How much do hotels need to spend on customer acquisition?

21 June 2022
Without sufficient revenue, a hotel can never produce a healthy profit nor survive without capital injections from the owners. Therefore, hotels must minimize the risk of acquiring revenue by assigning enough human and financial resources for commercial activities.
The total customer acquisition cost for a hotel is between 15 % and 25 % of room revenue. There are four large chunks of costs: commissions, reservation transaction costs, loyalty programs, and all other costs and expenses for labor, marketing campaigns, and other marketing, sales and revenue management, and reservation expenses. The complex part is determining the mix of resources in customer acquisition cost spending. Here are some guiding principles.
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Commissions

The definition of a commission is the difference between what the guests pay and how much the hotel receives. When a hotel gives the OTA/travel agent/tour operator a net rate, the commission is invisible to the hotel. Still, there is undoubtedly a commission, and it is probably very high.
 
Hotels pay very high commissions to channels selling distressed inventory and packaged products where the consumer does not know the price for the hotel room. In addition, hotels pay commissions to OTAs, travel agents, and other intermediaries.
 
The commission calculation can be a bit tricky since the rate the guest pays might be unknown to the hotel. In that case, the hotel has to estimate the commission to fully understand the total commissions paid to intermediaries.

Transactions

Transaction costs are transporting the reservation from the booking system to the hotel. The most common type of transaction cost is GDS fees. Other examples will be if the hotel has an external booking engine on the hotel website that charges the hotel per transaction. System owners send invoices to hotels for transaction fees, so this part of the customer acquisition cost (CAC) is easy to understand and include in the total calculation of CAC.

Loyalty

Some mega-chain loyalty programs include all fees in the franchise fees or marketing fees. Others charge for giving guests loyalty points and redeem points for free nights. The loyalty program owner will send the hotel an invoice for awarded loyalty points. When guests redeem points for free nights, hotels receive a pre-determined amount. Hotels should include the difference between the BAR and the amount for the redeemed hotel night.

All other costs

All other costs are labor and expenses for all commercial activities in a hotel.

Labor

Labor includes costs for all employees working with commercial activities to acquire the revenue. Typical roles are marketing, sales, revenue, and reservations. All hotels need at least one person to focus on attracting guests/customers to the hotel. A hotel with a commercial team understands the importance of investing in securing long-term revenue growth.

Expenses

Finally, all other expenses, such as advertising, website, printed materials, Metasearch, SEO, SEM, email marketing, and anything else, will help bring revenue to the hotel.

CAC mix

The CAC mix will be very different depending on the destination and the type of hotel. A B&B will probably have a higher share of commissions, while a sizeable full-service hotel will probably have a higher percentage of labor costs. A full-service hotel will have a commercial team with marketing, sales, revenue, and reservations. An independent hotel might not have any loyalty costs, while a mega-chain branded hotel might award 50 % of all guests' loyalty points and therefore see a high price for the loyalty program.
 
The CAC mix will be very different from hotel to hotel. Still, the critical part is to keep the CAC at a minimum by carefully allocating resources where they have the highest return on investment.

Keep track of CAC

Hotels that monitor the CAC regularly will be more profitable than hotels that show no interest in understanding the importance of keeping CAC at a minimum to make a healthy profit. Unfortunately, most hotels have no clue about their CAC. They will therefore see their long-term profits deteriorate over time since these costs tend to increase faster than the total revenue.