Mr. Smith

Technology

Internet Marketing Overview: Cost Per Acquisition (CPA) versus Cost Per Click (CPC)

By Donald R. Smith, Executive Vice President, Nor1 Inc.

Many hotel companies prefer a CPA model since it can be tracked to an actual stay; thus, the individual hotels pay for actual business received. CPA is a lower-risk option than CPC and much easier to manage, however, both have benefits depending on the needs of the company.

How Distribution has Changed over the Years

Before the growth of online travel sites in the late 1980s, most hotels worked on either a high margin net rate (usually offered to volume wholesale partners such as inbound tour operators and some consolidators), or on a commission basis (most of the bookings from external sources were commission based.) With the onslaught of online consolidators and OTAs (online travel agencies) over the past decade, many required the hotels to work on a high margin net rate basis. Most of these online travel sites required net rates since they had difficulty receiving payments from many hotels via the commission model. Sights like Expedia, Hotels.com and Travelocity grew very fast through organic growth, ability to maximize the use of online marketing (purchasing key travel-related words commonly searched by consumers) and by acquiring some key local aggregators that offered good inventory in popular destinations such as Las Vegas, New Orleans, Orlando, and NYC. Occupancy was down overall and hotel properties needed the online business to meet their occupancy goals.

In the late 1990 and early 2000s, the tide began to change. Several hotels and hotel chains began to negotiate with some of the large online travel sites in an attempt to regain control on the margin and inventory as well as to establish selling rate parity. This created a campaign by many chains to require their franchised and managed hotels to offer their lowest rates to the chains and prohibit them from offering lower rates to online retailers. The "best rate guarantee" would only be on their Web sites, resulting in the majority of online reservations being made on the brands' own sites.

Today, the distribution model has once again shifted. Search is very relevant and the new vehicles for distribution are search companies such as Google and Yahoo! and travel search-specific sites such as SideStep and Mobissimo. Most hotel groups are moving an increased share of their advertising dollars to online venues for a few key reasons: Online advertising is trackable, the message can be changed quickly, and most importantly, it is in a medium where the majority of unmanaged business and leisure travel booking takes place. The challenge is making sure that a CPC or CPM campaign is managed for a positive return and this can be very challenging, requiring hotel/hotel groups' revenue management teams to work very closely with their online advertising group, ensuring the ads are timed with their need periods and booking lead times. When working with an online site, the hotel/hotel chain is presented with several choices. It is important to first understand the different options being made available to them.

Definition of Terms

CPA /Cost per acquisition, or often referred to as a commission. This is usually based on actualized bookings

Cost per acquisition or CPA is popular with many travel suppliers for the following reasons:

No risk, as the supplier is only paying (commissions) on actualized bookings. Most hotel groups and chains find this method is the most popular since the payment is passed on to the individual hotel, freeing up advertising budget for brand awareness campaigns. CPA is also a preferred model since it is trackable to an actualized booking, and the effectiveness of channel can be measured.

Most chains and representation companies will pay based on a partner' IATA/TIDS # or will set up a pseudo IATAN # or tracking codes for particular partners they work with in this model. The IATA number (or a tracking code) is imbedded in the reservation. Once the stay is complete, there is usually a monthly upload from the hotel to the chain, soft brand or Representation Company, identifying the partner, guest stay information and the commission amount due. This is commonly processed via a central commission processing agency like Pegasus, Perot Systems, and Worldwide Payment Systems (WPS). The chain or the payment processor will electronically process a check to the partner for the past month's checkouts.

CPM is based on a set fee for every thousand views of a placement ad. This is commonly used when there is no call for action or request to click on the ad. While this is common in traditional offline advertising, depending on the campaign, most on-line advertisers prefer models were they can track the effectiveness of their ads.

Cost per click or CPC, is very popular with both suppliers and hotel advertisers since it is easy to track and simple to make quick changes to particular campaigns in order to maximize ROI. CPC can be riskier for the hotel advertiser if not managed correctly. If they are not careful, they may pay for several clicks that do not produce a booking and at times when they do not need external advertising to drive demand for their hotels. CPC is still popular with hotels and with many online travel sites that offer advertising and booking capability. Tracking is usually superior under this model and promotions can be changed and measured for effectiveness /conversion on a daily basis.

Hotel Groups have been using these different models based on their individual needs. And it's interesting to see different perspectives on why each prefers one method over the other. SideStep has worked with its customers through various distribution models depending on the needs and goals of the individual company. Since SideStep includes every major North American chain on its site, it has been particularly important to understand how to help each customer successfully implement each model.

Industry Perspective

According to Mike Wylie, founder of Standing Dog, "Mid size and smaller hotel groups have limited online budgets making CPA the preferred model." However Mike mentions that it often makes it more difficult to evaluate the effectiveness of campaigns centrally. Standing Dog evaluates the need periods and advanced booking lead times of their hotel customers so they can target any CPC spend for periods of soft occupancy. On one hand CPA is better for hotels groups since it takes away the risk but does not take into account the hotels occupancy. PPC and CPC needs management resources to be successful and can be more cost effective providing the conversions are there.

Tom Buoy, VP Marketing of The Morgans Group, said that when they evaluate new partners, Morgans models data from similar partnerships to analyze the CPA, CPC value. While the CPA model has fixed cost and imputed lower risk vs. CPC due to potential click thru fraud. With a high ADR that hotels in the Morgans Group enjoy, they prefer the CPC model and spend considerable time analyzing their data to insure a favorable ROI.

InterContinental Hotel Group (IHG), one of the largest and most internet savvy hotel groups, uses the CPA model for the core Search distribution and CPC or CPM for its advertising. IHG was one of the first operators to implement a strategy to increase brand direct bookings by setting standards for their online distribution partners; if a partner did not agree to the terms set forth by IHG, the hotels had to choose to do their own distribution or let IHG manage it. Otherwise, they were not allowed to work with them. Some of the terms included rate parity and inventory controls. IHG has built a strong affiliate program to insure that more and more of their business is booked direct on their brand's sites. Not only does this reduce their distribution cost and reliance on OTAs, but it also gives them a good opportunity to build brand loyalty via their successful Priority Club (used by all IHG brands).

Conclusion - It is important to work with online companies that understand all distribution models

The vast majority of hotel groups prefer CPA for the following reasons: The supplier's interest is aligned with the seller's interest - there is no cost for the lead or "hand off" to the hotel group if a hotel stay is not actualized, and the payment of commission is placed on the individual hotels vs. the chain. With a CPA model in place, a chain can focus on securing partners to work under this model and not be subject to annual or monthly budgets or securing co-op funds before starting a campaign.

There are some exceptions, however, where a CPC model may be a better option for a hotel/hotel chain than CPA. Some hotel groups enjoy a very high average rate or greater than average length of stays. Some of these groups, especially the ones that own and mange their hotels, find it more economical to work on a CPC basis. An example is Morgans' hotel group, a collection of high-end boutique hotels such as the Delano in Miami's South Beach and The Clift in San Francisco.

Most lead generation sites prefer to use a CPC model since it places the burden of conversion of the lead on the supplier. If a supplier's Web site doesn't convert well, has server outages or site bugs, the supplier does not get penalized. It's also superior for revenue recognition (instant) and billing (at month end) over CPA.

Regardless of the distribution model used, it is important for hotel/hotel groups to carefully analyze the ROI before and during each campaign. Within the next five years, online advertising will take the majority the advertising budget so the pressure is on now to figure out which distribution model works best. When deciding, a key success factor will be working with online companies that understand each model and have experience successfully implementing them.

Don Smith develops strategic supply partners and creates revenue opportunities through innovative processes and related modules. He oversees implementation of Nor 1’s suite of revenue enhancement products. Prior to Nor 1, Mr. Smith headed up Business Development at SideStep. He positioned the company for a successful sale to Kayak Software in 2007. He currently holds leadership roles in industry associations, such as the American Hotel & Lodging Association (AHLA) and the Hotel Electronic Distribution Network Association (HEDNA). Mr. Smith can be contacted at 408-996-7417 or don.smith@nor1.com Extended Bio...

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