As a hotelier, a great deal of your focus is on pricing. Getting the right price is critical to establish consumer trust.
NB: This is an article from Hotelogix
Room rates also change based on availability and seasonality. However, you also need to look at the other side of the coin – guest cost acquisition. If you’re not thinking in terms of how much it costs to get those guests in your door in the first place, you’re missing a critical metric in charting your success. What is guest cost acquisition? How do you calculate it? Why does it matter?
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What Is Guest Acquisition Cost?
Guest acquisition cost is relatively self-explanatory. It’s the cost you pay to acquire a guest in the first place. However, while it’s a simple enough concept, many different factors play into the final figure.
The Guest Acquisition Process
Guests don’t just blindly find your property and book a room sight unseen, at least not in most cases. Instead, they follow a specific path that goes from awareness (when they’re introduced to your brand) to consideration (when they begin thinking about adding your property to their travel plans) to decision (when they book a room) to retention (when they return).
Remember this, too – every guest who comes to your property has chosen your hotel over another one. Why? It comes down to those factors we mentioned before, also known as signals.
Signals That Make Guests Choose Your Property
Hotels invest a considerable amount of time and money in their sales and marketing efforts. Those translate into signals that convince guests to book a room at the property. These signals all come at a cost both monetary and in terms of time spent. What signals are they?
Reviews – Few things are more important to consumers today than actual guest reviews of your property. It’s all about social proof. The current definition of social proof is “a psychological phenomenon where people assume the actions of others in an attempt to reflect correct behavior for a given situation”. Now, that might be difficult to ascribe to hotel reviews, so let’s break it down.
When we’re unsure of how to act in a certain situation, we look to others for an example of what to do and not to do. The same concept holds true when it comes to making a purchase, and that’s one reason why Amazon customer reviews can make or break a product’s success. Your hotel is no exception. Potential guests want to know what others have experienced, what they thought of the property, the guest service, and more.
Pricing – As mentioned, pricing is one of the most critical considerations, but it’s about more than hitting the right price point. It’s really about value. What do your guests get for their money? Sure, there will be those who are on a tight budget that won’t spring for your ultra-deluxe rooms no matter what, but you can still find ways to add value to their stay and create a positive experience that encourages them to return.
Accurately pricing your rooms requires more than just following historic trends and making considerations based on the season. You need to factor in the impact of potential events and industry shifts, too. For example, if there’s an upcoming festival that usually draws large numbers of people to the area, you can expect occupancy to be higher than usual. Then there are seismic shifts that affect the entire industry, such as the expected revenge travel pattern in 2021 and 2022.
Advertising: Advertising plays a major role in building your brand and reaching prospective guests. It also comes in many different forms, from PPC campaigns to social advertising, retargeting, co-promotions and sponsorships, and so much more. Almost all advertising comes with both a monetary cost and a time cost (to create the ad collateral and then place and track it).
The good news about advertising is that it’s easier than ever to track thanks to the wealth of tools available. That includes tools provided by social networks, as well as those offered by Google (Google Analytics remains one of the most important tools for tracking traffic and conversions).
We’re also including other marketing and advertising activities in this category, such as email campaigns, loyalty programs, maintaining an organic social media presence (versus paid social ads0, and other such things.
OTA-Related Costs: Online travel agencies, or OTAs, accounted for over 40% of the online travel market in 2019, and that impact is only expected to increase. To be clear, OTAs comprise a very broad range of online platforms, from Expedia to Trivago, Kayak to Travelocity, and everything in between.
While there’s a bevy of such options out there and they all work a little differently, chances are you’ll pay a commission for any booking made through their interface. They also introduce additional complexity because you must find a way to update vacancies and handle reservations in real-time.
GDS: Global distribution systems, or GDS, are responsible for distributing your inventory and rates to OTAs. Sabre is a good example, but there are others, such as Travelport. You’ll pay around 20% of each booking in commission.
Channel Managers: To handle keeping reservations and occupancies accurate across all OTAs and other outlets, you’ll need to use a channel manager, which comes at an additional cost.
Booking Engine: Allowing your customers to book online requires a booking engine. SynXis and AxisRooms are two frequently used engines in the hotel industry.
Calculating the Cost
Now, you’ll need to calculate the costs of each channel/platform we touched on above. Combine that with guest tracking and you begin to see how you’ll come up with the cost of guest acquisition. When you track inbound traffic per source, you’ll be able to break down the cost of each guest you acquire.
The cost you pay will affect the profitability of your hotel. For instance, if you invest $70 to acquire a guest at a room rate of $100 per night, then your profitability is less than a hotel that invests $35 to acquire a guest at the same room rate.
However, you need to take things a step further. Compare your current costs to historical figures to determine actual performance. And remember that there is no even playing field in the hotel sector, as a property that’s only paying $35 to acquire a guest may have other factors that affect the cost, such as higher taxes that affect overall profitability.
Other factors that will need to be considered beyond the acquisition cost include the average spending of each guest per trip, whether or not they return for a repeat stay and, if so, how often they do so, and total guest retention time.
Moving Forward
The primary goal here is simple: determine the customer acquisition cost and then track it over time, benchmarked against historical performance and ongoing costs, to enable informed decision-making. Without the full picture, it’s impossible to make an informed decision and grow your hotel intelligently.
And remember, the customer acquisition cost is just one of many important elements that factor into success over the long term. Employee costs and retention, the daily costs of doing business, the ability to work with other local businesses – all of these will play a role, too.
