Implications of the Rising Cost of Customer Acquisition

On a superficial level, the implications of the rising costs of customer acquisition are easily identified. Increased costs lead to a decline in profitability, which results in a loss of asset value. However, like most things, it is never quite that simple.

One of the first areas to consider in this type of analysis is the economic cycle in which the industry is operating. In a strong economy, like the one the United States has been experiencing over the last several years, many revenue strategy sins can be covered up by occupancies that are improving and average room rates that are increasing. Combine these two key performance indicators and all seems well; however, the truth lies beneath the surface. In this kind of environment, any increased costs incurred to acquire the customer can be obscured by the increased level of room revenue. For example, if your hotel-collected RevPAR increased by 5 percent, that may appear to be excellent on the top line, but what might not be so obvious is the additional 1 percent in acquisition costs that are slowly eroding the bottom line.

Additionally, the analysis is made more complex by dynamically changing quantities of rooms booked through the OTA net or merchant models, where vendors keep their commission prior to sending funds to the property, or through wholesalers. In those cases, any incremental customer acquisition costs would be absent from the property P&L.

In contrast, when the costs to acquire the customer are increasing in a declining or recessionary economic environment—for instance, the most recent in 2008 and 2009—there is a much more obvious and dramatic impact on profitability and net asset value. Using the inverse example, if your hotel-collected RevPAR declined 5 percent while the cost of customer acquisition simultaneously increased by 1 percent, the effect on the property’s profit would be more substantial, as the change in both the revenue and cost metrics would be negative and declining.

Since bad behavior in an upcycle is not as apparent, it is easy to fall into bad habits, and one must react quickly once the cycle tide turns for the worse, making it critical to constantly and accurately track customer acquisition costs for your property as well as the industry at large. The U.S. lodging industry’s past behavior in times of economic stress has been to embrace high-cost booking channels; yet taking care to understand and manage these costs even under favorable economic conditions will result in a much better financial outcome when the inevitable economic downturn occurs.

Tracking your net revenue performance based on the contribution to operating profit and expenses (COPE) can be calculated as a percentage of guest-paid room revenue. By tracking both the absolute percentage and its change from a prior time period, one will get a much more transparent indicator of customer acquisition efficiency and the direction in which it is trending.


The first chart presents the COPE percentage for all U.S. hotels and each of the seven major channels/source-of-business categories for July 2017 YTD. It is evident that there are certain booking channels that are much more profitable to hotels than others. Not surprisingly, and voice channels, where guests book directly with the hotel, are significantly more cost effective compared to the indirect channels like OTAs and global distribution systems (GDS). The magnitude of the difference can be quite stark, ranging from a revenue capture of around 95 percent for direct channels and about 80 percent for the indirect channels. While not shown on the chart, the COPE percent declined in July year-over-year for five of the seven source-of-business categories and for the industry as a whole.


Because industry-wide numbers aggregate all property types, another way to look at the acquisition cost efficiency of the industry is to segment performance by property guest-paid ADR. In the second chart, we present the COPE percent by guest-paid room rate. As shown, generally speaking, the lower priced the property, the higher the COPE percent. While this may seem slightly counterintuitive, lower-rated properties tend to be smaller and have lower occupancies. Guests booking those properties tend to have a much shorter booking window, if they pre-book at all, meaning the hotels have a strong reliance on the direct booking channels due to the “walk-in” or “front desk phone reservation” nature of their business.

Understanding and monitoring customer acquisition costs, both at a hotel and industry level, is the first step in helping maximize profitability in strong economic times and better preparing for an economic downturn.

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Striving for optimal: How to maximize revenue performance

By: Ankush Khullar

Hotels traditionally benchmark their performance against the RevPAR of their comp set. Using this method, they are incentivized to strive for an average rather than “optimal” performance. By focusing on top-line revenue, hotels are not maximizing net revenue, or the revenue they keep after deducting costs for guest acquisition.

One way to remedy these issues is to utilize a custom “optimal” target by determining the mix of business the property can realistically achieve in order to maximize their net revenue performance.

Based on actualized statistics, consider an upper upscale hotel located near San Jose, California (the “subject hotel”). The hotel’s comp set consists of the subject hotel and four nearby properties. In 2016, the subject hotel achieved a RevPAR of US$123.56, while its comp set achieved a RevPAR of US$146.28, resulting in a RGI (revenue generation index) of 84.5 for the subject hotel. In order to achieve a RGI of 100, the subject hotel would need to earn an additional US$1.7 million in top-line revenue. After accounting for the subject hotel’s sales, marketing and acquisition costs during 2016, using this method, the subject hotel would target to earn an additional US$1.6 million in net revenue. However, how it would earn the additional revenue is not clear.

Another approach

Now consider that instead of benchmarking against the average performance of its local competitors, the subject hotel benchmarks against a net revenue target based on the best, or optimal, business mix it can achieve with the demand in its market. The optimal business mix (OBM) is based on a combination of factors such as the historical business mix of the subject hotel, the historical business mix of its competitors and the average rates in the market during 2016. Using this method, the subject hotel would target to earn an additional US$4.3 million in net revenue. The OBM method would not only set a target for total revenue but also provide guidance for how to achieve that revenue by increasing or decreasing share of the demand through specific distribution channels.

Based on these results, a hotel can often sell itself short when benchmarking against the average performance of its competitors. In this case, the initial target set is approximately US$2.7 million less than it could be if OBM is utilized as the target as part of the benchmarking process. Although it may seem unrealistic for the subject hotel to earn an additional US$4.3 million in net revenue, the inputs to arrive at the OBM are based on actual rates and demand in its market, by business segment and the acquisition costs specific to the subject hotel. Therefore, although theoretical, the results are based entirely on actualized characteristics of the subject hotel’s market.

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Which entity owns the hotel customer?

By: Mark Lomanno

It’s a common philosophical question among hoteliers, and of late, it has floated even more to the forefront of the minds of operators and thought leaders across the industry. With the advent of the internet, breadth of search functionality and purchase options available to hotel guests, it’s a question with many nuanced answers and an area that needs to be concretely addressed. The third-party intermediaries have offered an influx of “options” when it comes to transacting, but one must ask whether these options are truly a gateway or gatekeeper to higher guest satisfaction and increased occupancy.

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Before the technological developments in distribution, efforts in creating customer loyalty were focused on the competition between and among hotel properties and companies. Sales and marketing budgets were dedicated to promoting the unique selling propositions of the property and differentiating Hotel ABC from Hotel XYZ. Hotel marketers would highlight the benefits of Hotel ABC’s physical plant versus that of Hotel XYZ, and why this unique combination of space and service provides a superior overall guest experience.

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OTAs Become Early Choice In High OTA-Mix Markets

By: Mark Mazzocco

Common wisdom in the hotel world has been that hotels utilize lower cost channels to fill hotels first, and then fill occupancy gaps as necessary with higher cost channels. However, recent data shows that in U.S. markets with a significant OTA contribution, guests are looking and booking on OTAs at the same timeframe as they are considering

In markets with a high OTA mix like New York, Los Angeles, Orlando and Miami, OTA booking lead times have matched or are longer than This strongly suggests that to convert more guests into OTA bookers, OTAs have shifted from being a last stop-booking channel into a primary channel for some consumers.

As can be seen in the charts below, for those markets that have moved past the 20% OTA market mix threshold, OTA business appears to be utilized less as a channel to fill last minute unsold rooms, and more as a direct competitor to filling hotels at the same time as direct channels.

Booking lead-time in each of those markets is roughly equivalent to or longer for OTAs than for direct channels. As the hotel industry continues to experience growth in occupancy, monitoring this trend will be critical for properties and brands as they try to maximize their revenue through channel optimization.

Each hotel and each market will want to consider the way they can make the direct customer booking experience as compelling as possible as they plan their distribution strategy.

  • The OTA contribution to total transient business in 2016 ranged from 15.3% to 24.7% of total transient business in the top 10 U.S. markets
  • Typically, markets with OTA contribution rates of 20% or greater experienced similar booking lead times between OTA and
  • Typically markets with OTA contribution rates of less than 20% experienced 3- to 4-day shorter booking lead times for OTAs compared to

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Loyalty programs directly influence, increase occupancy

By: Mark Lomanno

As booking options in the lodging landscape continue to evolve and expand, hotels have been forced to adapt to changing market conditions. Consumers are increasingly booking online to the tune of 42% of all hotel reservations in 2016 being booked via online distribution channels. In response, hotel brands and operators have been dedicating significant resources to encourage those consumers to book directly with the hotel. The benefits of having consumers book directly are obvious. First, reservations made directly with the hotel are considerably less expensive than those booked through an indirect channel using a third-party intermediary. Second, direct reservations keep the hotel as the single point of contact with the guest, thereby avoiding any third-party intermediary communication, and often confusion, between the hotel and its guests.

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Over the years, much of the OTA marketing message has been centered around positioning the intermediary channel as the go-to resource to strike an opportune deal and receive discounts on hotel rates. Since early 2016, one of the primary efforts embraced by many lodging companies is to rewrite the script in terms of where the ‘best deals’ and ‘best rates’ are available.  These ‘book direct’ campaigns are a mode of industry education to inform consumers about the hotel distribution environment and to drive home the point that loyalty members are held in high regard by the hotel brand and thus will receive the best rate available in the market. To gain access to the book direct promotion featuring the lowest room rate offered, guests are required to either be a current loyalty member or complete the brief loyalty application while in the reservation booking flow. Thus, in addition to driving more direct bookings through the promotion of the loyalty program, it has also had the positive effect of increasing loyalty program membership. As such, in many ways, brand loyalty programs are effectively the new system contribution, a mechanism by which the hotel company’s brand equity can directly influence and increase the occupancy of their properties.

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The Rise of Indirect Bookings

By Mark Lomanno

Prior to the digital age, hotels viewed their competitive landscape in a very traditional manner. Their primary competition was with other hotels, generally those that were in their same general geographic vicinity and price range. There were, of course, exceptions to this rule, but generally a hotel’s competition was pretty easy to pinpoint. At that time, as a hotelier, your job was to use your sales and marketing expertise—along with a superior guest experience—to entice guests to your property.

Hotels today operate in a totally different world than the one that existed just 20 years ago. For both brands and properties, there are now two levels of competitors, rather than the local competition that existed historically. The first level of competition is for the customer’s attention. In this arena, hotels vie for customer attention against large technology companies like Google, Expedia, and Priceline, which are significantly larger than any company in the hotel industry. The second level of competition is with their traditional competitors—other hotel brands and properties.

The Evolution of the Digital Marketplace and Hotel Lodging

By: Cindy Estis Green

The hotel industry traditionally received reservations through calls, walk-ins and travel agencies. But more recently, at annual growth rates of 10-15%, technology aggregators have grown into a considerable force, with two online travel agencies (OTAs) representing a meaningful share of the domestic hotel business, particularly for leisure travelers.

  Kalibri Labs is a next-generation benchmarking platform that helps hotels improve profit contribution by evaluating and predicting revenue performance net of acquisition costs.

Kalibri Labs is a next-generation benchmarking platform that helps hotels improve profit contribution by evaluating and predicting revenue performance net of acquisition costs.

Meanwhile, in the past year, major hotel brands expanded loyalty offerings for booking direct through their websites. Search engines and mobile apps are the emerging models for travel, and it appears the digital experience may be the differentiator in consumer choice when it comes to hotel bookings in the future.

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The Financial Impact of Changing Booking Behavior

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By Cindy Estis Green and Matt Carrier

Part 2 of the new special report from Kalibri Labs, Demystifying the Digital Marketplace: Spotlight on the Hospitality Industry, dives deeply into the intricacies of digital distribution and provides insights into what drives business today. The report is based on hotel production data ad associated costs for 25,000 hotels 2014-2016 to examine the patterns of performance by hotel type over time and is sponsored by many industry associations, including HFTP. The following excerpt shares key findings from Part 2 of the report.

The analysis looks at three types of revenue or ADR: guest-paid revenue or ADR includes everything paid to a hotel or third-party to account for merchant (NET) rates; hotel-collected revenue or ADR reflects the revenue the hotel collects and shows on the P&L statement; and COPE revenue or ADR (contribution to operating profit and expense) which is a type of net revenue that reflects the guest-paid revenue after moving all direct acquisition costs such as commissions, transaction fees, loyalty expenses and channel costs. At the U.S. aggregate level the study examines net revenue which additionally removes sales and marketing expense.

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A First Look at Part 2 of Kalibri Labs’ Special Report

A first look at Part 2 of Demystifying the Digital Marketplace: Spotlight on the Hospitality Industry

Interview with Cindy Estis Green

To support the industry in addressing digital distribution evolution, Kalibri Labs has continued to track industry undercurrents to help reveal what hotel brands, owners and operators can do to embrace the changes and position their businesses for competitive success.

“Demystifying the Digital Marketplace,” a report that builds on the landmark 2012 study, is unprecedented in scope and scale. The rich insights and data provide a framework for understanding market realities as well as embracing opportunities to manage costs and optimize profit contribution.

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A look at how consumer behavior affects acquisition costs

by Mark Lomanno, Kalibri Labs

With the advent and acceleration of the digital age, consumers continue to adjust their behavior, approaching even hotel booking differently. Whereas in the past most guests tended to book their room reservations directly with the hotel by calling or going to the property directly, now consumers are much more likely to shop for and buy their rooms online or on a mobile device. For a hotelier, the shifting consumer behavior from one booking channel to another can have a dramatic effect on the property’s bottom line, as each booking channel comes with its own associated costs. Understanding the impact of shifting channels is key to managing a hotel’s cost of customer acquisition.

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Book Direct - The Numbers Tell the Story

The Numbers Tell the Story

It's no secret that here has been a flurry of book direct campaigns launched in recent months. This includes IHG and Accor launching campaigns in Europe in 20015 followed by Hilton, Marriott, Hyatt and IHG in the U.S. in 2016. This trend has raised many questions about how these campaigns will affect hotel performance from an owner and operator standpoint. Additionally, concerns have been raised by third-party OTAs and meta search vendors about how it may affect their own growth targets. 

AGGRESSIVE RESPONSES FROM THE OTAS HAVE INCLUDED: letters to hotels claiming the book direct campaigns are not working, de-ranking and “dimming” of hotel listings and removal of participating hotels from preferred listing status. Both the CEO of Expedia and have come out in public statements indicating they are not happy about the book direct cam-paigns and intimating that the large chain brands’ attempts will not succeed. The OTAs retaliatory actions convey a message that they sense a serious threat to their business.

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The Digital Marketplace in Europe: Hotels and Third-Party Intermediaries in the New Age of Travel

The Digital Marketplace in Europe: Hotels and Third-Party Intermediaries in the New Age of Travel

The Digital Marketplace in Europe has changed drastically in the past few years. This white paper explains the pushback on last room availability by many hotel companies. How will hotels balance direct initiatives and those deployed through third parties to retain and acquire customers?

Key Topics:

  • The three pillars of the digital market strategy
  • Managing acquisition costs of the marketplace
  • Investment in customer acquisition and retention

Next Generation Revenue Performance Benchmarking for the Digital Economy

Next Generation Revenue Performance Benchmarking for the Digital Economy

THE HOSPITALITY DISTRIBUTION WORLD as we know it is in a near constant state of change. This has never been more true than in the past several years. Expedia acquired Travelocity, Orbitz and then HomeAway., a massive distribution platform, is now offering technology solutions, such as PMS and revenue management, to independent hotels. Metasearch platforms are expanding instant booking offerings to keep customers on their sites. Booking Brands, such as OTAs and metasearch, have become gatekeepers for online travel shopping causing the Stay Brands, traditional hotel companies, to pay much more for access to customers. The cost of sales in the 1990s of about 5 percent to 10 percent of room revenue has shot up to 15 percent to 25 percent and continues to rise. 

How does a hotel manage this challenging new environment? What are the metrics it should track to sustain profitability and thrive? The traditional RevPAR metric doesn't account for this new and substantial cost of sales and therefore often doesn't reflect a hotel’s profit contribution. This new world of sky-rocketing acquisition costs, calls for a next generation set of benchmark metrics to evaluate hotel revenue performance. 

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End of Year Review: Digital Marketplace

End of Year Review: Digital Marketplace

2015 has been a whirlwind year for the digital marketplace. Here are just a few of the changes that affected hotels and the digital ecosystem in which they operate.

Expedia acquired Travelocity and Orbitz by Q3 of 2015 and most recently announced the acquisition of Homeaway to compete in the vacation rental space. Sabre announced the acquisition of Trust, adding to its breadth of independent hotel and small chain CRS offerings, and Amadeus consolidated its hold on Newmarket, expanding its distribution reach into the groups and meetings markets. Priceline/ pulled together a trio of companies to provide services to independent hotels. These companies included buuteeq to create websites, HotelNinjas to provide cloud-based PMSs and PriceMatch to offer revenue management services. Priceline/ calls the new offering Booking Suite and appears ready to compete with hotel brands and franchisors by offering an end-to-end distribution platform and related services.

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Revenue Strategy: Investing in Your Hotel’s Optimal Channel Mix

Revenue Strategy: Investing in Your Hotel’s Optimal Channel Mix

The Billboard Effect is Dead, 
Rate Parity is Dead, 
Last Room Availability is Dead; 
Long Live Revenue Strategy

The third-party wars are raging in Europe with rate parity’s demise pending only a few more strokes of the regulatory pen. With pushback on last room availability by many hotel companies, inventory control may soon be back in the hands of the hotels. Also crumbling is the long embraced theory of the billboard effect. Expounded by the OTAs for the last 10 years, the billboard effect claims to provide “free” merchandising, leading to even more bookings direct on a hotel’s own website.

Ultimately, even in this changing environment, hotels in today’s digital landscape have to constantly balance the two options they have to acquire and retain customers: direct initiatives and those deployed through third parties. There are costs associated with every single acquisition technique. While many channels can bring value, none bring unlimited value or have infinite volume. Tradeoffs and decisions have to be made by hotel revenue strategists.


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The 3rd Dimension of the Hotel Business — Content

The 3rd Dimension of the Hotel Business — Content

Could the way that hotels deploy and manage content affect the sustainable health of the hotel industry?

“Content is king” is a commonly used aphorism, but what does that really mean? They say the currency of the digital economy is content but how does this affect a hotel? Content for the hotel industry means everything from hotel descriptions, photos and video, along with rates, availability and guestroom and meeting space inventory. Creating, curating and controlling content has been core to the strategy for the large tech companies. For example, Google is amassing the power to control the content for every aspect of the digital economy in many sectors, e.g., travel, retail, music, et al. Amazon has made similar headway in the retail merchandise markets.

Content enables the merchandising of products and services that ultimately results in sales. The better the content is, and the easier access one has to it, the more valuable it is. Whoever controls the content controls access to the consumer and in so doing, the ka-ching of the virtual cash registers.

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Google's European Antitrust Issue

Google's European Antitrust Issue

The European Union's recent announce­ment of its intent to file antitrust charges against Google has large implications for the hotel industry. The main complaint is that Google favors its own travel search products over those of its competitors and hotel-inventory providers. 

Google's acquisition of ITA Software's flight-search services and implementation of the bidding model behind its Hotel Price Ads (H PAs) have caused frequent com­plaints from OTAs, metasearch sites and travel brands. In fact, the first results page is almost entirely "pay for position." 

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Last-Minute Caution Expedia

Last-Minute Caution Expedia

Expedia's launch of its Sell Tonight platform, which allows hoteliers to more easily manage last minute inventory, is an indication that more traditional distribution players are going after the hot last-minute booking space that HotelTonight and others pioneered. 

Hoteliers should be aware of the cost, risks and benefits inherent in channels providing this service and enter into any agreement with open eyes and reasonable expectations about net revenue, customer profit and consumer perception in the market. 

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