"You've got to spend money to make money" is one of the oldest sayings in business.  In the hotel industry, Directors of Sales and Marketing frequently use this mantra to justify increases in their departmental budgets.  When available, increased funds are generally readily granted to the sales department.  Compared to other forms of real estate, most owners realize that hotels are extremely marketing intensive.  However, during periods of poor performance, owners are usually reluctant to grant any increases.  As a percentage of total revenue, sales and marketing expenses (exclusive of franchise fees) have historically fallen in a fairly tight range of four to six percent of total revenue.

Historically, what's the payback?  One simple way to measure the return-on-investment of hotel marketing dollars is to compare the annual increase in marketing costs to the corresponding growth in revenue.  True, the dollar value of one percent of marketing costs is much less than one percent of revenue.  However, it does highlight some interesting trends regarding the efficiency of the extra expenditures.
 
Marketing Growth Outpaces Revenue Growth

From 1980 to 1998, the average hotel increased its total revenue $24,143 per-available-room, while marketing department expenditures grew $1,423.  Certainly, this 17 to 1 ratio is favorable.  However, on a percentage basis, these figures represent a 4.8 percent compound annual growth rate for revenues, compared to a 6.2 percent increase in marketing expenses.  In other words, hotel sales and marketing departments have become somewhat less efficient in their ability to bring in more top-line dollars.

Man Versus Machine

When spending money in the marketing department, you can either spend it on people, or other marketing devices such as advertising, promotions, or public relations.  In fully-staffed marketing departments, payroll and related costs typically range from 40 to 45 percent of total departmental expenses.  Resort hotels have the lowest ratio of salaries and benefits (36.7 percent in 1998), while full-service properties spend approximately half of their marketing dollars on personnel.

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It has been said that the 1980s were the "Decade of Marketing" for the hotel industry.  Not only were new niche products rolled out into the marketplace (all-suites, limited-service, extended-stay, etc.), but property-level marketing became much more sophisticated.  A complete market penetration analysis became an integral part of the competitive market section in the marketing plan. 

The increased emphasis on marketing can be seen in the dollars poured into the sales department.  During the 1980s, marketing costs grew on average 9.6 percent per year, significantly more than the 4.8 percent average increase in revenues.  During this period, the 9.6 percent increase in total departmental expenditures outpaced the 7.6 percent increase in marketing payroll.  This is indicative of the fact that money was being spent more rapidly on items other than sales personnel.

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In PKF Consulting's 1997 survey of Sales and Marketing departments, the influence of technology in the sales departments of U.S. hotels became very apparent.  More than 80 percent of all hotels responded that they use some form of technology to perform such functions as inventory control, yield management, budgeting, and forecasting.  It can be assumed that the expenditures in technology within the sales and marketing departments of U.S. hotels in the 1990s have increased their efficiency in gaining revenue. 

Once again, resorts have proven to be the most efficient in converting marketing dollars to revenue.  During the 1990s, resort hotels had an incremental revenue to marketing dollars ratio of 34-to-1, compared to 29-to-1 for full-service hotels and 21-to-1 for convention hotels.

Responsibility

A whole host of factors outside the influence of the sales department cause growth in hotel revenue.  For instance, the increase in personal discretionary dollars during the 1990s certainly enhanced the demand for resort properties.  This is just one case where the marketing department cannot be solely credited or blamed for significant gains or declines in revenue.

However, given today's popular theory of "total revenue management", it is the single mission of most hotel sales and marketing departments to bring in profitable revenue for their properties.  An analysis of the relative growth of marketing costs versus revenue can be used as a top-line method to evaluate the efficiency with which increased expenditures are being converted into revenue.  Nevertheless, another old saw is perhaps relevant here - in a competitive market, "no one ever saved his way to success."

Patrick Quek is president and CEO of PKF Consulting, an international hospitality consulting firm headquartered in San Francisco.