Whenever we speak about digital marketing in the context of the hospitality industry, we commonly look at the return on ad spend (ROAS) or return on investment (ROI). Ever since online travel agency, such as booking.com, dominates the digital space, marketers now categorize online revenue into two distinct segments: the OTA versus the direct booking. Since the OTAs charges every room reservation for a percentage of commission, it is only natural that the commission became the baseline ROI. The conversation of any digital marketing campaign would soon surround the OTA-declared benchmark. Would this campaign do better than the reference? My management won’t approve if we can’t prove that the campaign’s return would do better than the OTAs. However, is the OTA’s declared benchmark the only factor that matters?
The commission fee can be negotiated and varies over time. However, the number of rooms a hotel has won’t change. The number of bedrooms is fixed physically, which brings us to the next industry metrics: occupancy rate. We calculate a hotel’s occupancy rate by the percentage of available rooms occupied at any one-time. According to Statista, the average occupancy rate in the Asia Pacific region in 2017 was about 70.9%. Typically, a city-based hotel might enjoy a higher occupancy rate, and a destination-type hotel might see a lower occupancy rate.
Like any for-profit organizations with physical property, hotels’ fixed cost affects the profit profoundly. At any period, if the number of occupied room-nights falls below a specific threshold, we would see red in the financial statement. On the flipside, the higher the number of occupied rooms, the fixed cost is distributed to more room-nights. As the cost per room-nights drops, the profit margin would increase.
In a typical digital campaign report, various metrics tell different perspectives of how well (or bad) a campaign is doing. However, I feel there is a need to report another metric: cost per room-nights sold (CPRS). This metric includes the total cost of both operational and advertising expenditure. This metric would give us a new perspective on how we would decide on a budget to spend on advertising. If we can sell more room nights to reduce fixed cost, it would also mean that the money, which is supposed to “pay” the fixed cost, is now available for marketing.
If we focus primarily on ROAS, we might forgo opportunities even if it means increasing occupancy rate and lower the fixed cost per room. Instead, if we concentrate on CPRS, we might jump on opportunities even when it cost more on advertising expenditure; knowing that it would increase overall profit per room.
I’m hoping to have industry data to back up my point. Here is an example I found on the internet to illustrate my point.
- Rooms Available: 295
- Average Daily Rate: $200
- Fixed Cost: $8,000,000
- Variable Cost per room: $50
- Revenue if the occupancy rate is 70%: $15,074,500
- Revenue if the occupancy rate if 80%: $17,228,000
- Cost per room sold at 70% OR: $8,000,000 / 75,372 nights + $80 var cost = $186.14
- Cost per room sold at 80% OR: $8,000,000 / 86,140 nights + $80 var cost = $172.87
- Cost per room sold difference between 80% and 70% OR: $186.14 – $172.87 = $13.27
From the above example, we know that we could afford easily another $10 per room-nights sold but still increase the overall profit.
To sum it up, I think OTA’s commission shouldn’t be the benchmark to gauge the effectiveness of a digital marketing campaign. Also, if the property has the potential to increase the occupancy rate, they should be ready to invest more to do so. Overall, it might help to improve the bottom-line.