How to manage customer acquisition cost (CAC)

23 August 2022
According to Kalibri Labs, a US-based company collecting data and researching customer acquisition costs (CAC), the CAC is between 15 % and 25 % of room revenue. CAC is a high cost for hotels, and it has increased from 5-6 % in the 1990ties. CAC will likely continue to grow if the hotel does not manage it correctly to drive down the CAC. Here are a few ideas on how to successfully manage CAC.

Collect the data

“What gets measured gets done.” It means regular measurement and reporting keep you focused — because you use that information to make decisions to improve your results. To measure something, the hotel needs to collect data. Otherwise, it is impossible to understand the current situation. Every hotel needs to collect information in four categories.

Commissions

Commissions usually are calculated as a percentage of the reservation value and paid to travel agents and distribution channels, such as OTAs. The hotel should easily find this information since the commission percentage is in the contract the hotel has signed with the party that promises to send reservations to the hotel. It sounds straightforward, but commissions could be complex depending on the reservation and if more than one party is involved in the transaction. Try to keep it simple and remember that having a reasonable estimate is better than being right on the decimal.
 
Hotels also sell rooms at a net rate (non-commissionable) to third-party travel companies that will use that net rate in packages or add a percentage and re-sell the room to a consumer. In this case, the hotel has to estimate the commission as defined as the rate paid by the consumer minus the rate received by the hotel.

Transaction costs

Transaction costs are the transportation cost of the reservation from a system, such as a GDS, to the hotel PMS. Hotels typically pay for these costs at a fixed price per transaction. Transaction often means reservation, but it could sometimes also mean room night. Costs for updating rates and availability are also part of transaction costs. Other costs are associated with the transaction, such as a fee (monthly or per transaction) for the booking engine on the hotel website and costs for channel managers and distribution systems. Transaction costs are those associated with reservations but not categorized as commissions.

Loyalty and brand

Using a brand is also part of the customer acquisition cost since the purpose is to attract more guests than an independent hotel. Hotels think that a well-known brand from a mega-chain will attract guests, so hotels pay a fee for using the brand. Hotels should consider this cost as part of CAC.
 
Hotels can also join a loyalty program to lure more guests into staying in the hotel. The mega-chains sometimes include loyalty program costs in the other fees payable for using the brand. Other loyalty program owners charge a fee for giving loyalty points and low reimbursement for award stays at the hotel.

Labor and expenses

Finally, the last category of costs for acquiring the guest is all other costs. Labor costs for all roles in the commercial team and expenses for advertising, hotel websites, travel, and additional costs directly related to customer acquisition are in this category.
 
Once a hotel has collected the data for the four categories of costs, the hotel can quickly add up the costs and calculate the CAC percentage of revenue. Most hotels will end up somewhere between 15 % and 25 %.

Analyze CAC

Before a hotel can analyze CAC, the hotel has to distribute the costs to the correct reservations, so every reservation has an actual or calculated CAC. Commissions, transactions, and loyalty costs are directly related to reservations, so this is an actual cost for getting the reservation. Labor costs and expenses need to be distributed based on how the different roles have dedicated their time and the costs based on how they are related to reservations. One example is that the hotel should distribute the cost for a corporate salesperson to all reservations that have materialized from a corporate agreement.
 
When the hotel has distributed all costs to reservations, the analysis can start by analyzing differences in CAC between segments, feeder markets, distribution channels, room types, length of stay, day of the week, season, and many other variables. The purpose of the analysis is to find the most profitable sub-segments of the market to shift the business mix toward a better combination.

Create an action plan

The analysis will result in new insights. Based on these insights, the hotel can create an action plan to lower the CAC to increase profitability. One example is adding resources to acquire the most profitable business instead of just randomly acquiring any business. A great action plan has the potential to end up in the lower end of the cost spectrum of 15 % to 25 %. Therefore, analyzing the correct data and crafting an action plan is the right way to manage CAC to keep the cost at a minimum to maximize profits.