Budgeting time – Yeeaaahh !?
It’s that time of the year again, budgeting. I love budgeting times and it reminds me of preparing a wish-list of presents for Santa Claus (or Sinterklaas, in Holland..). I used to spend weeks dreaming about what presents I would like to ask and write them on a wish-list. Over time the wish-list would get longer and longer and I then had to start setting priorities and cross out presents. Preparing a hotel’s expense budget is very similar, but with one critical difference. For my personal wish-list of presents I had to stay within a clearly fixed maximum budget amount. In contrast, a hotel’s expense budget is reviewed in relationship to the hotel’s revenue and overall profitability, or GOP, and that means that if you prioritize presents that actually help you improve profitability by increasing revenue and / or saving costs, then you can add more presents to your wish-list.
Here are the top 3 priorities for your hotel’s sales & marketing expense budget:
Almost every customer will visit your website before making a booking, whether they book online or offline. During that visit you have ONE chance to make a first impression, an impression that directly impacts your business. In today’s online-driven market a good first impression is not good enough anymore to change the mind of customers: a first impression needs to be GREAT, and for that you need a GREAT website.
“Today, your website is your most valuable and influential asset, so treat it that way”
If you want to know the characteristics and features of a great website let me know, I’ll be happy to share that, together with some tools to check your website’s current quality.
Next on your priority list should be GREAT content and today that means visual content: photos, virtual tours / 360° panorama photos and my favorite, video. People don’t read anymore, they look. The only thing people want to read are customer reviews, not your own marketing pitch…
You only look as good as your most attractive visual content.
“A picture is worth a thousand words”
is more true than ever before. Do your pictures truly show-off your hotel and most unique selling points as inspirational and inviting as possible?
If a picture is worth a thousand words, imagine how much a video is worth…!? Check out one of my favorite videos, and at the same time how to prominently place a video on your website: www.keemala.com (tip: switch on sound!). Yes, it’s a stunning resort, but see how the video introduces the destination first, is playing on emotions to grab your attention, and only gradually introduces the resort, while making sure to keep your attention all the way through the 2 minute video..? I hear you think “that’s a very expensive video, we cannot afford that”. That’s nonsense. You can have a great quality video from as little as USD 2,000, but a better way to budget for this is by answering this question: “how many more bookings do you expect to receive from having a great video on your website?” One a week? One a month? OK, take the average online value of 1 booking and calculate the total additional revenue you make over a period of 3 years. There you go! That’s a lot more than USD 2,000, isn’t it ?! Now make sure you budget for a (new) inspirational video!
Having GREAT content is the (only) way to go, but make sure your website can handle it and displays visual content as fast, large and crisp as possible, especially also on mobile. Great visual content on a too slow website will do more damage than good and too many clicks to get to content will defeat its purpose.
3) BOOKING ENGINE
Once your website and content is really GREAT the next priority is your booking engine. A good booking engine may deliver decent results, but a great booking engine will simply deliver better results. I still see hotels with a booking engine that is not secure, or not completely mobile responsive, having far too much clutter or needing too many clicks, all reducing conversion rates.
An integral part of your booking engine should also be the available online payment options. For instance, more than 90% of the Indonesians don’t have a credit card and those who do, don’t use it online. They pay online through internet banking, ATM or convenience stores. And Chinese prefer WeChat Pay, Alipay and for instance UnionPay. So make sure you cater to your core markets.
So that is your top 3 priorities. Once your website, content and booking engine are all great, then it’s time to focus on marketing your website, through performance marketing, search engine optimization, search engine marketing and social media marketing, amongst others. More about this in a future article, but if you can’t wait, contact me.
Let’s go back to your hotel’s sales & marketing expense budget and how to make sure you get your wish-list approved, but first something important about a hotel’s P&L statement.
“A hotel’s P&L statement is often done WRONG and does NOT show the actual profitability of the hotel’s business”
Why? Most B2C OTAs are commercially speaking on an agency model, meaning a hotel agrees to pay a commission over a provided selling price, but as most OTAs deduct their commission upfront and pay the hotel a net rate they are effectively treated as if they are on a merchant model. This means that most OTA commission does not appear as a cost of sales for rooms in the hotel’s P&L statement. I believe this is wrong, and room revenue should be posted without the deduction of the OTAs’ commission.
Q: “is ALL OTA commission included as an expense in your P&L statement?”
A P&L statement that does not show ALL income and expenses may lead to wrong business decisions. For instance, I know plenty of hotels whereby owners (at some stage) do no longer want to pay commissions to Booking(dot)com. Of course these hotels explain owners the difference (and similarities) between Agoda and Booking(dot)com, but owners are often more focused on expenses than (impact on) income. Imagine you have to ask your owner to sign a cheque for the amount of ALL the OTA commission you pay every month…? A lot of hotel owners (and management!) simply do not realize the impact of the cost of OTA commissions on their GOP and bottom line and how a relative little investment in a GREAT website and content have a positive impact on profitability. So when submitting your sales & marketing expense budget and wish-list make sure decision makers are aware of the true cost and income of your hotel, show it, until they really understand! I guarantee you a lot of decision makers will have a lot less problems signing off on your wish-list.
PS: a revenue generating website is indeed a company ASSET and the initial expense to design and develop a website and its content should be included under CAPEX. Only maintenance, hosting, regular service, etc is an operational expense.
To demonstrate the difference between a hotel’s P&L with and without all commission included as a cost of sales have a look at below simplified scenario 1 and 2.
In scenario 1 revenue is posted with OTA commission already deducted, while in scenario 2, which I believe is the correct budget, total revenue includes the due commission, and this commission is an expense. Departmental profit for both scenarios is the same, but profitability is not.
Scenario 2 shows that when a sales & marketing expense budget is calculated as a percentage of revenue (in above scenario 9% of room revenue) you theoretically have an extra budget of almost 10%. When you use some of this budget for a great website, content and booking engine your direct online bookings will increase significantly. Scenario 3 shows the impact of doubling your own website’s share of online sales. For easy comparison I’ve kept total online sales and ADR the same. The savings in OTA commissions results in more profit and a positive return for the increased sales & marketing expenses.
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