The cost of customer acquisition for hotels is a key factor in understanding profitability. It helps to dictate rates and ensure that you’re charging what you should be for your hotel rooms across channels. Many hotels want to diversify channels and acquire as many bookings as possible from diverse sources, but the price can vary tremendously from channel to channel.
Let’s look at the different costs of hotel customer acquisition, and how to calculate what it takes to acquire new customers for your hotel. By getting a better understanding of what it takes to get customers, you will be empowered to unlock long-term profitability.
How do we define the cost of hotel customer acquisition?
The cost of hotel customer acquisition is defined by what you pay to acquire a new guest. That includes marketing, reservations and the cost of serving the guest.
More specifically: the total costs from commissions, reservation transaction costs, loyalty programs, and all the other costs that go into the act of acquiring customers for a hotel. These associated costs could be related to marketing activities and campaigns, sales, and revenue management, booking engine fees, labor, and any other incidentals.
Which are the different costs associated with hotel customer acquisition?
Bookings can be acquired directly through your own branded website or via indirect channels. One of the key differences is that an OTA, travel agent or GDS charge transaction fees. Hotels want to find strategies for boosting direct bookings because it’s the only channel without the associated costs.
Capturing demand
Since hotels capture demand rather than create it, demand generation should be the basis of all commercial activities. Hotels should understand the cost of capturing demand and factor the resulting commercial activities into the CAC.
Total customer acquisition costs generally make up 15-20% of overall room revenue. They are divided into commissions paid to third parties, reservation transaction fees, loyalty programs, and other costs necessary to attract clients to stay at your hotel. Let’s explore them.
Commissions
A commission is a fee that a hotel pays to a third party for helping them to acquire a customer. There is generally a substantial difference between what the guests pay and how much the hotel receives. For a traditional travel agent, that commission is about 10%, while an OTA like Booking.com can charge as much as 25%.
Reservation transaction fees
Transaction fees for reservations are the costs associated with converting a booking into your hotel’s system, whether from a GDS, another external booking engine or channel manager. Some of these systems will charge reservation transaction fees.
Loyalty programs
Many hotels run their own loyalty programs with no additional costs. Larger loyalty programs, external to the hotel or associated with a franchise, may charge a fee for all the awarded loyalty points.
When a guest cashes in on a free stay, your hotel will receive a standard amount, which may not correspond with your hotel’s BAR (Best Available Rate). This is why hotels must compensate for the difference between the BAR and the amount received from the loyalty program administrator.
Hotels may consider allowing guests to cash in on loyalty points only during low season. That’s when the BAR is lower, and the standard rate is enough to cover operating costs.
Other costs
Being profitable is one of the most important hotel challenges. Just consider the labor costs of your marketing and sales departments, revenue managers and reservations specialists. They play an integral role in generating revenue but should also be figured into the cost of acquiring customers.
This is why automating revenue management through a Hotel revenue management software is a major game changer when it comes to cost management. It can decrease labor costs since you don’t need to rely on a dedicated revenue manager anymore.
Beyond revenue management, there are also the expenses associated with advertising online. Just to name a few: SEM (Search Engine Marketing), email marketing, running fees for your website, printed materials or offline marketing, etc.
Calculating the cost of acquiring new customers for your hotel
Acquiring new customers for your hotel is not easy and comes at a price which will depend on the source of the booking. To ensure profitability, calculate that cost to make sure you’re charging the ideal amount per room. Since not all channels are created equally, check out the 12 best hotel pricing strategies.
So, how do we calculate the cost of acquiring new customers? Divide the total expenses for acquiring customers by the total number of customers acquired over a given time. Once all costs have been found and totaled, calculate the CAC as a percentage of revenue.
CAC % = CAC / guest paid revenue
Net revenue = guest paid revenue - CAC.
Conclusion
We’ve looked at how to define the cost of hotel customer acquisition, the different costs associated with it and the formula to calculate the cost of getting new customers.
Your costs may vary depending on the location and type of hotel you have. The secret to profitability lies in keeping the CAC at a minimum by allocating resources dedicated to customer acquisition where the ROI is the highest.
Keep a close eye on your hotel’s CAC to stand the test of long-term profitability.
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