Here Be Dragons: Dangers and Opportunities in the Digital Marketplace

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June 01, 2014
Marketing
Cindy Estis Green

The digital marketplace is ever changing with constant disruption. Newspapers, digital photography, retailers and financial services have undergone massive changes as a result of consumer behavior. The hotel industry is no exception. Hotel selection happens much deeper in the sales process because consumers are gathering travel information on aggregator sites like online travel agencies, Google and TripAdvisor well before narrowing down to a shortlist. By the time the consumer decides to make a hotel purchase, he or she may have touched seven to 10 sites  and been directed or diverted by the search or information site based on which hotel(s) have a more prominent listing or a higher ranking for the destination.

Managing Acquisition Costs – the Marketplace
The bifurcation of brands in hospitality into booking brands and stay brands has been a driving force behind the escalation of customer acquisition costs. Hotel operators along with corporate and regional teams, have to navigate the digital marketplace with a new imperative to modify revenue performance evaluation. Supplementing the traditional methods of tracking operating margins and market share, managing gross margins (revenue – cost of sales) may prove to be a key to success in a dynamic and turbulent online arena.

What does this mean for hotels going forward? Some argue that third-party aggregators and search engines will ultimately control the consumer path and hotels are going to be commoditized and passive recipients of business as they pay third parties for traffic and then pay again to compete with each other on the stay experience.

The first industry study examining customer acquisition costs was completed in 2014 for the Hospitality Asset Managers Association (HAMA). HAMA collected data from almost 500 member hotels for the period from 2009 to 2012, and found that commission costs for the hotels were rising at two times the rate of revenue growth.

A Kalibri Labs study conducted on 2012 data in New York City indicates the estimated range in acquisition costs (retail and wholesale commissions, transaction fees and sales/marketing expenses) in the North American market as ranging from 15 percent to 25 percent.

By contrast, the airlines have a “maniacal” focus on distribution costs as described by Tom O’Toole (CMO, United Airlines; ex-CMO, Hyatt), speaking recently at an industry conference. He said if the airlines spend $1, they feel that is $1 too much (not figuratively, literally). Tom shared the anecdote that the airlines are like the guy who had two near-fatal heart attacks and decided to start exercising and completely alter his diet, and by comparison hotels are like the guy who casually decides to make a new year’s resolution to try to go to the gym a little more and cut back on potato chips and french fries.

The hotel industry’s triple threat for increased dependence on third parties is brand dilution through commoditization of hotel rooms, increased costs with little control over the shopping and buying process and a diminished relationship with the customer. Brands have a dual challenge: generate demand for their hotels without duplicating third-party costs, while at the same time managing to differentiate the brand booking and/or stay experience in the eyes of their consumers.

Beyond brand strategy, there are tactical issues in the world of rising acquisition costs. Many would like to think they can price optimize their way out of higher acquisition costs. While rate and inventory levers are important, a successful hotel will have to do more; it will have to find ways to efficiently deploy resources to achieve an optimal channel mix – not just invest in brand.com (including mobile), but also business triggers (including social and metasearch) that can be tapped to influence not only brand.com, but also voice and other direct channels. Conversion, retention and ancillary revenue will also play into a hotel’s results as well as closely managing traditional wholesalers.

What changes are needed? Legacy sales and marketing infrastructure is due for a fresh evaluation. Piling on incremental new opportunities, however compelling, may push costs to a level that is unsustainable. What can be eliminated without diminishing the foundation of any given hotel’s demand? Establishing a cap on acquisition costs will be essential and will vary based on the hotel’s position in its marketplace including factors such as physical condition, brand (large, small or independent), the intensity of competition and location.

You can only manage what you measure. The industry knows how to manage operating and labor costs and now it’s time to put a maniacal focus on acquisition costs.  Here be dragons. It’s time to face down the danger in this new territory we call the digital marketplace and pursue the opportunities.

Cindy Estis Green is CEO and co-founder of Kalibri Labs, a company that offers an analytics platform that enable hotels to plan and monitor profit contribution by channel and segment. A 35-year veteran, she is co-author of the industry bestseller, "Distribution Channel Analysis: A Guide for Hotels," published by the HSMAI Foundation and AH&LA.

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Cost Comparisons to Other Industries

The biggest difference between the travel sectors is ownership of the assets – the major brands in air and car directly own and control pricing and availability of the majority of their supply.

Airlines report costs for customer acquisition and retention at approximately 5 percent to 10 percent, with some of the most profitable examples like Southwest at the low end of this spectrum because they control distribution so tightly, and use many ways (like seat selection) to induce customers to book directly on their proprietary sites.  The airlines have also made a practice of controlling the inventory available for redemption in their loyalty programs to limit saleable seats that are affected.

Rental car companies operating in the United States own most of their inventory and can control both pricing and availability.  Total customer acquisition and retention costs are similar to airlines, although their loyalty programs are considerably smaller, so their costs are at the lower end of that spectrum, between 4 percent and 8 percent. (Source: Company statements and investor presentations).

As a result of the ownership of most of their inventory, airlines and car rental companies don’t hesitate to use availability as a tool. That means that if a commission-seeking distributor comes to them asking for non-standard compensation, they can generally say no, even if it means not being sold by that distributor. 

*A second study was done by the HAMA in 2014 and authored by Frank Camacho, an industry consultant with 30 years of senior executive experience in various sectors of the travel industry.

Hotels, airlines and rental car companies share many dimensions:
• Large capital base – buildings, aircraft and cars
• Perishable inventory – an unsold room, seat or rental can’t be carried over
• Primarily sold with reservations – walk ups exist but are generally a minority
• Global distribution – all are present in the GDSs
• Heavy online – it is the largest reservations channel for all three



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