Mr. Isenberg

Revenue Management

Understanding Your CAC (Customer Acquisition Cost) - Then and Now

By Gary Isenberg, President, LWHA Asset & Property Management Services

In the early years of my career, before the industry had revenue managers, managing hotel bookings was relatively straightforward and easier to understand. Reservations managers controlled inventory and their main focus was to maximize sellouts. They had only three channels to monitor: the brand's central reservation system; a local reservation system; and group sales. This simplicity had its challenges. For one thing, inventory had to be opened and closed manually. Once at the Sheraton Russell in New York, the reservations manager went on vacation and her fill-in did not follow the correct sequence of key strokes and processes to close out inventory. There was a citywide sellout week, and the hotel oversold by 100%, requiring the front desk to "walk" 150 guests to hotels as far away as upstate New York and New Jersey.

In addition to relying on manual processes, little practical data existed to assist in determining maximum pricing. Prior to the availability of daily competitive data via the Weekly STAR Report, hotels conducted a "call-around" every night in order to evaluate their daily market performance. Night auditors would share occupancy and ADR with local competitors. Similarly, in the days before services like Rate360 by TravelClick, price shopping by competitors was basic. PBX operators were tasked with calling nearby hotels pretending to book a room. (Obviously, this was prior to caller identification.)

A major step came when early technologies allowed for the emergence of revenue managers who, using historical data and patterns, introduced yield management to maximize rates. Then came The Game Changer: the Worldwide Web and the subsequent proliferation of booking channels, including OTA's like Expedia and metasearch sites like TripAdvisor, Facebook and Google. The Web replaced roadside signs, Mobil Travel Guides and other legacy sources of information. It also changed the complexity of the revenue management function.

Fast forward to today and a booking world dominated by technology, data and multiple booking channels, creating a new focus for revenue managers: Customer Acquisition Cost (CAC). Although maximizing RevPAR continues to be important, the industry is now in a position where all spending practices must be examined - whether it be OTA's, meta search sites, the return on ad spend or myriad other expenditures. Hotels have become so dependent on high-cost channels that in many cases profits have shifted from hotel owners to vendors.

Historical CAC's for the sector are far from favorable. A 2013 Kalibri Labs (which benchmarks and evaluations revenue performance and acquisition costs) study in conjunction with the Hotel Asset Managers Association (HAMA) indicated that commissions were rising at twice the rate of revenue growth from 2009 to 2012. The Kalibri Labs database also indicates that commissions paid to third parties were still rising at twice the rate of room revenue growth for the period from 2011 through 2015. Let's use this information as a warning that we need be cautious as continue to navigate through this continuously changing landscape.

It is important to measure CAC on many fronts; while OTA's and other third parties may be the most high-profile channels, they are only part of the picture. Bottom line: the digital revolution has changed the revenue manager's goal to one of finding a magical mix of rate and costs that maximizes -- not RevPAR -- but profitability.

CAC - An Ongoing Challenge

The heightened importance of CAC now presents revenue managers with a continuously shifting scenario, depending on the channel, the hotel and other variables. Kalibri Labs' latest report, "Demystifying The Digital Marketplace showed that Guest Paid Revenue (GPR) in 2015 was $145.5 billion (the amount guests actually spent on rooms), an increase of 6% from the previous year. That's the good news. The bad news is that commissions and transaction fees increased by 9% from 2014 to 2015 representing over $13.4 billion in additional commissions and transaction fees, which goes to third parties and not to the hotels themselves.

The 2015 data from the same report illustrates that the cost of acquisition is about 18% of guest paid revenue but ranges from 15% to 25% in the U.S. These numbers highlight the fact that CAC is increasing faster than top line revenues and furthermore is the swiftest growing cost in hotels today. And, as Estis Green points out, third parties continue to aggregate demand in spite of the various initiatives under way to alter this pattern.

An independent property may be paying a 24% commission to Expedia while a booking through the hotel's website directly may have a cost of $2 - a make-or-break differential. Some portion of OTA business may in fact be incremental, but the question becomes: what is that customer costing you? During a recent engagement, LWHA Asset & Property Management had a client that received 75 percent of its bookings through an OTA at 24% commission. That money could have been used for a substantial marketing budget - and the opportunity to gain customers through a lower cost channel.

Success of the OTA's is due in part to placing themselves at the top of consumers' minds as a by-product of their massive marketing budgets and spokespeople like Mr. Trivago and others. According to Skift, the online news platform, Expedia and Priceline combined spend more than twice on marketing than all hotel brands combined. The industry has evolved into what some refer to as non-stay brands, hospitality technology companies that do not operate a single room. Furthermore meta-sites like TripAdvisor are now segueing into the booking process, further complicating the landscape. Making matters even more opaque was that the cost of OTA customer acquisition was "hidden" for years until the OTA's moved from the merchant model to a "guest pay direct" model. Under the merchant model, the commission was not recorded anywhere on hotel books; only net revenue was recorded - after discounting the commission did not appear on a hotel's P&L. The net profit was the same but revenue and expense were understated. The unrecorded expense has become a true expense to hotel's because OTA's have targeted their marketing efforts to shift business away from direct channels to their booking channel, yielding them a commission as high as 24%.

With the new model, guests now pay at checkout with their own credit cards and the gross rate is recorded upon which a hotel records a 24% commission and pays the OTA. Those sometimes startling numbers now show up on the books of a hotel, forcing hoteliers to think differently about their channel mix.

Estis Green's research demonstrates that the brands and the industry as a whole need to be more proactive and aggressive. Chain hotel companies have fought back with lowest rate promotions and loyalty programs, and are also battling on the content front byoffering better photos, videos and information than the OTA's have on their sites. Those are all effective ways to provide more value. Global brand strategies including marketing, rate discounts, and loyalty promotions aim to shift demand in a way that was not being done before. As a result, the latest report from TravelClick indicate a shift in bookings toward direct bookings and away from other channels like OTA's.

Direct Booking Focus

The trend to drive direct bookings has resulted in a proliferation of third party vendors such as Triptease, The Guestbook, and Avvio, all offering products to increase and improve direct bookings. However, cost must again be paramount and it is imperative for revenue managers and senior management to evaluate the impact of the totality of these additional expenses on the direct booking CAC. I am concerned that when total costs associated with driving direct bookings are compounded, it may in fact drive the cost of those bookings higher than the supposed nemesis: the OTA booking.

Major brand families, such as Marriott International and Hilton Worldwide now offer discounts to loyal guests who are already booking direct, as well as charging their hotel for brand loyalty points earned during the stay. Therefore hotels need to weigh all these factors and understand the true costs of every booking. In some instances, after factoring in the cost of the points earned and the discounted rate an OTA booking may in fact be less expensive to a hotel than a brand loyal guest.

Clearly, direct bookings are only part of the solution. As the trend continues to drive direct bookings, revenue managers and marketers need to cautiously consider and analyze CAC. In certain instances, the cost of acquisition may be hidden, concealed and/or touted as low when in fact it is not. Even something seemingly as clear-cut as key word advertising may not offer the best CAC results. Through SEO and other tools, a successful campaign may be yielding a return of 400% on ad spend, when in fact this equates to a CAC of 25%. In this example, an OTA may have been more profitable.

Facing a Future of Complexity

The complexity of revenue management will continue to grow as disruptors become more dominant and new disruptors emerge. New technologies will bring new disruptors; mobile applications will play a larger role in expanding the playing field and in shaping consumer habits. I would not be surprised if at some point in the near future "Pokémon Go", or similar mobile game applications are utilized by hoteliers to drive revenue.

The sharing community such as Airbnb, HomeAway, VRBO, etc. will continue to converge with the hotel industry, segmenting consumers and demand. On a personal note, as we do every year, this Fall, my family will attend a football game at our favorite college. Instead of our friends and family spending $4,000 for the weekend on four hotel rooms, we have booked a house from Airbnb for $2,000 that is more convenient and hopefully more comfortable. Airbnb has already had a huge impact on compression situations like this.

Not only a price point issue, my group will have a superior product that better matches our needs - an entire house where we can barbecue and tailgate before and after the game. Quite frankly, I would have booked this Airbnb even if it had not been less expensive than the hotel rooms. However, if it were not for the two-night minimum and overpriced room rate, I most likely would not have visited the Airbnb website. In certain situations, the sharing community is serving a consumer need not offered by hotels, they are not merely stealing share.

That is not a commentary on hotels or Airbnb but is meant as a reflection of what the lodging industry faces, namely a landscape where a hotel's revenue management process is like a whitewater rapid - fluid, and continuously shifting and changing. I firmly believe the mission of modern revenue managers is to navigate that rapid to optimize RevPAR and, more importantly, profit, by always understanding and considering CAC.

Gary Isenberg is President of LWHA® Asset & Property Management Services. Mr. Isenberg’s expertise includes third party asset management, serving as an owner’s rep, due diligence for real estate investors, and development services to negotiate management or franchise agreements. His asset management specialties include capital budgeting, PIP costing, and internal control and accounting. A graduate of Fairleigh Dickinson University with a Bachelor of Science in Business Management and minors in Corporate Finance and Information Systems, Mr. Isenberg started his career with ITT Sheraton as a Corporate Trainee. He was rapidly promoted over a series of increasingly responsible positions, mergers and acquisitions, at both the corporate and property level. Mr. Isenberg can be contacted at 212-300-6684 x108 or Please visit for more information. Extended Bio... retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by

Receive our daily newsletter with the latest breaking news and hotel management best practices.
Hotel Business Review on Facebook
General Search:

JUNE: Sales & Marketing: Who Owns the Guest?

Emanuel Baudart

Social media opens the doors to conversations about experiences – good or bad. Twitter gives hotel guests the option to air their grievances while Instagram gives them the bragging rights on their best days. Customers are giving out their feedback and it’s up to the industry to take it seriously in how hotels engage with their guests. A guest’s social media is an opportunity for hotels to work better and more efficiently to target and enhance the guest experience. Coupling the data that guests give through social media with the data we have from years of growing AccorHotels, we are focusing on using the right tools to best access the guest. At AccorHotels, we are moving away from the transactional model of hospitality and focusing on building relationships through social engagement and bolstering the benefits of our loyalty program. In order to do both, we’ve invested in building better tools for our hotels to succeed on the promise of hospitality – great service, attention and comfort. READ MORE

Wendy Blaney

In a world where almost everything is done digitally, it is important to remember how impactful a two-way conversation can be for consumers interested in booking travel. There is no denying that it has become easier and easier to plan trips online, and purchase products almost instantly – yet there are still many customers who want the personal touch and assurance that they truly understand what it is that they are buying. They want someone to provide direction, answer questions, and give them “insider” information. This is especially true for a dynamic destination like Atlantis where there are an abundance of options. Our guests aren’t just interested in a resort, they are seeking a coveted, catered experience. READ MORE

Mustafa Menekse

Though it seems that online travel agencies have been a part of the hotel booking landscape for eons, the reality is that just 25 years ago, brick and mortar travel agencies were the norm. Travelers would visit an agency for trip planning advice, printed brochures, and to speak with actual travel agents to assist in booking airfare, hotel accommodations and rental cars. Travel agencies had the knowledge and information about the destination and, of course, the tools and connections to book hotels and flights to begin with. The support these agencies provided put traveler’s minds at ease, especially for international trips. This was the foundation of why OTAs are in existence. READ MORE

Scott Weiler

A guest of a hotel or chain books with an OTA. Terrific for everyone, right? The OTA is grateful for the transaction, and hopes to get a nice share of that customer’s travel bookings for years to come. The hotel is happy to get a (let’s say) first time guest. Sure, they paid a commission for that booking, but the GM and their team is ready to do their stuff. Which is to say – deliver a great stay experience. Now what? Now it’s a battle of the marketers! READ MORE

Coming Up In The July Online Hotel Business Review

Feature Focus
Hotel Spa: Measuring the Results
As the Hotel Spa and Wellness Movement continues to flourish, spa operations are seeking new and innovative ways to expand their menu of services to attract even more people to their facilities, and to and measure the results of spa treatments. Whether it’s spa, fitness, wellness meet guest expectations. Among new developments, there seems to be a growing emphasis on science to define or beauty services, guests are becoming increasingly careful about what they ingest, inhale or put on their skin, and they are requesting scientific data on the treatments they receive. They are open to exploring the benefits of alternative therapies – like brain fitness exercises, electro-magnetic treatments, and chromotherapy – but only if they have been validated scientifically. Similarly, some spas are integrating select medical services and procedures into their operations, continuing the convergence of hotel spas with the medical world. Parents are also increasingly concerned about the health and well-being of their children and are willing to devote time and money to overcome their poor diets, constant stress, and hours spent hunched over computer, tablet and smartphone screens. Parents are investing in wellness-centric family vacations; yoga and massage for kids; mindfulness and meditation classes; and healthy, locally sourced, organic food. For hotel spas, this trend represents a significant area for future growth. Other trends include the proliferation of Wellness Festivals which celebrate health and well-being, and position hotel spas front and center. The July issue of the Hotel Business Review will report on these trends and developments and examine how hotel spas are integrating them into their operations.