Hotel customer acquisition costs unsustainable
Hotel customer acquisition costs unsustainable
04 SEPTEMBER 2014 7:29 AM
Between 2009 and 2012, customer acquisition costs grew nearly as fast as hotel revenues, according to a HAMA white paper.
REPORT FROM THE U.S.—When the Hilton Garden Inn in West Little Rock, Arkansas, opened over the summer, the property already had a full head of steam.
An aggressive Facebook campaign, which included a series of 60-second videos posted every week touting the soon-to-open property, resulted in 1,500 likes on the social media site. The campaign paid off. Mike Hines, chairman and CEO of HP Hotels, which manages the property, said the hotel achieved a revenue-per-available-room index of 100% within a month of its June opening. 
Not only did the up-front effort yield a built-in set of prospective customers, Hines said, but it also helped mitigate customer acquisition costs, which is an ever-growing challenge in the industry, according to a white paper titled “The rising costs of customer acquisition” from the Hospitality Asset Managers Association. The group found that between 2009 and 2012, customer acquisition costs were nearly on par with revenue growth.
The study of 104 upper-upscale and luxury managed properties with brand affiliations in the United States and Canada found room revenue increased by 23%, or 7% annually. By comparison, customer acquisition costs increased almost as quickly at just less than 23%.
Breaking down the total customer acquisition costs further, brand allocations increased by 37%, third-party commission grew 34% and local property marketing (including property-specific Internet and paid search) saw a bump of 6%. 
Steven Nicholas, principal and executive VP with Noble Investment Group and a member of HAMA’s board, said he does not expect customer acquisition costs to continue at such a fast clip. Such growth is unsustainable for owners and operators, he said.
“Every one of these costs can’t be absorbed by ownership,” he said.
He said he expects owners will begin asking more questions of the channel mix employed by their management companies. 
“In a free market system, some channels will get pushed out,” he said.
Wesley Bloomfield, who works in business development and strategic marketing for Charlestowne Hotels, said channel shifting is key to generating direct bookings. In markets that are purely leisure-driven with less price-conscious travelers, direct bookings are much more likely whereas traffic from online travel agencies could be as low as 20%, she said.
“Certainly, we could go out and sell every room on third-party websites, but that’s not what we do,” she said. “We understand the most valuable reservations always come through direct booking channels.”
Difficult to quantify
Part of the problem is that customer acquisition costs can be difficult to quantify. That was one of the main challenges of HAMA’s survey as well, Nicholas said.
“Right now, there are too many unknowns,” he said. “I think that’s why costs go up. You can’t get your arms around it.”
Naveen Kakarla, president and CEO of hotel developer, investor and manager HHM, agreed with Nicholas’ assessment. Sourcing revenue is a continually evolving discipline, with focus, for example, shifting from travel agents to third-party booking sites in recent years.
“My first thought is that it’s difficult to put those numbers together and come up with a true cost,” he said, adding, “As an industry, we’re not as sound as we could be.”
Bloomfield said some operators might underestimate initial marketing budgets and just how much it is going to cost to get guests into the hotel, especially for a new hotel or repositioned brand that is not yet stabilized. 
“It’s going to be more than a few years down the road until their hotel is stabilized,” she said.
Charlestowne keeps a close eye on the cost of customer acquisitions, Bloomfield said. For instance, the company puts a high degree of emphasis on email marketing and retaining past customers.
“We use the most advanced online tracking techniques so that we know exactly how to get in front of our guests, how much it costs and how much we’re getting from it,” she said.
Kakarla agreed it’s important to define specifically what is going to be included in customer acquisition expenses, be it marketing, sales, OTA fees, etc. 
“It takes hard work that needs to be done to get a full view of (revenue),” he said. “You need to drill down into the financials and find which acquisition costs have a (return on investment) and which don’t. What you start to notice is you have redundancies.”

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