Why pay attention to Customer acquisition costs

I remember back in the old days, having my hotels when we complained about the high fees to GDS. Those were the days when an average customer acquisition cost was around 5 % of total room revenue. Due to the small number, this cost did not get much attention from the GM. Even if it was a fraction of what it is today, it was considered high, and yes, we were complaining. Still, it would not make much impact on the profit, and our attention was needed in other areas of the hotel business.

The Internet changed all of this, and the customer acquisition cost started to increase at a steady but very slow pace. It was so slow that no-one even noticed. Hotels were also already used to the merchant model and did not think much about customer acquisition cost. These transactions took place between the guest and the wholesaler/tour-operator /distribution channel and never ended up in the hotel’s chart of accounts. The customer acquisition cost, when the merchant model is used, is practically invisible since the hotel never manages it.

New internet distribution channels emerged with other business models. Some distribution channels started to use the retail model, which had already been used by travel agents and began sending invoices to the hotel for commissions for booked rooms. The retail model makes the customer acquisition cost more visible since the hotel will have to make payments to a third-party company for bringing in the business. 

The new distribution channels were 100 % focused on helping the consumer to find and book a hotel to the best price. On top of their agenda is to show the best comparison of which hotels and rooms are available at the destination and make the booking process as quick and straightforward as possible. Of course, the consumer prefers to use these services over time-consuming research by visiting several hotel websites comparing rooms and rates manually and then often get stuck in a not so user-friendly web booking module.

Over time the distribution mix changes from the vast majority of reservations coming directly to the hotel to an increasing number of bookings coming through intermediaries that charge a fee for each booking. 

Why did the customer acquisition costs increase?

The first root cause is that hotels have not been capable of accepting and understanding the changing consumer behavior driven by an overwhelming number of choices when traveling and the lack of time when making a decision and the reservation. Maybe the hotels have already lost this battle even if all of the mega-chains now successfully are driving customers to book directly by giving them a discounted rate. The mega-chains can offer choice with many different brands, and they have improved their booking functionality. Independent hotels have a hard time to keep up with the mega-chains.

The second root cause is that the commercial organization is more or less the same as it used to be 25 years ago. The only difference is that the marketing person is now buying Google Ads and post content on social media instead of buying ads in the Yellow Pages and magazines. The number of people in the team is still the same but the number of room nights they touch/produces has been reduced. The productivity of the commercial team has decreased at the same time as they work harder than ever before. 

Three critical steps to solve the problem

The first step is to calculate the real customer acquisition cost for the hotel. Research shows that it will be between 15 % and 25 % of room revenue. Unless there is a number, both the total cost and the percentage of room revenue, there is nothing to manage.

The second step is to analyze the customer cost of acquisition based on several variables, such as distribution channel, feeder market, rate code, segment, corporate contracts, and marketing campaigns.

The third step is to set a strategy to find the most profitable room revenue based on the net revenue (revenue – customer acquisition cost).

Take back control

Do you want to take control of the customer acquisition cost to stop the negative impact on your profits? Demand Calendar has a complete solution to calculate and analyze the real customer acquisition cost. We can even help you find the right strategy to take back control.