Hoteliers are paying approximately $25 billion a year in the United States to acquire customers, according to recent research from Kalibri Labs. In 2018, researchers estimate that hoteliers will only capture 83.5 percent of revenue, which can translate to about $5 billion in asset valuation loss or unrealized profit.
“Fifteen [percent] to 25 percent of guest-paid revenue is spent to acquire customers. Before guests walk in the door, hoteliers only have 70 [percent] to 85 percent to work with,” said Cindy Estis Green, CEO, Kalibri Labs, during a webinar titled “Time to Take Action: Data Analysis to Drive Revenue” hosted by the Asian American Hotel Owners Association.
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Fortunately, there are ways to use data to combat this problem, according to researchers.
Know the Actual Cost of Commissions
One of the largest overall reservation cost drivers is merchant and opaque online-travel-agency commission, and it doesn’t appear on the profit-and-loss statement, according to Matt Carrier, director, revenue strategy & account management at Kalibri Labs.
“Few hoteliers would ignore a P&L expense item that equals 15 [percent] to 35 percent,” he said. That’s why he said it’s important to thoroughly examine acquisition costs by channel and then drive a more optimal channel mix.
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“Monitoring these costs will enable management to help determine that optimal mix across all channels and to determine the ideal proportion for the higher-cost OTA business,” he said.
Determine the Optimal Business Mix
Every hotel has an optimal business mix, according to Carrier. “Establishing a target for revenue streams and costs needed to achieve the optimal business mix is key to a hotel’s success in the digital market,” he said.
To determine the optimal mix, hoteliers need to take into account a variety of factors, including: the demand in the market; the hotel’s ability to tap into demand relative to competitors; the hotel’s physical design, including meeting space and guestroom ratios and overall condition; brand strength and loyalty contribution; and consumer perception.
Carrier said that determining the optimal business mix happens in seven steps, given the constraints of the market. Those steps are: forecast demand; review the gap; choose the opportunities; establish the net revenue objective; select a spending target; measure performance; and evaluate success.
“After trying different techniques, a hotel should determine if they succeeded in getting an optimal mix by assessing growth in profit contribution,” Estis Green said.
Focus on Flow-Through
“Hoteliers need to understand the flow-through for the bookings coming into the hotel,” Carrier said.
The goal of the analysis is to evaluate different parts of business in relation to each other to get insight into profits, he said. Different sources have different flow-through to profit, so hoteliers need to analyze them with all costs in mind.
Part of that analysis relates to under what circumstances hoteliers should and shouldn’t take low-margin business. Carrier said hoteliers should consider taking low-margin business in the following instances:
- to create a base for compression;
- to bring in business you can’t bring in yourself;
- when ancillary spend is high;
- to fill a hole;
- to hit a threshold; and/or
- to cover cash flow.
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On the flip side, hoteliers should not take low-margin business in certain scenarios, he said. For example, Carrier said to steer clear of low-margin business when:
- it becomes too large of a percentage of the property’s overall channel mix;
- it diverts financial or staff time and resources from finding higher-profit business;
- it erodes the overall rate strategy of the property;
- it feeds a downward price spiral in the comp set and doesn’t bring in enough demand to make up for the rate reductions;
- it reroutes customers who would otherwise book through higher-profit channels; and
- it’s promoted close to arrival and trains customers to wait until the last minute to book for the best deal.
“Determining flow-through for each type of business helps a hotel operator calculate the profit contribution for the planned mix of business,” Estis Green said.