Table of Contents
Why is an optimal distribution channel mix required?
Even as brand.com has the lowest cost of customer acquisition, hotels need to create an omnichannel strategy with an optimal channel mix. A balanced mix, with room for heavily discounted business as a supplement when necessary, is key to sustaining profitability in the ever-evolving digital marketplace.
The digital market calls for a move past the old days of unmanaged spending on commissions and transaction fees with a need to right-size sales and marketing spend by keeping it aligned to the actual market demand of a given hotel.
What are the challenges for an optimal online distribution channel mix?
Calculation of Customer acquisition cost (CAC)
With the proliferation of booking platforms, the cost of customer acquisition has increased and OTA’s are considered to be one of the expensive channels. Some of the costs don’t show up in the hotel’s profit and loss account.
It is important to calculate CAC accurately to determine the best channel in terms of profitability for creating an optimal distribution channel mix.
Platform companies influence on distribution
The platforms have an enormous amount of customer data which gives them immense power to influence customer decisions. The platform company which hoteliers are most worried about is Google. Then are OTA’s (Online Travel Agents) whose commission increases disproportionately to the number of bookings from their channels.
One of the major challenges for hotels is to correctly assess the credibility of multiple platforms companies and their impact on distribution.
CAC (Cost of Customer Acquisition) is most important in determining the best booking channel in terms of profitability and so we will focus on CAC.
What are the factors to be considered for calcualtion of CAC(customer acqusition cost)?
The costs of customer acquisition are spread across hotel profit-and-loss sheets and aren’t grouped in the sales-and-marketing budget only. There is a need to account for multiple costs associated with room booking for different channels to arrive at a more realistic value. This will help to determine the most cost-effective channel.
- For bookings where the revenue is collected by third parties, such as wholesale, opaque, and merchant model OTA, the commission is taken “off the top” which means that only the portion paid. to the hotel by the platform is recorded on the Profit & Loss. The commission or the fees that were included in the total rate the guest paid to the platform company is not recorded. These mark-up commissions represent a customer acquisition cost and must be tracked and considered.
- The advertising costs such as pay per click media spending, or different kind of banner ads, will show up in the sales-and-marketing budget. This must also be accounted for in determining the customer acquisition cost.
How to assess the brand.com(website) distribution cost or CAC?
The direct online channel is the most cost-effective channel. Online travel agency channel is one of the most expensive options along with Travel Management Company bookings.
OTA commission rates may be lower per transaction for many branded hotels, however, the volume of business has risen causing the overall industry cost to be considerably higher. When receiving business from an OTA channel, the hotel is less likely to observe repeat behavior.
The following are the direct cost component of booking through Brand.com
- Internet booking engine cost
- Cost of professionally developed and aesthetically designed website
- Web site maintenance cost
- Cost of human resources to manage the online booking and related activities
- Online Marketing Cost (SEO, SEM, Social Media Marketing
What are the three analysis required for an optimal distribution channel mix?
| Analysis | Description |
| Profit contribution | The amount of contribution to profit down to a gross operating profit (GOP) level on a stay basis, for different sources of business that guests book through. Different sources have different typical average rates (ADRs), lengths of stay, and cost structures associated with them. |
| Life Time Value Analysis | The metric analysis “lifetime value” of different types of guests based on how they book and whether or not they are part of a loyalty program. |
| Ancillary Spend | The final analysis looks at another important component of guest value, the “ancillary spend,” or the spending in other revenue centers beyond room revenue. |
How to calculate channel wise profit contribution?
Calculate channel wise total acquisition cost
| Brand.com | OTA-Merchant | OTA-Opaque | Global Distribution | Property Direct | |
| Website | |||||
| SEO cost | |||||
| SEM cost | |||||
| Transaction Fees | |||||
| Loyalty cost | |||||
| Retail commission | |||||
| Wholesale commission | |||||
| Total acquisition cost |
Calculate channel wise room profitability per room night basis
| Brand.com | OTA-Merchant | OTA-Opaque | Global Distribution | Property Direct | |
| Avg guest paid daily rate | |||||
| Avg length of stay | |||||
| Room revenue per booking | |||||
| Total acquisition cost | |||||
| Other room expenses | |||||
| Income before fixed charges | |||||
| Undistributed expenses | |||||
| GOP* per booking | |||||
| GOP* per room night |
What is use of customer lifetime value (CLV) analysis?
Customers who return frequently and remain loyal, either to a brand or to an individual hotel, can provide significant value above and beyond their direct revenue contributions. . Their informal influence within their circles along with their propensity to provide online reviews and commentary carries weight and can positively impact the hotel.
The CLV is a prediction of the value a business will derive from its entire relationship with a customer. NPS (Net Promoter Score) can be calculated for different channels/platforms to determine the booking source/channels with a high proportion of loyal customers. The optimization of the distribution channel should take into consideration the life time value.