Which Half of your Marketing Budget is Being Wasted?
As a specialist hotel accounting and consulting firm, we regularly get asked by clients to assist with building budgets and business plans. A vexing question is often raised during the process: “How much should we be budgeting for marketing?” Unfortunately, due to the diverse nature of the hotel industry, it is hard to ascribe an exact dollar figure, or a percentage that will be applicable for all venues. There are however some very broad rules-of-thumb, but they are exactly that: very broad. A marketing budget for a regional hotel in Mackay focussed on retail will look entirely different to a budget for a hotel in Fortitude Valley focussed on bars and late night entertainment. However, there are 2 key criteria that need to be considered when building and reviewing a marketing budget.
- What is the desired outcome? And
- What is the return on investment?
The purpose of marketing is ultimately to engage with both existing and new customers to encourage them come to your hotel to buy your goods and services. The components of your marketing mix are:
- Your Product (the goods and services you provide as well as the overall experience and ambience your hotel provides),
- Your Pricing relative to your competitors,
- Your Promotions, (including advertising, loyalty programmes and sponsorships), and
- Place, (your strategic positioning in the marketplace, and point of difference relative to your competitors). In management school this is called the 4 P’s.
Commentators in marketing often say that half of every marketing budget is wasted, but we just don’t know which half that is! They are correct in that some of your budget needs to be directed towards building your hotel’s profile, (or brand), and the return on investment for that spend is nearly impossible to measure. However brand building is an important budgetary spend because you need to ensure that your business remains top-of-mind when your customers think about which venue they should go to; whether that be for a meal, to listen to music, catch up with friends for a drink or a flutter on the gaming machines. If they don’t hear from you, then they are likely to forget about you. Keeping up regular communication with customers is now getting cheaper with the advent of the internet and the use of cost-effective emails, and social media channels such as Facebook and Twitter. Traditional advertising mediums such as radio and TV are expensive in city regions but can still be quite reasonably priced and effective in regional towns where your customer base is more concentrated.
The returns on investment for some marketing events at a hotel are easy to measure. Take for example the running of a one-off event such as broadcasting a major boxing match on a midweek evening. You will know what your average sales would be that night, and you also know how much it will cost to buy the broadcast and the cost to advertise in your local area and with customers. From a financial point of view, the event will be a success if you get a positive return on investment: that is, the gross profit from increased sales for the night cover your outlays plus a profit. The same applies for booking bands and entertainment if you do this on a periodic basis.
From a salesmanship viewpoint, the easiest sale at your hotel is selling an existing product or service to an existing customer. For example, if you already have someone at the hotel who is a good gaming or bar customer, then it is relatively easy to sell him or her a meal in your bistro. Conversely, selling a new product or service to someone who isn’t a customer will be the hardest and most expensive sale to make. Accordingly, direct the biggest proportion of your budget to cross-selling your existing products to existing customers: that will also give you the highest return on investment. Loyalty programmes are particularly effective in cross-selling to customers and often have a high return on investment.
To keep customers interested in your hotel, and to grow your business, you need to keep developing products and events that give them with a reason to come back to visit. As entrepreneurs well know, some things you develop will work amazingly well, and some other things you try will be a dismal failure. But if you don’t try anything, you won’t improve your business and the product will become stale with customers.
When building the marketing budget with a client, we usually start by reviewing the business plan and drill down into the marketing priorities for the coming year. We then categorise the proposed spend into advertising, sponsorships and promotions by each department and evaluate the effectiveness of the spend in the previous year. At the same time we compare the overall budget with benchmarks for similar hotels to determine it is in-line with its peer group; that is hotels with a similar positioning and focus. Finally the planned events that are unique to the hotel for the coming year are overlaid. For example, if the hotel is planning on opening a new area, such as a function room, then an additional budget may be allocated for that. The final budget is then negotiated with key managers and calibrated against other business and bottom line objectives for the hotel.
From a benchmarking viewpoint, we see a divergent landscape of marketing budgets and spends around advertising, promotions, sponsorships and loyalty rewards; typically marketing budgets range from 1% of turnover to 5% of turnover depending on the focus of the business (retail, gaming, bars, food), it’s competitive positioning, target markets and location of the hotel. We are however seeing a far greater investment by hotels in social media advertising and loyalty programmes.
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.