Consumer acquisition costs too high and growing, says Kalibri Labs CEO

Pictured: Cindy Estis Green, CEO & co-founder of Kalibri Labs.

NEW YORK — Customer acquisition costs in hospitality can vary depending on the property, but when guests book through third parties, hotel revenue takes a serious hit. Cindy Estis Green, CEO & co-founder of Kalibri Labs, held a workshop on the second day of the Direct Booking Summit in New York City titled “The New Dynamics of the Digital Landscape,” which delved into the numbers behind customer acquisition costs and how small shifts in direct bookings can add up over time.

According to Green, the cost of customer acquisition in hospitality is an average of 15 percent to 25 percent of guest-paid revenue, but she said there are many hotels that are spending as much as 35 percent of guest-paid revenue to put new heads in beds. Green said revenue that contributes to operating profit and expenses (such as sales and marketing) consists of whatever is left after operators pay out for loyalty investments, retail commissions and wholesale commissions, leaving a tiny slice of the pie for overall net revenue. 

Many of these costs are an unavoidable part of doing business, but the “X-factor” is wholesale commissions, consisting of wholesalers, unknown online travel agencies and merchant OTAs such as Expedia and Priceline.com. These merchants have a massive effect on what hotels actually take home. Green’s data showed direct bookings represent the lowest cost associated with acquiring new business, but OTA business required as much as 6.5 times as much investment by comparison, and global distribution systems required roughly five times the investment.

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For example, in 2016, guests spent approximately $148 billion on hospitality, but removing all costs, including sales and marketing, the industry took home $125.4 billion.

“We spent about $24 billion to get our business in 2016, which is a really big number,” Green said. “We captured 84.6 percent of our revenue in 2016, but we captured 84.9 percent of our revenue in 2015. To put that in perspective, a change of -0.3 percent year-over-year was a loss of $500 million for hotels and an asset value decrease of nearly $5 billion. These tenths of a point make a massive difference.”

After all is said and done, much of a hotel's net revenue is eaten up just trying to get guests in the door.

Green pointed out that while the industry’s largest brands have boasted about their ability to negotiate better terms with OTAs, there is more business subjected to those costs, resulting in OTA costs growing three times the rate of growth in guest-paid revenue. Guest-paid revenue grew 14 percent from 2014 to 2016, but OTA commissions grew by nearly three times that rate.

“This is not a cost issue, this is a control of the customer issue,” Green said. “Cost is a huge variable, but we have to take into the account of the likelihood for these guests to return, to refer their friends and family and to get them to book direct.”

Encouraging direct bookings can have a measurable effect on your hotel’s business. If a hotel is worth $100 million in revenue, one percentage point in revenue capture is equal to $1 million. Therefore, Green said causing a 2-percent to 3-percent shift in direct bookings will result in noticeable revenue generation without gaining a single new guest.

Aside from reducing the number of guests booking via OTAs, Green also said there is room to increase efficiencies in sales and marketing spending. With the typical revenue capture in the industry falling at 75-85 percent of total customer spending, sales and marketing is a good place where optimization is possible. Otherwise, hotel operators need to analyze what kind of property they are in charge of and what level of third-party involvement may is necessary for success.

“There is nothing wrong with third-party business, but operators should take a hard look at demand in their marketplace,” Green said. “For some hotels, optimal demand mix from OTAs is 5 percent. For others, it’s 25 percent.”

But why is this important? Uber has flirted in the past with a shift from ride sharing to an expansion into travel. Now with former Expedia boss Dara Khosrowshahi leading the company, Green expects the ride-sharing giant to take a stab at travel once again. Meanwhile, Alibaba, a Chinese e-commerce company roughly eight to 10 times larger than Amazon, opened an office in New York City this year and is looking into stepping into the retail and travel sectors. It's a sign that the the travel and hospitality industries are growing and shrinking in different areas, which makes this an interesting time for consumers and a complicated one for hotel operators.

"We don’t want a duopoly; we are already there with the OTAs and it isn't working for us," Green said. "But a monopoly could be worse, with the control Google has right now [over travel]. Alibaba could grow to combat Google, but hopefully they don’t turn into Pac-Man and eat each other up. Then we'll just have two or three players in online travel, and nobody wants that."