WASHINGTON, DC—The rising cost of customer acquisition was a much-discussed topic at this year’s Revenue Strategy Summit, held here at the Renaissance Washington, DC Downtown Hotel. In recent months, hotel brands have chosen to combat that through marketing endeavors and changes to loyalty programs that ask and incentivize guests to book direct, a practice that panelists also dove into in great detail.
Cindy Estis Green, CEO and cofounder of Kalibri Labs, which hosted the conference with Duetto and Silver Hospitality Group LLC, provided data to attendees, which came from “Demystifying the Digital Marketplace,” Kalibri Lab’s follow up to 2012’s “Distribution Channel Analysis.”
In the 1990s, the acquisition cost for hotels was between 5% and 10%, while it’s now between 15% and 25%, said Green. Breaking that down by the numbers, Green said that in 2015, guests paid over $145 billion for all U.S. hotel rooms booked, but when you take away various costs—wholesale commissions, retail commissions, transaction fees, channel costs, loyalty costs, sales and marketing, etc.—the net revenue is $125 billion, meaning the industry spent about $25 billion to get business.
Revenue capture, said Green, also went down in 2015. In 2014, the industry captured 83.2% of what the guest paid; in 2015, it captured 82.8%. According to Kalibri Labs, a one-point improvement in revenue net of acquisition costs in the U.S. market in 2015 would have given back an estimated $1.4 billion to hotels. “It’s something we as an industry have to focus on,” said Green.
One of the biggest points of contention with regard to rising acquisition costs has long been OTA commissions. Kalibri Labs analyzed the value on a net basis of bookings on brand.com vs. OTAs. “We looked at real transaction data and it turns out there’s a 9% differential; the brand.com booking is worth more than the OTA on a net basis,” reported Green. She stressed that this number isn’t complete—the book-direct campaigns were not fully in effect yet when this analysis was done—but it’s an area the company will continue to revisit and monitor in the future.
Nathalie Corredor, SVP, corporate strategy, Hilton Worldwide, commented on the book-direct campaign. “It’s still early days, but Hilton HHonors is growing faster than ever and we have seen a lift in our direct bookings,” she said. “We’ll see where it goes in the future, but retraining the consumer—even if they do want to look around elsewhere—that booking direct and creating a direct relationship with us will give them the overall most value… If we continue to execute on that, I think we’ll have a positive result.”
Jeremy Welter, EVP, asset management, Ashford Hospitality Trust, stressed that direct booking is an important issue and Ashford is “very much aligned with the brands on it.” However, he said, “I’m very concerned because I think some of the pricing discounts we’re giving are too much. For instance, 10% discount for member stays on weekend pricing—I think that’s too much… What we’re seeing is some of the brands that have initiated this are the ones we’re seeing the lowest growth in ADR. We’re supportive of this experiment, we’re trying, but I think we need to be really smart because in some ways, it’s the tail wagging the dog.”
Chad Crandell, managing director and CEO, CHMWarnick, added, “I think this is where there’s a difference between brand and owner equity. The brands want to grow the rewards members and owners don’t necessarily want to pay for it. The motivations are not aligned… Revenue management can’t always be top-line driven and it frustrates me so much when we are historically at the highest occupancy this industry has seen, and where the brands think we can motivate people is with discounted rate.”
For her part, Corredor responded, “We think the 10% discount roughly equals the cost of using an OTA. I still think that’s a win because you transfer the value to the consumer as opposed to another business. If you give the value to the consumer, that’s always a win.”
Welter expanded on his point, noting that it’s not just OTA-turned-direct guests who get the discount, but loyalty guests who aren’t particularly price sensitive. “We’re discounting a big portion of folks who would’ve paid the higher rate regardless just because we want to take the OTA volume down from 10% to 9%,” he said. “One of the things you won’t be able to measure is the loss in ADR and opportunity costs associated with it. It’s too difficult to do… Loyalty is not price. It’s rewards, making me feel important, and that’s what brands have done a good job with. We don’t have to discount to get them to stay at our hotels.”
Welter also pointed out that member pricing doesn’t show up on metasearch sites, which is a problem. “It makes it very difficult because consumers are not cross shopping that low rate, so it’s going to take a long time to educate those consumers,” he said. “It’s something we need to be cautious and sensitive of.”
Marriott International’s Drew Pinto, VP, distribution strategy, systems & intermediary channels, also provided the brand perspective. “We are looking at the long-term cost of customer acquisition,” he said. “If there is a customer who is interested and willing to engage with our brands, we want them to book direct. We are trying to bring down the [long-term] cost of customer acquisition. We don’t want to keep acquiring them every single time.
“The other critical piece is a long-term change of price perception,” continued Pinto. “You can’t just look at what is the immediate ROI of doing this because it’s hard to change customer perception and behavior. It takes time and you have to work at it.” Pinto added this is made more difficult because hospitality is not an industry where people make frequent purchases. “This isn’t buying a soda where you have that impression to communicate every single time. Most customers don’t think about where they should shop and book,” he said. “This is not a short time summer promotion we launched. It’s a fundamental change in the value we provide our rewards customers. We have to keep that in mind as we look at the short and long term.”
It’s a sentiment Green touched on. “There’s a tendency for people to take the cost of a particular booking and compare it to the cost of another booking, let’s say brand.com versus an OTA booking, and compare the dollars and cents,” she said. “The concept of repeat guests and a lifetime value analysis, and how often they come back and the cost of bringing them back, is not often taken into account.”
Book-direct campaigns were later discussed again. Starwood Capital Group’s Ash Kapur, SVP and chief revenue officer of hospitality, echoed Welter’s sentiments. “Loyalty is being misconstrued as discounting, which is a bad path to go down,” he said. “We are missing a focus on repeat guests. Understand the guest better, regardless of the channel or segment, and then we know that person will be loyal to us. That means we should be able to drive high rates and profitability—not discount them.”
“It’s a great point,” said Oliver Bonke, chief commercial officer, Loews Hotels & Resorts, noting the company doesn’t have a loyalty program in the traditional sense. “The question is how do we achieve retention? We think it’s by changing some of the dialogue you had in the previous session from how do we change from book direct to engage direct? We think the right retention strategy combined with the right engagement strategy can translate that into enough momentum to be able to not just focus on repeat guests as a task, but culturally, you can make a shift toward that.” HB