track. Here are a few examples of significant costs that negatively impact profitability. Here are three of the most common hidden costs in a hotel that management should manage.

Customer Acquisition Cost

Customer Acquisition Cost (CAC) is the total cost of attracting customers or guests. It's a critical metric for any business, but it's particularly important in industries like hospitality, where competition is high and customer loyalty is challenging to maintain. Unfortunately, for several reasons, CAC is a hidden cost and hard to manage in hotels.
  1. Complex Calculation: CAC is not just about direct marketing or advertising costs. It also includes indirect costs like the salaries of the marketing and sales teams, the cost of promotions, the cost of running events or campaigns, and the commission paid to travel agents or online booking platforms. As such, the cost of acquiring a customer is often spread out across multiple line items in a hotel's budget, making it difficult to calculate accurately.
  2. Variable Costs: The cost of acquiring a customer can vary significantly depending on the methods and target audience. For instance, acquiring a customer through online advertising may have a different cost than attracting a customer through a referral or loyalty program. This variability makes CAC challenging to predict and manage.
  3. Measurement Challenges: The impact of marketing and sales efforts can be difficult to measure precisely. For example, if a potential guest sees an online ad, visits the hotel's website, and then books through a third-party platform, tracking that process and attributing the customer acquisition to the original ad can be challenging.
  4. High Competition: The hotel industry is highly competitive, with many hotels vying for the same guests. This competition can increase customer acquisition costs, particularly in popular tourist destinations or during peak travel seasons.
  5. Time Lag: There is often a time lag between when costs are incurred (like an advertising campaign) and when the results are seen as reservations. This time lag can make it challenging to manage CAC effectively.
  6. Guest Retention: A high guest turnover rate increases the CAC as more resources need to be spent to attract new guests instead of retaining existing ones. Retaining customers typically costs less than acquiring new ones, so focusing on customer service and guest experience is crucial.
  7. Changing Trends: Trends in the hospitality industry can change rapidly, and what worked to attract customers one year might not work the next. Hotels need to constantly adapt their strategies, which can make customer acquisition costs unpredictable.
Properly managing CAC requires a robust system for tracking marketing and sales efforts and their results and a strategic approach to budgeting for these activities. It's also beneficial to focus on improving guest retention rates to lower the overall cost of customer acquisition.

Employee turnover

Employee turnover refers to the number of employees who leave an organization during a given period and are replaced by new hires. In the hospitality industry, including hotels, turnover tends to be relatively high due to various factors such as seasonal demand, long hours, and the often demanding nature of customer service roles. While it's clear that losing an employee and hiring a new one cost money, these costs can often be hidden or difficult to calculate precisely, making them a major challenge in the hotel industry. Here's why.
  1. Recruitment Costs: When an employee leaves, you must find a replacement. The associated costs include advertising the job, recruiting agency fees, time HR or managers spend screening and interviewing candidates, etc. These costs can add up quickly but are often spread out and not tied directly to the turnover cost in the budget.
  2. Training and Onboarding: Once a new employee is hired, they must be trained. This includes their roles and the hotel's policies, systems, and culture. There are also administrative costs for setting up the new employee in payroll and other systems. However, the cost of the time spent by other employees on training the new hire is often overlooked.
  3. Lost Productivity: It takes time for new employees to reach the level of productivity of the person they replaced. During this time, the hotel may not operate as efficiently as it could, resulting in potential lost revenue.
  4. Lowered Morale: High turnover rates can lower morale among remaining employees, potentially affecting their performance and customer service. This often leads to lower customer satisfaction and reduced revenue.
  5. Mistakes and Poor Service: New employees are more likely to make mistakes or provide lower service levels simply because they are still learning. These issues often lead to customer dissatisfaction and damage the hotel's reputation, leading to revenue loss.
  6. Loss of Institutional Knowledge: When employees leave, they take with them knowledge about the hotel's operations, guests, and culture. This loss can be hard to quantify but significantly impact the hotel's operations.
  7. Overtime: If a critical role is left vacant, other employees must work overtime to cover the gap, increasing labor costs.
Understanding and managing employee turnover requires a focus on employee engagement, competitive compensation, good working conditions, and opportunities for growth and development. In addition, reducing turnover can lead to significant cost savings, improved guest experience, and better overall hotel performance.

Lack of technology upgrades

Technology is an essential part of almost every business in the modern world, and the hotel industry is no exception. However, failing to keep up with technology upgrades can have a range of hidden costs and pose significant challenges for hotels. Here's why.
  1. Efficiency Loss: Modern technologies often offer more efficient ways to handle various tasks, from property management to customer service. If hotels fail to implement these technologies, they may be wasting time and resources on inefficient processes, leading to higher costs in the long term.
  2. Reduced Competitiveness: If competitors are using more advanced technologies, they may be able to offer better service, lower prices, or other advantages that make them more appealing to guests. This could lead to lost business and lower revenues for the hotel.
  3. Missed Revenue Opportunities: Certain technology upgrades, like revenue management systems, can help hotels optimize their pricing and increase revenue. Without these technologies, the hotel may be missing out on potential earnings.
  4. Increased Maintenance Costs: Older systems often require more maintenance and are prone to failures, leading to increased costs and potential disruption to the hotel's operations.
  5. Security Risks: Older systems may also have more security vulnerabilities, which can lead to data breaches or other security incidents. These can be costly to recover from and damage the hotel's reputation.
  6. Customer Dissatisfaction: Today's guests expect a certain level of technological conveniences, such as online booking and check-in, WiFi, and in-room technology. Guests may choose to stay elsewhere if a hotel can't offer these features because they haven't upgraded their technology.
  7. Training and Transition Costs: If a hotel delays technology upgrades for a long time, transitioning to a new system may be more complex and costly. Staff will need extensive training, and there may be more initial problems as they adapt to the new system.
  8. Regulatory Compliance: Certain technology upgrades may be necessary to comply with regulations, like data protection laws. Failing to implement these upgrades could lead to penalties.
Keeping up with technology upgrades requires an ongoing investment, but it's essential to consider the potential hidden costs of not doing so. These costs can significantly impact a hotel's profitability and long-term success.

Demand Calendar manages hidden costs

Demand Calendar is a SMART Suite of software designed for hotels. It helps maximize profitability by providing a comprehensive overview of a hotel's performance and powerful tools for managing demand, marketing, sales, revenue, and other essential aspects of hotel operations. Here's how it can help manage hidden costs.
1. CAC Management
Customer Acquisition Cost (CAC) is a critical metric for any business. It's even more crucial for hotels because the hospitality industry is intensely competitive, with customers having a wide range of stay options.
Demand Calendar aids hoteliers in effectively managing their CAC in several ways:
  • Data Aggregation: The platform gathers data from various sources, such as marketing and sales campaigns, third-party booking platforms, direct website traffic, and more. This allows it to calculate an accurate CAC by considering all relevant expenses.
  • Insightful Analysis: By analyzing the data, Demand Calendar can provide insights into which channels and strategies yield the lowest CAC and highest return on investment. This can guide decisions about where to allocate resources most effectively.
  • Performance Tracking: By continuously monitoring the CAC, hotels can track how changes to their strategies or market conditions affect their acquisition costs. This allows for timely adjustments to keep CAC in check.
2. Knowledge Base
High employee turnover is a persistent issue in the hotel industry, leading to a loss of accumulated knowledge and expertise. Demand Calendar helps combat this in the following ways:
  • Information Repository: Demand Calendar is a comprehensive repository of essential data, insights, and strategies. This ensures continuity and consistency in operations and decision-making, even when there's a change in personnel.
  • Accessible Learning: With the information centralized and readily accessible, new employees can quickly come up to speed on the hotel's operations, reducing the time and costs associated with onboarding and training.
  • Best Practices: By capturing and sharing best practices within the system, hotels can ensure that valuable knowledge and effective strategies are preserved and disseminated, increasing overall operational efficiency.
3. Modern Technology & Future Needs
As a cloud-based solution, Demand Calendar is designed to adapt and evolve with changing technological trends and business needs. Here's how it helps:
  • Scalability: Demand Calendar can quickly scale to match as a hotel grows or its needs change. This flexibility prevents the hotel from being locked into an outdated or insufficient system, saving the cost of switching or upgrading systems later.
  • Continuous Upgrades: With its cloud-based model, updates and new features can be rolled out quickly and seamlessly. This ensures that the hotel can always access the latest tools and functionalities.
  • Future-Proofing: Demand Calendar's commitment to staying abreast of evolving trends means the platform is continuously optimized for the future. This enables hotels to stay ahead of the curve, meeting the expectations of tech-savvy guests and standing out in a competitive market.
  • Data Security: Demand Calendar protects sensitive hotel and customer data with advanced security measures. Preventing potential data breaches saves hotels from incurring financial and reputational damage.
Demand Calendar's capabilities in managing CAC, preserving institutional knowledge, and staying up-to-date with the latest technology trends can greatly help hoteliers manage hidden costs and enhance their business operations.