In today’s ever-evolving and competitive hotel industry, more than the traditional focus on generating top-line revenue is required.
NB: This is an article from Demand Calendar
Instead, the need to maximize profitability has become increasingly critical. This transition has ushered in a new approach – Profit-Oriented Revenue Management (PORM). At the heart of PORM lies a crucial factor that can dramatically influence a hotel’s profitability: the Customer Acquisition Cost (CAC).
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According to research from Kalibri Labs, CAC is now 15-25 % of room revenue, up from 5-6 % twenty years ago. The bad news is that there is a high risk of an increasing CAC over time without effective and efficient management.
In this blog post, we delve into the concept of CAC, its impact on profitability, and strategies to optimize it within the PORM framework. So, whether you are a hotelier seeking ways to improve your bottom line or a hospitality professional looking for insights into innovative revenue management strategies, this article is for you. Explore how effectively managing CAC can revolutionize your hotel’s financial performance and set you on higher profitability.
What is Profit Oriented Revenue Management (PORM)
Profit Oriented Revenue Management (PORM) represents a paradigm shift in the hotel industry’s approach to financial success. Traditional revenue management methods focus primarily on driving top-line revenue, often emphasizing occupancy rates and RevPAR (Revenue Per Available Room). However, while necessary, these metrics paint only a partial picture of a hotel’s financial health.
PORM offers a more comprehensive lens. It shifts the focus from mere revenue generation to actual profit realization, considering the revenue and costs associated with earning that revenue. This more holistic perspective provides a clearer view of a hotel’s true profitability.
In the PORM model, every department in a hotel, from operations to the commercial team, plays a critical role. They work collaboratively towards a unified goal – maximizing profit, not just revenue. To achieve this, it’s crucial to understand and effectively manage all costs associated with generating revenue.
Among these costs, one of the most significant and often the most challenging to manage is the Customer Acquisition Cost (CAC). Understanding and optimizing CAC is a cornerstone of successful PORM implementation, and that will be our main focus in this blog post.
The importance of Customer Acquisition Cost (CAC)
Understanding and effectively managing Customer Acquisition Cost (CAC) is critical to profit-oriented Revenue Management. CAC refers to the total cost incurred to acquire all guests and customers. For example, the hotel industry includes expenses related to marketing and advertising, commissions paid to travel agencies or other booking channels, costs associated with reservation systems, and loyalty program costs.
The reason why CAC is pivotal in PORM lies in its direct impact on the net revenue and, thus, on the profitability. Every dollar spent on acquiring a customer reduces the overall revenue generated by that customer, and if not managed carefully, these costs can quickly erode profit margins.
In the traditional revenue management approach, the focus often lies solely on driving bookings, regardless of the cost of securing those bookings. However, under PORM, it’s not just about booking a room; it’s about booking it profitably. A booking with a high customer acquisition cost might boost occupancy rates and top-line revenue, but it does little for the bottom line, which is the actual profit.
Furthermore, understanding CAC allows for more strategic decision-making. By knowing how much it costs to acquire a customer through various channels, hoteliers can make informed decisions about where to invest their resources to attract guests. This can lead to a more effective allocation of marketing spend, reduced costs, and improved profitability.
In essence, managing CAC is about finding a balance. It’s about investing in customer acquisition efforts wisely to attract and retain guests without compromising profitability. In the following sections, we’ll explore the components of CAC and provide strategies for managing them effectively.
