• Customer acquisition costs rising

The cost of acquiring customers rose by 23% between 2009 and 2012, according to a study by the Hospitality Asset Managers Association.

The study called for owners to ensure costs were part of contract discussions, as the need for investment in new distribution channels and loyalty programmes grows.

The white paper, “The Rising Costs of Customer Acquisition”, looked at the results of a more than 100 upper upscale and luxury hotels with brand affiliations. It specifically looked at both the external costs of brand allocations (for marketing, advertising, major promotions, national and global sales offices and loyalty programmes) and third party commissions (for group and transient bookings), as well as the internal costs of marketing and sales programmes, including local marketing, sales staffing and other expenses, including reservations staff.

The study’s author, Frank Camacho, a travel industry executive and consultant, said: “The travel industry has been undergoing enormous changes over the past 10 years, driven by a combination of technology, a global recession and the changing nature of global business.

“Owners should be examining the long term relationships they have to ensure that they still produce economic benefits. If not, they need to consider this when choosing partners and negotiating new agreements.

“Implicit in the findings of this study is the conclusion that channel mix has a substantial impact both on revenue growth and its profitability. If rising brand costs are unavoidable in the near term, then effective channel optimisation becomes even more critical.”

The report found that, while total customer acquisition costs rose by 23% during the period, brand allocations grew by 37% and third-party commissions by 34%, while local property marketing (including property-specific Internet and paid search) increased by only 6% or less than 2% per year.

The change in marketing mix meant that as a result of the disproportionate growth of external marketing and sales costs, properties now control less of their marketing spend, down to 44% against 49% in 2009. For the hotels featured, total acquisition costs rose from USD348m in 2009 to USD424m in 2012.

Costs have not been spread evenly, with commission cost growth varying from a low of 10% to a high of 72% for the top 10 brands included in the study. The author said that third party commissions accounted for much of the variance, commenting that third parties could contribute to revenue growth, but did not drive revenue increases as fast as costs growth.

Franchised properties were hit hard, with room revenue growing by just under 22% during the period, but total acquisition costs rising by almost 27%, driven by increases in commissions of 48% and brand allocations of 36% and mitigated by on-property spend of only 15%.

Looking forward, one of the key findings of the study was that “in new management agreements, customer acquisition costs must be clearly stated and ownership has the right to approve incremental fees”. Camacho added: “Customer acquisition costs should be a major discussion item between owners and brands.

“If brands become less able to deliver ‘uncommissioned’ revenue, they have a lower economic value.”

This year has seen a significant push by the major operators towards using loyalty programmes to drive direct bookings. The past month has seen Hilton Worldwide and Marriott International add a number of features to their mobile apps – features which will only be available to members of their loyalty programmes.

At Hilton Worldwide, the company has enabled room selection and customisation via mobile and web-based floor plans, alongside plans to allow customers to use their smartphones as room keys. At Marriott International, the group has extended its mobile check in and out service to reach 4,000 hotels by the end of the year.

The pair are not alone. Earlier in the summer Accor announced plans to upgrade its loyalty programme, offering more points and greater flexibility in their use, as part of a previously-announced strategy in its battle for direct bookings with the online travel agents.

Earlier this year Sébastien Bazin, Accor’s chairman & CEO, told analysts that he was prepared to invest more than the EUR120m previously announced to improve the company’s distribution.

The costs are not limited to the operators. As was reported in last week’s Hotel Analyst Distribution & Technology, Expedia’s CFO Mark Okerstrom told analysts at the group’s second quarter earnings call that the company had “decided to make some additional discrete investments in the back half of the year, pushing down the pedal a bit on selling and marketing and adding staff to our supply organisation to drive an accelerated pace of hotel supply acquisition”.

While the operators are pushing ahead with plans to improve their loyalty programmes, so are the OTAs. Expedia described its loyalty programme, Welcome Rewards, as “starting to scale”, while Orbitz Worldwide said in the same week that it was “focused on developing a meaningfully differentiated consumer value proposition through our loyalty offering”. The group said that, despite the ramp up of the loyalty programme and promotional activities hitting revenues, the Orbitz Rewards programme was “a net benefit”.

With both sides spending money to make money, the cost of the customer – and likely to the customer – is unlikely to fall soon.

 

HA Perspective [by Peter O’Connor, editor at large for Hotel Analyst Distribution & Technology]: As the battle for the customer intensifies in the electronic distribution arena, it comes as no surprise that companies of all types need to spend more to position themselves in front of, and convert, today’s fickle customer.

As a result of this increased competition, properties are finding themselves becoming increasingly dependent on their brand partners, allocating an increasing share of their marketing spend to corporate channels to the deference of individual spending.  The brands in turn need this increased spend not just to compete with each other but also with the extremely well-funded and increasingly powerful OTAs battling to attract the self-same customer.  Spending literally billions to be prominently listed in every travel search, the latter’s marketing efforts have led to severe bid inflation on paid search channels, driving up customer acquisition costs for everyone.

Such intense competition has also forced the major hotel brands to spend more on encouraging conversion. Unable to use price as a lever, the latter are spending more on rewarding key customer segments through increasingly sophisticated and generous loyalty programs to try to get potential customers to book directly. Expensive to put in place as well as to operate, such programs are also driving up the cost of customer acquisition, and in many cases are of limited use as their value propositions are quickly matched and surpassed by competing OTA schemes.

As a result, owners of franchised or management contract properties are increasingly beginning to question their participation in a brand, particularly if much of their property’s business is being driven through third party (particularly OTA) channels. Thus to survive in the future, brands will need to be able to much better articulate, and justify, their true value added, as well as provide quantifiable evidence of their return on investment.

Customer acquisition costs are also likely to continue to accelerate in the short term, in particular while consumers continue to use mainstream search as their primary way of identifying suitable travel products.  In the medium term meta-search does provide an opportunity to reduce transaction costs, but only if hotel brands and individual properties make the necessary investments to be appropriately listed.  As it currently stands most have not done so, allowing this increasingly important medium to become dominated by OTA listings, thus forfeiting the potential cost advantages of direct distribution.

Ironically the report clearly shows that day after day hotel properties are becoming more dependent on third parties (be they the much feared OTAs or their supposed partners the hotel brands).  Most hotel properties are failing to invest in the one area where spending could in fact make a difference, namely local marketing.  As a result direct sources of business are declining, making them even more dependent on the brand in an ever-accelerating vicious circle.

Thus the Hospitality Asset Managers Association is correct is pushing for more focus on this important topic. Owners need more say and more control over how their marketing dollars are being spent, and need to more carefully managed their portfolio of distribution channels to both maximize efficiency and minimize their cost of distribution.

Perhaps in some cases this will involve reevaluating whether they should in fact be working with a particular brand, a decision that will become much more common as the issue of customer acquisition cost is better understood and becomes much more prominent in brands’ communications with potential, as well as existing, owners.

 

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