5 Ways to Deal with High CPA in the Hotel Industry
As a hotelier, you need to be thinking in terms of CPA (Cost Per Acquisition). This metric gives you a more honest understanding of the return you’re getting on your investment. High CPA in the hotel industry is rampant. Your OTA bookings alone come with an average CPA of 25%. Bookings from other channels range from 6% to 25%.
As a percentage of room revenue, CPA can eat up anywhere from 7% to 23%. That’s a wide range and across brands, the same 5 culprits are usually responsible for an inflated CPA. So let’s take this opportunity to dive deeper into the reasons why your hotel has a high CPA and what you can do to improve it.
The Limits of CPA’s Usefulness as a Metric
It’s easy to notice that high cost per acquisition and cringe. But before you go slashing costs and cutting corners, you need to really understand what this metric is trying to tell you. There are cases when a high CPA is not as bad as it seems. There are, likewise, cases where a low CPA could actually be a sign of trouble.
To put your CPA into perspective, you really need to be looking at it alongside other metrics. For example, compare your CPA to your RevPAR. If your average revenue per room is also high, the increased cost per acquisition could be well worth the investment.
By that same logic, the fact that your competitors might have a lower CPA than you might not be the sign of the financial strength you assume it is. This is a metric that can be manipulated. For example, the hotel may have made dramatic cuts to its marketing and sales budget and the number of acquisitions hasn’t begun to decline yet. Don’t worry, the other shoe will drop.
There are two key takeaways here:
- Always look at your CPA next to your RevPAR. If revenue is growing in line with (or, ideally, faster than) your CPA, there’s no reason to panic.
- Don’t become too obsessed with getting your CPA to be at or below the industry average. You don’t want an exorbitantly high rate but your end game is to be more profitable than your competitors, not to just be the one that spends the least.
With these points in mind, your CPA is still a useful metric for helping you figure out where your spending is less efficient than it could be. So let’s now break down five of the most common reasons a hotel’s CPA will be high.
Reason #1 It’s Just Plain Hard to Quantify
As important as it is, CPA can actually be a really tricky metric to nail down in the hotel industry. That’s because you’re using so many different distribution channels; you’ve got your own marketing to consider; and there are just a lot of unknowns (or at least “difficult-to-knows”).
Even if you have a figure written down, it might not be 100% accurate. And you might not have the data necessary to know whether or not that figure represents an upward or downward trend.
Without knowing all the factors that should be included in your calculations, it’s hard to pin down exactly what your CPA is right now. It’s also hard to know how exactly your investments and strategy are contributing to that figure. Finally, it’s even harder to know exactly what you should be doing to push that number down.
It seems harsh to start an article off with such a pessimistic message about how unknowable your CPA really is. But there is a solution. As tricky as it can be, it is possible to arrive at a figure that is at least accurate enough to be useful in developing an effective plan to tackle the problem.
How To Deal With It
This is more a problem of information than strategy. But you can’t develop an effective strategy to lower your CPA if you a) don’t know exactly how high your CPA is or b) don’t know exactly what factors are to blame for it.
So the first step to addressing your CPA is actually getting to know it. Gather the data. Go through it with a fine tooth comb:
- Find out exactly what your CPA is.
- Find out how it has changed historically.
- See how it stacks up against other metrics like RevPAR or CLV.
- Measure your CPA for each individual distribution channel.
- See how the CPA for each channel has changed historically.
Reason #2 OTAs Aren’t Being Used To Their Full Potential
Hoteliers tend to be a little begrudging about using OTAs. They’ve been billed as a sort of necessary evil. But, in reality, they aren’t necessarily all that evil. They do take a pretty steep cut (between about 18% and 25%), but unless you are a top notch marketer, there’s a good chance you could end up spending a similar percentage on marketing. And, in exchange for those high commissions, OTAs do offer some real value:
- Great exposure for your brand. If you’re an independent brand or a boutique hotel, it’s unlikely you’re going to see a lot of direct searches for your name. OTAs are going to be an important means of getting access to your market.
- About half of travelers will visit your website directly after first finding you on an OTA. This increased web traffic is something you can (and should) use to your advantage.
- OTAs tend to have huge marketing budgets and full marketing teams. By using these channels, you get to benefit from those top-of-the-line marketing resources without needing to invest the money it would cost to achieve the same yourself.
So this is not really a channel you can afford to ditch just because you’re unhappy with the costs.
How To Deal With It
You may not be able to eliminate OTAs from your business, but you can rethink your OTA strategy a bit to maximize the benefits while minimizing your dependence on it as a source of bookings.
- Use web traffic to capture new customers and encourage direct bookings onsite rather than going back to OTA. Create loyalty programs or exclusive onsite booking offers.
- Dig deeper into the numbers to measure just how much you are benefiting from OTA marketing efforts (including how much time/money/manpower you are saving by not doing it yourself). Weigh this against the commission costs. Do this for each site. Determine which ones are worth sticking with and which ones aren’t really cost effective.
Reason #3 Global Distribution Systems Are Underutilized & Not Tracked Well
Global Distribution Systems (GDS) are another important distribution channel for hotels. It’s a great source for both group bookings and business travel, but a lot of hotels aren’t using this channel as effectively as they could be.
One of the key mistakes hotels make is slashing their rates in order to maintain relationships through their GDS channels. This is not ideal, however. GDS set up fees hover around $1,000 and each transaction done through them will come with a flat fee of $10-$15. So lowering your rates too much can end up making this channel more expensive than it’s worth.
GDS fees and OTA commissions are most likely the two biggest factors inflating your CPA. The costs can really add up. That doesn’t mean you should cut and run, but it does mean that optimizing these two channels will likely be the most effective places to start driving your CPA down.
How To Deal With It
There is a lot more hoteliers could be doing with their GDS channel and it starts with paying much more attention to it. First, make sure that travel agents actually have the most up-to-date information. They need to know your current rates and, of course, they need to have the most current information.
That information should include:
- Amenities and services offered
- Points of interests
In addition to regularly checking that travel agents have the most up-to-date information, measure the effectiveness of your GDS channel. Find out the main travel agencies used by your market segments.
Pay special attention to your customer acquisition costs (CAC) and your customer lifetime value (CLV) when measuring the revenue coming from this channel. Track the change in these metrics over time.
With this data in hand, you might consider investing in a targeted marketing campaign focused on the key market segments that are booking through this channel.
Reason #4 Hotel Websites Aren’t Fully Optimized
Earlier you read that an OTA can drive more traffic to your website. But what are potential customers going to find when they get there? If your website isn’t user-friendly and optimized to perform, customers will simply go back to the OTA and either book your hotel through them or book a different hotel entirely.
In both cases, you’re losing money. There are a surprising number of hoteliers who have neglected their websites. As a result of this neglect, many hotel websites suffer from staggeringly high abandonment rates. Visitors will bounce immediately after seeing the landing page or they will get part way through the booking process and abandon before completing it.
Your website is one of the channels you have the most control over so it’s a terrible waste to let it go underutilized.
How To Deal With It
Devote some real time and resources to analyzing your website as it currently exists. Scrutinize every page. Identify every weak point and every aspect that could be improved. Find out at what stage of the booking process users are most often abandoning.
- What could you be doing better at that point to keep them going?
- Is your website as fast and simple as it should be?
- Is your message both clear and compelling?
- Is the design enticing and attractive?
- Have you optimized the site for SEO?
These are just a few of the questions you need to be asking. If you don’t feel qualified for the job of analyzing and optimizing your website, you might want to use a professional web design and optimization service to get this important revenue channel up to par.
Reason #5 Revenue Is Stagnating
In the quest to increase booking rates, hoteliers across the nation will feel the pressure to drop their rates. This race to the bottom in order to attract more customers is contributing to a stagnation of revenue across the industry.
In addition to decreasing revenue, lowering room rates also causes your CPA to take up an even higher percentage of your revenue. In other words, you are spending the same amount of money (or potentially more) and getting less in return for it. It’s not good any way you look at it.
While decreased revenue doesn’t directly raise your CPA, it does raise the temptation to start slashing your marketing budget or cutting distribution channels. This mindset will send you on a downward spiral that ultimately leads to fewer bookings. And weren’t more bookings the reason you dropped your rates in the first place?
How To Deal With It
Keeping your RevPAR up and your CPA won’t be such a burden by comparison. That sounds like something that’s easier said than done. It does take some effort and a lot of strategizing but it is possible. And it is very much worth it.
The key is to optimize your prices, not drop them. You need to develop a revenue management strategy that will help you set the rate of each room at the optimal price for each day.
There is no single revenue management strategy that can fit every hotel. It requires highly specific customization to your exact circumstances. What is the best price for this specific room in this specific hotel in this specific location on this specific day for this specific customer?
To find these optimal prices, you need to gather as much data as you can and put it into your strategy. If you can drive up revenue while keeping your costs stagnant or declining, you’ll be attacking the issue from all sides.
A key lesson here is that it’s better to think in terms of optimization rather than simple cost cutting. If OTAs are an expensive source of bookings, that doesn’t necessarily mean you should invest less in that channel. Instead, look for ways to get the most for your money and balance it out with other channels. Track your CPA and use it as a guide to find the weak points in your budget. While high CPA in the hotel industry has become commonplace, there are effective ways to mitigate those costs. Now, keep calm and optimize!