At Fornova we are advocating that the best equipped and most knowledgeable people in any hotel that can evaluate the real cost of managing metasearch campaigns are the distribution and revenue managers, regardless if they currently have the budget to do so.
We aren’t claiming they should replace the marketing managers in any way shape or form; rather that they are the the best leader in the organization to put any PPS initiative under evaluation and then make the best recommendation for the right model and more so, the right commission (under PPS) or Cost of Acquisition (under PPC) to place on Google.
The way to answer the complex question in the title, is to first calculate the real cost of working on Google’s Pay Per Click program; There are three parameters that need to be taken into account:
- your campaign management cost
- the cost of capital
- the risk of cancellations
Cost of campaign management - Pay Per Stay (PPS) removes the need to pay hefty fees to agencies to manage the complexities of a PPC campaign. Managing a hotel PPC campaign where Google allows a different bid per country, platform, Length of stay etc. is a complex challenge which requires Account Managers and sophisticated technology ( some of your providers will even claim they use AI ) which comes at a high cost and often hear of a cost range in of anywhere between 4-8% of the booking value. We are not claiming whatsoever that these amounts are unreasonably high for management of a PPC campaign as it requires sophistication, however, in the PPS model it is worthwhile noticing that Google will do all the heavy lifting for you, therefore the cost of management is dramatically lower than managing a PPC campaign.
What percentage of bookings does your agency charge?
What fees do you pay for a bid management platform?
Cost of capital - When we refer to the cost of capital we mean what do you estimate is your cost of capital with your current PPC campaign? With PPC you are paying for clicks weeks or months in advance of the guest stay, whereas with PPS you will pay during the following month after checkout. To estimate the cost of capital with PPC work out what is the cost of spending money in advance of the guest staying. Our recommendation is to ask the following questions and multiply the answers:
What do you estimate your cost of capital is, in the percentage of the booking value?
What’s your average daily rate? What’s your average booking window? By adding 3 or 4 weeks to the answer (as you pay on the 18th of the following month to checkout).
Risk of cancellations - Work out your average cancellation rate, even if it is hard to estimate due to the coronavirus uncertainty, as many nationalities are still unable to travel due to border closures and other restrictions.
With PPC you need to take the cost of acquisition with your agency or internal marketing team and calculate the new cost of acquisition including the cancellations. If your marketing team or agency achieved a return on ad spend and your estimated cancellations which means you need to take whatever the return your agency used to get and reduce the cancellations from said returns. For example, if your cancellation rate is 25% and your return on ad spend achieved was 10, your effective new return on ad spend is 7.5. Whereas, with PPS there is no risk of payment for no-shows or cancellations what-so-ever as you are only paying after checkout.
What is your estimated cancelation rate?
We are absolutely not advocating that PPS is a better model than PPC for all hotels. There will be many hotels which will run the evaluation we have laid out and conclude that PPC is more beneficial for them.
It is also worth mentioning the additional advantages of working with the PPC model, which include:
- Currently the only metasearch engine to provide a PPS model is Google, if you believe you can receive more guests from the other meta sites such as Trivago, Tripadvisor, or Kayak, etc. you should do so.
- The other point which is important to acknowledge is that in order to simplify PPS, Google doesn’t currently provide any granularity which allows smarter targeting of guests - they do so in order to simplify the whole campaign management, working in a similar way to OTAs. Whereas, if you select the PPC model you can provide different bids by country, LOS booking window, day of the week or even device.
- Google has informed us that in the near future more granularity will be added, starting from the booking window allowing you to bid a different commission on different booking windows. While this is good news, we estimate it will take a long time, if at all, until the PPS model will cater to all of the options available on PPC.