08Mar

Understanding Customer Acquisition Cost to Determine Value & Profit

Author: Avanti Joglekar

Hotel revenue managers are experts at determining how much revenue a particular guest will generate. With their RMS, they use predictive analytics to perform a thorough guest valuation analysis that determines how much value or profit a guest is adding to the bottom line. But, there are acquisition costs for every guest that need to be considered. How should properties approach the expense side of their guest valuations to ensure that they’re identifying the guests’ total profitability?

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There are multiple costs involved in acquiring and retaining guests. First, there’s the costs involved with getting a guest to book at your property. Acquisition costs can stem from sales and marketing promotions, booking fees and even a portion of internal technology costs from software used to manage these programs. The biggest driver of acquisition costs is by far retail and OTA commissions. In fact, most experts speculate that for every increase in room revenue, third party commissions rise at nearly the same rate.

Reinvestment cost is the amount at which a property will spend on retaining a customer's business while maintaining a profit. Most hotels use loyalty programs and comps to retain guests, but you must tread lightly. Giving away too many freebies to your guests, even though it might increase loyalty, isn't necessarily a good strategy as it can reduce the guests' profitability. Plus, a room dollar is not the same as an F&B dollar or a casino dollar, so understanding the margins of each of these components is critical to a profitable reinvestment strategy.

Marginal costs are key parameters used for optimizing your segments. For example, if after operational expenses, a room dollar is worth 60 cents and an F&B dollar is worth 35 cents, that's a significant difference in profit margins. Your customer valuation needs to include marginal costs as an input into the RMS. 

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For casino properties, a significant component of determining profitability is spent on equalizing a gaming to a non-gaming customer. For example, let's say it costs X to bring a gaming customer to the casino. In general, the profits from bringing in a gaming guest are higher than those garnered from a guest using spa services because the margins on gaming are better than those from the spa. The expenses with keeping the slot machine operational are far less than how much it costs to operate the spa or F&B services.

Plus, not all customers are the same. The ADR can represent the buying power of a customer, but at times it can be misleading. Imagine a scenario in which a family saved up for years for a trip to Disney. They might be spending a lot on room revenue, but that doesn't mean that they'll spend much on ancillary revenue, nor does it mean that they're going to be repeat guests. In a full-service property, following total customer valuation as closely as possible would be the optimal way to maximize revenue regardless of guest behavior.

Considering is the costs of your guests should be a major factor in your valuation model. Unfortunately, only a portion of hotels are tracking the expenses they incur from acquiring and retaining their guests. Remember that when it comes to guest valuation, high quality and real time data is crucial for accuracy and relevance. If you’re using bad data or your RMS isn’t parsing it properly, your conclusions will be wrong no matter what.

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