Customer acquisition costs in hospitality can vary depending on the property, but when guests book through third parties, hotel revenue takes a serious hit. Cindy Estis Green, CEO & co-founder of Kalibri Labs, held a workshop on the second day of the Direct Booking Summit in New York City titled “The New Dynamics of the Digital Landscape,” which delved into the numbers behind customer acquisition costs and how small shifts in direct bookings can add up over time.
According to Green, the cost of customer acquisition in hospitality is an average of 15 percent to 25 percent of guest-paid revenue, but she said there are many hotels that are spending as much as 35 percent of guest-paid revenue to put new heads in beds. Green said revenue that contributes to operating profit and expenses (such as sales and marketing) consists of whatever is left after operators pay out for loyalty investments, retail commissions and wholesale commissions, leaving a tiny slice of the pie for overall net revenue.
Many of these costs are an unavoidable part of doing business, but the “X-factor” is wholesale commissions, consisting of wholesalers, unknown online travel agencies and merchant OTAs such as Expedia and Booking.com. These merchants have a massive effect on what hotels actually take home. Green’s data showed direct bookings represent the lowest cost associated with acquiring new business, but OTA business required as much as 6.5 times as much investment by comparison, and global distribution systems required roughly five times the investment.
For example, in 2016, guests spent approximately $148 billion on hospitality, but removing all costs, including sales and marketing, the industry took home $125.4 billion.
“We spent about $24 billion to get our business in 2016, which is a really big number,” Green said. “We captured 84.6 percent of our revenue in 2016, but we captured 84.9 percent of our revenue in 2015. To put that in perspective, a change of -0.3 percent year-over-year was a loss of $500 million for hotels and an asset value decrease of nearly $5 billion. These tenths of a point make a massive difference.”
