Understanding Your CAC (Customer Acquisition Cost) - Then and Now
By Gary Isenberg President, LWHA Asset & Property Management Services | October 23, 2016
In the early years of my career, before the industry had revenue managers, managing hotel bookings was relatively straightforward and easier to understand. Reservations managers controlled inventory and their main focus was to maximize sellouts. They had only three channels to monitor: the brand's central reservation system; a local reservation system; and group sales. This simplicity had its challenges. For one thing, inventory had to be opened and closed manually. Once at the Sheraton Russell in New York, the reservations manager went on vacation and her fill-in did not follow the correct sequence of key strokes and processes to close out inventory. There was a citywide sellout week, and the hotel oversold by 100%, requiring the front desk to "walk" 150 guests to hotels as far away as upstate New York and New Jersey.
In addition to relying on manual processes, little practical data existed to assist in determining maximum pricing. Prior to the availability of daily competitive data via the Weekly STAR Report, hotels conducted a "call-around" every night in order to evaluate their daily market performance. Night auditors would share occupancy and ADR with local competitors. Similarly, in the days before services like Rate360 by TravelClick, price shopping by competitors was basic. PBX operators were tasked with calling nearby hotels pretending to book a room. (Obviously, this was prior to caller identification.)
A major step came when early technologies allowed for the emergence of revenue managers who, using historical data and patterns, introduced yield management to maximize rates. Then came The Game Changer: the Worldwide Web and the subsequent proliferation of booking channels, including OTA's like Expedia and metasearch sites like TripAdvisor, Facebook and Google. The Web replaced roadside signs, Mobil Travel Guides and other legacy sources of information. It also changed the complexity of the revenue management function.
Fast forward to today and a booking world dominated by technology, data and multiple booking channels, creating a new focus for revenue managers: Customer Acquisition Cost (CAC). Although maximizing RevPAR continues to be important, the industry is now in a position where all spending practices must be examined – whether it be OTA's, meta search sites, the return on ad spend or myriad other expenditures. Hotels have become so dependent on high-cost channels that in many cases profits have shifted from hotel owners to vendors.
Historical CAC's for the sector are far from favorable. A 2013 Kalibri Labs (which benchmarks and evaluations revenue performance and acquisition costs) study in conjunction with the Hotel Asset Managers Association (HAMA) indicated that commissions were rising at twice the rate of revenue growth from 2009 to 2012. The Kalibri Labs database also indicates that commissions paid to third parties were still rising at twice the rate of room revenue growth for the period from 2011 through 2015. Let's use this information as a warning that we need be cautious as continue to navigate through this continuously changing landscape.
It is important to measure CAC on many fronts; while OTA's and other third parties may be the most high-profile channels, they are only part of the picture. Bottom line: the digital revolution has changed the revenue manager's goal to one of finding a magical mix of rate and costs that maximizes -- not RevPAR -- but profitability.