On average, how much does it cost to generate a booking at your property?
NB: This is an article from Cloudbeds, one of our Expert Partners
It seems like a simple metric most hotel managers would know off the top of their head, but it’s a bit more complicated. Different guests come with different acquisition costs, and costs are spread across departments, making it challenging to calculate true costs.
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However, controlling costs is vital to maximizing profits, so it’s an important metric for lodging owners and operators to track.
Here we break things down for you, explaining how to calculate guest acquisition cost and the different costs to factor in.
What is guest acquisition cost (GAC)?
Also known as customer acquisition cost (CAC), guest acquisition cost is the average amount of money a hotel spends to entice travelers to make bookings.
These costs are primarily comprised of marketing and distribution expenses such as advertising, fees, and commissions, but technology, labor, and other expenses may also be included.
When people plan a trip online, accommodation operators have opportunities to connect with them at various touch points on the traveler’s purchase journey.
For example, let’s say Mrs. Smith is planning a trip to Seattle next weekend to attend a concert. She begins by searching “hotels in Seattle” on Google and explores the listed options on the map, where she finds your property listed. A few days later, she searches for your hotel on Google and finds your search ad at the top of the listings. She clicks on that link and explores your website. A few days later, she visits Trivago to compare prices. She clicks on the link to your hotel booking engine from the site, but ultimately she goes to Booking.com because it’s showing the lowest price, and she books there.
Each of these touchpoints can come with costs to your hotel. This may include cost-per-click (CPC) advertising fees paid to Google and Trivago, commission paid to Booking.com, and the costs of building and maintaining your website and booking engine. In this example, the path to purchase was fairly simple, but some travelers visit dozens of travel sites when planning a trip. The costs of reaching them can quickly add up.
How to calculate your GAC
To calculate your hotel’s average guest acquisition cost, simply divide the total amount spent on guest acquisition activities by the total room revenue earned and then multiply the result by 100 to get a percentage. GAC can be calculated for a month, year, or another period.
Formula: GAC = $ Spent on Guest Acquisition Activities/Rooms Revenue Earned x 100
For example, if you spent $8,500 on guest acquisition activities in November and earned $32,900 in room revenue, your GAC for the month was 25.8%. So basically, just over a quarter of your room revenue went to acquisition costs.
What is a good GAC to target? That’s difficult to say because it can vary by property, property type, time of year, and the costs factored in. For example, GAC is typically higher in low seasons when room rates and occupancy are lower, and lodging properties spend more on marketing campaigns.
Generally, the higher your GAC, the less profitable your bookings. Bear in mind that you must also pay additional operating costs like labor, utilities, and cleaning supplies. If you regularly spend more than you earn, it’s not sustainable. To generate a profit, costs must come down or revenue must go up – or a combination of both.