In the highly competitive hotel industry, understanding and optimising the Guest Acquisition Cost (GAC) is crucial for businesses looking to increase profitability and build a sustainable customer base. Having an idea of the GAC will allow you to know how much it costs you to generate a new booking at your hotel property.
This blog will delve into the concept of GAC, how it is calculated, and explore examples from the hotel industry to provide a clearer understanding what costs to factor in.
What is Guest Acquisition Cost?
Guest Acquisition Cost (GAC), also known as Customer Acquisition Cost (CAC), refers to the total amount a hotel spends on acquiring a new guest. This includes marketing, advertising and commissions paid to third-party aggregators like online travel agencies (OTAs) and other distribution channels.
GAC is often expressed as a ratio between total acquisition costs and the number of guests acquired within a specific time frame. The Guest Acquisition Cost (GAC) is like counting how much money it takes to get a new hotel guest to make a booking at your hotel.
First, you need to add up all the money you spend on things like advertisements, promotions, and discounts to get the hotel guest’s attention and make them interested in stay at your hotel. That's the total amount of money you spend to try and get new hotel guests.
Then, you need to know how many new hotel guests stayed in your hotel. That's the total number of new hotel guests you were able to convince to make a booking.
To calculate the GAC, you divide the total amount of money you spent, by the number of new hotel guests that stayed in your hotel. This gives you the average amount you spent to get each new hotel guest.
For example, if you spent €10 on advertisements and got 5 new hotel guests, the GAC would be €2. That means you spent an average of €2 to get each new hotel guest to make a booking.
GAC formula
GAC = Total acquisition costs / Total number of acquired guests
Consider a luxury hotel with 100 rooms that sets aside €30,000 per month for marketing efforts and another $25,000 for OTA reservations during that period. They acquire 400 guests over the month.
- Total acquisition costs = Marketing expenses + OTA commissions
- Total acquisition costs = €30,000 + €25,000 = €55,000
- Again the formula for GAC = Total acquisition costs / Total number of acquired guests
- GAC = €55,000 / 400 = €137.50
For this luxury hotel example, the GAC for each guest is €137.50.
Guest Acquisition Cost might not be that straightforward
However, different guests can generate more or less revenue depending on what type of rooms they stay in, how much upsell and extra services the guest is adding to its basket.
By calculating the total amount spent on quest acquisition activities and divide with the total room revenue earned, and then multiply by 100 to get a percentage. This way you’ll get the hotel’s average GAC for a certain month or year.
Also you can measure average GAC for each channel, per marketing segment, type of guests or geographies (local, international etc) to compare and help your marketing and acquisition strategy.
So to calculate GAC is sometimes easier said than done – it can be done in a very simple way as a starting point, and it can also be a very complex task the more in depth and accurate you want to be.
Types of guest acquisition costs and what to factor in
Guests often follow a specific path from awareness of your brand, to consideration i.e. when they begin thinking of adding your hotel to their travel plans (among other potential hotels), further to decision making, when they actually book a room.
If well spent you can do marketing and promotions to have the guest chose your hotel over another one. There are a number of activities and strategies of which the costs should be factored in when calculating the acquisition cost.
Advertising and marketing
There are many types of advertising from Pay-per-Click (like Google Ads) or Comimission-per-stay (CPS) like Google Hotels, Trivago, Tripadvisor etc), social media advertising, sponsorships and retargeting. The cost of advertising comes from creating the artwork, done inhouse or by an agency, and also the media spend. As more and more marketing and activities move to digital, it makes it easier to track and measure on a very detailed level, and specific hotel guests can be attributed to actual campaigns. There are also other ways to reach new hotel guests such as email marketing and organic social media posts on Instagram and the like. All costs for marketing and advertising should clearly be included in the acquisition costs.
Direct bookings and commissions to Online Travel Agencies (OTAs)
For most hotels, the rise of online travel agents (OTAs) like Expedia and Hotels.com has reshaped the landscape, becoming indispensable for visibility and reach. These digital platforms mirror the traditional travel agency model but with a modern twist, offering guests seamless comparison and booking options across numerous hotels in a region. A typical OTA might charge hotels a commission ranging from 10% to 30% per booking, with additional costs possibly arising from special promotions or programs.
While OTAs are pivotal, a hotel's own website remains a vital, direct revenue source. Investing in a robust website equipped with a booking engine and a gift card manager not only curtails commission fees but also opens doors for unique branding opportunities. This approach allows you to directly engage and upsell to your guests, enhancing their pre-check-in experience and fostering a more personal connection.
Incorporating a booking engine on your site is a strategic move, enabling guests to book directly, bypassing OTAs and third-party intermediaries. Although this involves ongoing costs like a monthly fee, search engine optimisation (SEO), and continuous website development and optimisation, direct bookings often emerge as the most cost-effective channel. To maximize return on investment, it's essential to maintain a balance, regularly evaluating the costs associated with driving traffic to your site against the savings and benefits of direct guest engagement.
The importance of monitoring and optimising GAC
Guest Acquisition Cost (GAC) is important for hotels because it helps them understand how much money they have to spend to get new guests to come and stay at their hotel. It's essential for hotels to regularly review their GAC to identify inefficiencies in their marketing strategies and reduce their overall acquisition costs.
GAC helps hoteliers figure out if it's worth spending money on things like online ads and travel websites to attract new guests.
Conclusion
Understanding GAC in the hotel industry is vital for businesses aiming to maximise profit while remaining competitive. Hotels should continuously monitor and evaluate their GAC by analysing their marketing and distribution channels while optimising their sales and marketing strategies accordingly.
It’s best to start with the basics and get more detailed over time. By keeping a close eye on GAC, hoteliers can take control and be well-positioned to optimise the profitability of their property.
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