If you are in e-commerce business e.g. online retail store, hotel, airline booking, etc, I believe that you are already familiar with “ROAS” (Return On Ad Spend) as a mean of measuring the performance of your campaigns. ROAS tells you how your ad budget is spent and whether it is good value for money against the cheap/expensive price that you pay for your ads. The question raised from this is what level of performance the ROAS you are looking at is reflecting.
In this article, I would like to share my experience in running online ad campaigns for Hotels and how we should look at ROAS. But don’t worry if you are in other industries, I will make sure to share on that in later articles.
What Is the Campaign Purpose?
Most hotels start generating sales (bookings) by using OTAs (Online Travel Agencies) as one of their main online sales channels. The universal condition of working with OTAs is the commission rate that hotels have to pay by a percentage out of their sales revenue. After a period of time and a level of target sales reached, many hotels will then consider running their own online marketing to generate direct sales and thus to lighten the load of the commission that they have to pay to the OTAs.
Direct bookings not only solves the commission problem, it also creates brand loyalty amongst those direct customers. While the customers compare and make their decisions based solely on the price shown on OTA platforms, the direct customers are likely to make their decisions based on the hotel’s brand image alongside its added offer as the total value perceived.
What Is the Valid Benchmark for Your Ad Budget?
Each hotel starts their direct online marketing at different stages of their revenue situations. Most hotels allocate their online marketing budget based on the industry benchmark – somewhat similar to what other hotels are doing. The budget could come solely from the management team’s decision in some hotels, while in other hotels the budget is translated from the online sale revenue i.e. from OTAs.
Let’s see a bit of calculation for the latter case where, for example, the commission for OTA service is 15%. Question: what should be an appropriate amount of budget for direct online marketing and how does it compare in terms of ROAS?
To set a simple scenario, let’s say our room price is 3,000 THB/night. Assuming that this is the price for 1 booking, the 15% commission is therefore 450 THB per booking.
If a hotel brand generates 100 bookings per month in average,
the revenue before commission = 3,000 x 100 = 300,000 THB,
the revenue before commission = 3,000 x 100 = 300,000 THB,
with commission payable to OTA = 300,000 x 15% = 45,000 THB.
Therefore, it is reasonable to say that the hotel can start its online direct marketing budget by using the expense on OTA service as a benchmark, which in this case is 45,000 THB per month.
How Much ROAS Means Your Campaign IS In Good Shape?
Let’s consider an easy start where you budget your online ad campaign at 45,000 THB per month. How different are the ROAS’s in each scenario?
Scenario 1:
The return of your online ad campaign equals OTAs
Online ad budget = 45,000 THB
Return = 300,000 THB
ROAS = 300,000 / 45,000 = 6.67
Scenario 2:
The return of your online ad campaign is lower than OTAs
Online ad budget = 45,000 THB
Return = 150,000 THB
ROAS = 150,000 / 45,000 = 3.34
Scenario 3:
The return of your online ad campaign is higher than OTAs
Online ad budget = 45,000 THB
Return = 400,000 THB
ROAS = 400,000 / 45,000 = 8.88
The three scenarios show us that the return from the campaign determines the ROAS ratio, meaning every 1 THB spent on the online ad campaign brings back 6.67 THB of income (Scenario 1). This is the number that the marketing department can use together with other expenses to evaluate the overall performance.
Should ROAS Be Evaluated by Comparing It to the OTA Performance?
It is one of the easiest ways to set the online advertising KPI using OTA performance as a benchmark because doing so, you are comparing the performance of your online marketing department/agency to that of the OTA service you are using and the return is the most solid indicator.
However, the important note is that comparing your online campaign performance to OTA will be the valid KPI only for 1-3 year period or longer. This is because the goal of your online advertising is to create direct bookings. The return from the direct bookings actually depends on many factors such as your website traffic, prices and promotions, competitors’ offers, booking engine fees, credit card service expense, as well as the performance of the key people involved in each step.
What Is the ROAS That Should Be Expected to Begin With?
I can give you a rough number based on my past experience – if you are brand new to online direct booking and has no traffic to your website or if you are simply a brand new hotel, 0-2 ROAS can be expected during the first 6 months (calculated from the total online marketing budget) followed by a steady growth caused by the gradually improved booking process.
Numbers from the Hotel Industry?
The ROAS numbers that I have come across during my 8 years in hotel e-commerce vary immensely depending on each hotel direction. I am familiar with hotel chains that manage and market for many properties and have years of experience in online marketing. ROAS usually varies along the hotel’s ADR (Average Daily Rate).
ADR 1,000 – 10,000 THB → Avarage ROAS at 5 – 15
ADR >10,000 THB → Average ROAS over 15
(Watch how ROI 44 : 1 was achieved at a famous hotel chain with an intelligent tech vendor.)
There is no one universal formula in digital marketing. Nothing can be achieved overnight. The most important thing that will help your business grow in the most desirable direction is to learn from experts and use their findings to improve what you do. A thorough and unbiased measurement can help you tailor a unique solution for your own brand. If that is what you are looking for, MEDIA CONSOLE can help you. 😊
* All insights and calculation scenarios above are cited from the author’s 8 year experience in hotel e-commerce in which the variety of each hotel’s marketing background was present. There is always a high possibility for different unforeseen cases in the future.