The debate of increasing online travel agency (OTA) commission for hotels has been around for years. But for some reason very little has been said about Sales & Marketing costs (S&M). How much more (or less) are hotels investing in S&M to drive revenue growth without the help of the OTAs? If we add up commission and all other acquisition costs, are we actually spending more than before to acquire business? Is it possible that rising distribution cost in our industry is a hoax?
In order to verify ourselves we looked at three different indicators to analyze our acquisition cost over the last years. The first one was direct acquisition cost yield (figure 1) which measures how much revenue is kept after deducting all third-party commission and other transaction costs that can be attributed to a single booking. For our sample of some 20 hotels in primary and secondary cities across continental Europe the direct acquisition cost yield was indeed getting lower each year. Not surprisingly, a direct result of our increasing OTA share. So far, no fake news.
The second indicator was return on S&M investment (figure 2) which measures the amount of net revenue we get back for each € spent on S&M in the same period. The trend is quite the opposite compared to direct acquisition cost yield. We were getting more (net) revenue in return every year. So how is that possible? It is certainly not our PPC campaigns on Google that are generating a higher ROAS. It is also not because of significant cuts in the sales or marketing payroll. The answer is that we have done nothing. Really, nothing. Every year we have maintained the S&M budget from the past year and even decreased it at times. At the same time, we have budgeted a high single- or double-digit growth in room revenue (and achieved it). And as a result, the ratio of room revenue in relation to what we are spending in S&M is becoming more favorable.
The third and final indicator we looked at was total acquisition cost (figure 3) which considers all of the above e.g. everything that is spent on acquiring business to the hotel; reservation fees’ from your brand or tech provider, payroll for reservations and sales, RMS and BI systems, digital media, offline advertisement, product placement and of course OTA commissions.
The result; rising acquisition costs are fake news! Each year we are keeping a higher proportion of revenue of what we sold. In other words, our cost of acquisition is decreasing. Yes, OTA commissions are increasing, but spend on S&M isn’t and as we generate new fresh revenue every year, we are, contrary to the popular opinion, not paying more to acquire business. The costs have just shifted from the indirect acquisition cost bucket (traditional sales & marketing) to the direct acquisition cost bucket (OTA commission), and even to the point that we are getting more efficient.
Basically, we have invested in OTA commissions in the last few years to drive our revenue growth. The critical question is; if we would have invested the money elsewhere, would we have realized the same return and revenue volume?
We’ve been complaining about rising distribution costs for years when in fact we were paying less the entire time. How different the discussion would have been if we would have considered both cost buckets from the start and looked at the full picture.
So how to move forward from this? For us the three first critical steps were, simple as they may be:
- Agree on a framework to calculate and measure cost of acquisition
- Really understand our total cost of acquisition.
- Start treating both OTA commissions and S&M costs equally, both are investments and belong under S&M in the P&L.
To those of you who passionately contest that rising distribution costs are fake news – First of all, be honest, did you really consider all the facts (e.g. all costs)? For those of you who did, and legitimately disagree – Bravo and fair enough. At least you are looking at the full picture and are taking solid distribution decisions for your hotel. We need more of your kind so we can start comparing and benchmarking distribution cost better in the industry. We also need to agree on a common framework to do so (why not the one introduced by the clever people at Kalibri Labs).
Rising distribution costs may not be fake news for all hotels, but before you put on your “Make Distribution Costs Great Again” hat, it may be worthwhile to fact-check and verify first.