By Julian Castelli, CEO, LeisureLink — The cost of guest acquisition through direct bookings is rising.
Virtually every aspect of marketing for a direct booking is increasing in price. The above-the-fold results in Google have been continually monetized with price increases and competing ad models. As a result, the cost of a Google pay-per-click (PPC) conversion has grown by 130% (or more) since 2010, bringing direct acquisition costs as high as 15% for a PPC conversion.
This leaves Property Management Companies (PMCs) with organic rankings as their only remaining low cost acquisition path and this path is shrinking rapidly as organic results are pushed lower in Google search and smaller PMCs are consistently crowded out by powerful brands and online travel agencies (OTAs).
What is driving these increasing costs? Competition, growing awareness of vacation rentals by both customers and big travel brands, and online shopping habits. OTAs and intermediaries are gaining market share—with OTAs achieving a 108% increase in their share of room revenue for economy- and mid-scale hotels between 2011 and 2014.
By the end of 2016, Phocuswright predicts OTAs will account for 51% of online distribution.3 Though TripAdvisor and Google eschew OTA classification, each is in the process of monetizing its own instant booking programs. What some consider a “direct booking” from these intermediaries really has a price tag of 12-15% commission attached.
With the continued growth of OTAs and intermediaries, PMCs are wise to move away from an “us vs. them” mentality. Costs are increasing all around, and the opportunity for suppliers is in leveraging all sensible channels to their benefit in order to increase profitability.
Channels can be used to maintain and grow ADR, open up new market segments and acquire new customers, and maintain rate integrity and branding. This is all possible if suppliers reconsider the traditional approach to revenue, an approach that has valued revenue without appropriate consideration around profit, the latter being the more important of the two.
NetRevPAR: Understanding Profitability
Traditionally, lodging suppliers have used RevPAR as one essential marker of success. RevPAR can be calculated as (room revenue/total # rooms). RevPAR, however, only signifies revenue; it does not calculate profit, and until the cost of guest acquisition is factored in, true profitability is elusive, as are thoughtful strategies for maximizing profitability. At the end of the day without an intelligent consideration of costs, most suppliers will continue to bemoan commissions (all the while likely paying more of them) and assume their direct bookings are already as profitable as they can be—and profits will shrink.
Calculating NetRevPAR, on the other hand, incorporates the cost of achieving the booking. It is calculated as (revenue – cost to acquire/available rooms). It takes into consideration not only third party commissions but also transaction costs and indirect acquisition costs for direct bookings. These indirect costs are often hidden by the erroneous assumption that they are free. Really? Where did that repeat customer originally find you? An OTA? Google PPC? Word of mouth? Spreading acquisition costs across the multiple stays a repeat guest generates provides a much more accurate accounting of true acquisition costs.
The obvious benefit of calculating NetRevPAR is a better understanding of the cost of acquisition across channels. This enhances a PMCs ability to create strategies tailored to each channel that can optimize rate and increase profit. A simplified example: a PMC may find that the cost of achieving a booking via PPC, especially if it is reaching the 15% threshold, is more than that of a HomeAway booking, and HomeAway may provide more consistent and broad exposure that leads to direct inquiries and bookings because of the billboard effect. PPC may still serve a purpose, but this information may help the PMC determine to shift attention to better optimizing listings and placement on additional global vacation rental brand shelves like Airbnb, where they can enjoy the benefits of increased exposure to new customers. Contrary to popular belief, suppliers have the ability to create profitable booking preferences between virtually any channels while maintaining rate integrity, but the drive to do so begins with an honest assessment of each channel’s value.
The Gray Areas of Attribution
One among many reasons I advocate for inclusion of direct marketing costs in NetRevPAR is the dynamic guest path to purchase.
Last year, Google popularized the term “micro-moments,” reflecting the ways in which travelers will quickly, often in the middle of another task or while standing in line waiting, pick up a device, usually a smartphone, to do a minuscule amount of research toward a trip. As Google research has found, among leisure travelers that use smartphones, 69% search for travel ideas in random, spare moments and almost 50% of those go on to book through an entirely separate channel.5 Recent studies have shown that travelers may now visit hundreds of web pages during the course of researching and booking one trip. The booking journey is a collection of moments across brand.com, OTAs, tourism organizations, meta-search sites, sharing sites, and more.
While the idea of closely tracking attribution across all points in the purchase path is admirable, for most PMCs the reality is that it is far too complicated to accurately track at this point. An attainable solution is to incorporate marketing costs associated with direct bookings into a holistic picture of the cost of guest acquisition. As referenced above, a meaningful percentage of direct bookings are as a result of OTA exposure. According to a study by hotel agency WIHP, over 20% of direct bookings occurred after guests found a property on an OTA.6 Ultimately, the difference between marketing costs and commissions is becoming more muddled with the rise of micro-moments; however, if they are considered comprehensively using NetRevPAR as one tool, a more realistic view of acquisition costs emerges. This allows us suppliers to craft powerful strategies that will maximize profits.
Knowing channels, their costs, the ways in which they may be overlapping in the path to purchase, and some sense of attribution, PMCs can shift the conversation from the current emphasis on avoiding third-party commissions to a more proactive dialogue driven by optimizing true acquisition costs for each new guest and each stay they generate.
Channel Strategies to Maximize Profitability
Many suppliers continue to use OTAs as their last resort. The last stop for selling the lowest priced or distressed room. However, this approach compromises rate integrity by suppressing rates and driving down revenue on top of an already elevated cost of acquisition. (It has also been shown that when one property begins to drive rates down, others follow suit, and all properties lose revenue without any having gained a competitive edge.) A profitable approach is to consider the actual cost of achieving bookings and determine how to maintain rate integrity across all channels while creating a bias toward the most profitable channels—those that reap not just a lower cost of acquisition, but also a longer length of stay, higher realized ADR, more advanced bookings, and so forth.
To do so requires maintaining consistent availability and seasonally appropriate rates on direct channels as well as the broadest array of third-party channels. The OTA user experience gives PMCs a powerful opportunity to capture market share from neighboring competitors using enhanced reach and global visibility. In addition, suppliers can differentiate themselves on these channels through the strategic use of value adds. Creating a competitive advantage of this nature may also allow a PMC—especially one with a visually appealing presence and positive traveler ratings—to edge up rates against competitors and further increase profit because a higher rate has been shown to have a greater impact on the bottom line than the reduction of a fixed cost.
Value adds may include spa services, free Wi-Fi, a complimentary cocktail or dinner, offering complimentary amenities, or a unit upgrade. They can, and should, reflect the channel audience and property branding. Different, perhaps higher, levels of value may be created for direct channels to encourage repeat guest business.
Most operators and industry pundits understand that third-party channels have a higher cost of acquisition than direct bookings. The reality of the changing world of customer acquisition for vacation rentals is that these channels are also gaining an increasing share of customer searches and new customer acquisition opportunity. Accepting the cost and comparing it side by side with marketing, technology, and indirect costs for direct channel business has value as part of a NetRevPAR strategy.
The emphasis becomes, rather than OTAs as a discounting mechanism, OTAs as a productive channel for new customer acquisition that can be profitable when branding and rate integrity are preserved and repeat stays are generated from new customers. PMCs can use them to shift market share away from competitors while driving a higher level of property visibility, which is increasingly necessary given the increased cost of attaining that visibility through direct channels.
1). The Cost of Pay-Per-Click Advertising. Hochman Consulting. November 2015.
2). Mayock, Patrick. Study: OTAs Continue to Steal Market Share. HotelNewsNow.com. July 2015.
3). Sileo, Lorraine. Intermediaries Stealing Larger Piece of Online Pie. Phocuswright. March 2016.
4). Should TripAdvisor Instant Booking Be Part of Your Direct Booking Strategy? HotelMarketing.com. January 14, 2015.
5). Sridhar Ramaswamy. How Micro-Moments are Changing the Rules. Think with Google. April 2015.
6). Finding the Balance Between OTAs and Direct Bookings. WIHP. Feb 2014.