Customer acquisition costs (CAC) are more or less what they sound like – how much money it costs to bring in a new guest.
NB: This is an article from WebRezPro
OTA commissions, transaction fees, loyalty programs, advertising campaigns, and sales and marketing personnel all contribute to the cost of acquiring new customers. But why is knowing this important, and how do you measure it? Keep reading to find out.
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Why CAC Matters
Your CAC affects your profits as well as your pricing and marketing strategies. The lower your CAC, the higher your profit. Reducing your CAC (or maintaining a good CAC) influences the kind of channels and customers you target. For instance, OTA bookings are more expensive than direct bookings (unless your online booking engine charges transaction fees—ouch!), so you want to emphasize those direct bookings. Certain kinds of guests may also be more disposed to like you, so you don’t have to spend as many marketing dollars to convince them.
Your CAC also impacts your rates. If you’re a luxury hotel, you may have greater customer acquisition costs (top-notch marketing campaigns are expensive!), but your rates are also higher. If your rates go up and CAC stays the same, that’s good for your profitability. The trick is to find the sweet spot where you make more profit, but people are still willing to pay.
A Good CAC
CAC varies by hotel and depends on many factors, not all of which are inside your control. For example, CAC generally rises during the off-season and shrinks during the busy season. Across the industry, the average CAC is 15 to 25 percent of room revenue.
Set goals to shrink your CAC and grow profit. Though not every factor is within your control, many of them are. You may be spending more money than necessary, e.g., if you’re overly reliant on OTAs. Compare your CAC month to month and year to year.
Calculating customer acquisition costs is challenging. Costs are often distributed across departments and vary by channel. Some properties base calculations strictly on distribution and advertising expenses, while others go further to include the likes of website maintenance and wages for sales and marketing personnel. The key is to remain consistent when measuring CAC and profitability over time.
You can get an idea of your CAC by dividing the cost of acquiring customers by the room revenue generated over a specific time period. Then multiply your answer by 100 to convert it into a percentage.
CAC % = cost of acquiring customers over a certain time period / room revenue generated over the same time period (x100)
For instance, if your hotel spent $15,000 on customer acquisition and took in $75,000 of room revenue in September, your CAC for the month would be 20 percent of revenue. You want this percentage to be as low as possible. The higher it rises, the more it eats into your profits.
Note, be sure to calculate costs and revenue for the same time period. You don’t want to use expenses from July and revenue from all summer long.
CAC varies between different channels and guest segments. For instance, guests that book through an OTA may be more expensive to acquire because of OTA commission fees (see above). It’s worth your while to calculate the CAC for each channel and type of guest (i.e., business travelers versus leisure guests). If a guest spends a lot, but they also cost a lot to bring in the door, they may not be as profitable as you think.
When calculating acquisition costs, don’t neglect discounts or perks given to guests. If you give your guest free parking in exchange for booking directly, that free parking is part of their acquisition cost.
You can use your property management system to generate monthly booking reports that show room revenue generated by channel and segment (e.g., repeat, corporate/group, and transient guests).
Segmenting your CAC enables you to steer towards the guests and channels that give you the most profit.
Return on Investment
A higher CAC may be worth it if you have a better chance of retaining the customer. The general rule is that customers cost five times more to acquire than they do to retain. However, it may be a good idea to work out your own specific retention costs as well as your acquisition costs and compare them. Returning customers are also willing to spend more, now that they trust you to deliver a great guest experience.
It makes sense to invest in channels, such as Google Hotels or Tripadvisor, that allow you greater control over guest data and thus a better chance of developing a long-term relationship with the guest. Don’t get so caught up in short-term costs that you neglect to think about the future.
It’s important to check that the cost of bringing in guests doesn’t outpace your profits. Measure your CAC regularly to guide your sales and marketing strategies and improve your bottom line.