Cost optimization and profitability: Cost-optimization has always been a central notion in revenue management. That being said, the pandemic brought renewed attention to the topic. Today, more than ever, proper cost control is crucial to navigate these difficult waters and prepare for the "new normal." Whether we like it or not, every single decision revenue managers take on a daily basis, has an impact on the bottom line, meaning that revenue management is not only about optimizing the revenue streams, but also about increasing profitability. Favoring the distribution channels with the highest profit has become imperative in our industry. But how can hotels calculate the cost-per-acquisition of each channel? What should be taken into consideration? And how can this analysis influence one's distribution decisions?

Federica Salvatori
Federica Salvatori
Revenue & Commercial Strategy and Founder of Federica Salvatori Consulting

The revenue management is evolving. Although its core business is optimizing revenue, every single decision of a revenue manager has, indeed, an impact on the bottom line = profit. For this reason, revenue professionals should take a step ahead and include a channel cost analysis in their strategy. 

How to calculate the Customer Acquisition Cost is a controversial topic, since there are different levels of analysis. Apart from commissions there are many other costs to consider. In fact, the CAC can range from 15% (in a few cases) to 30% (more likely) of guest paid revenue.

Here is a list of the main costs:

  • commissions (included the "mark-up commissions", which are taken off the full rate. This is the case of wholesaler net rates, opaque and net merchant model OTA)
  • Discounts (genius, country rates, members only ect.)
  • transactions and channel fees (GDS, booking engine, outsourced reservation center etc.)
  • GDS, OTA and google ads campaign, metasearch, social media
  • loyalty investment
  • consortia affiliations
  • S&M expenses (benefits, such as free minibar or an F&B credit have to be counted as well as a marketing expense). And what about the website and the booking or sales staff? These are also costs

Why is a channel cost analysis so important? Because it helps to determine the most profitable channels and take the right decision in terms of inventory management with a focus on the profit. As an example, it is clear (from above) that direct reservations don't have a low cost either! So, is it always necessary to disintermediate at any cost? Your channel analysis will reveal it. And you will be able to apply a cost control driven distribution and push the high margin channels at the detriment of the low margin ones.  

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