ROI: Focusing on Return on Investment and Conversion

© Eric Goldreyer and Sandy Soule, BedandBreakfast.com

Return on investment (ROI) is a key factor in any business decision, both when you are buying/ expanding/upgrading your inn, as well as in your marketing. We’re going to touch on the high points of ROI in this article, keeping in mind the limited capital and cash flow available to most innkeepers. In a future article we’ll cover the relationship between ROI and branding.

What is ROI? Return on investment (ROI) measures how effectively a business uses its capital to generate profit; the higher the ROI, the better.

According to Wikipedia, “ROI is used to compare returns on investments where the money gained or lost is not easily compared using monetary values. For instance, a $1,000 investment that earns $50 in interest generates more cash than a $100 investment that earns $20 in interest, but the $100 investment earns a higher return on investment.

• $50/$1,000 = 5% ROI
• $20/$100 = 20% ROI

To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.”

How does ROI apply to short-term marketing? Measuring ROI for short-term projects is pretty easy. Let’s say you spend $1,000 to print and mail a holiday newsletter to past guests, and it delivers $6,000 in reservations. You spent $1,000 and netted $5,000, for an ROI of 5X. On the other hand, if the mailing only generated $2,000 in reservations, your ROI would be 1X. You might decide that that cost was justified, because the lifetime value of a guest (for both repeat and referral business) is worth viewing from a longer perspective.
 
You also need to compare the ROI of a printed piece to that of an email newsletter. The cost of creating an email newsletter should be little or nothing, especially if you are already using a service like ConstantContact. For example, if it costs you $200 to create and email your newsletter, and it generates $2,200 in reservations, your ROI is 10X – you got back 10 times more than you invested. While the return on investment for the email newsletter is much better, the long-term branding may be less effective. Click here to use this free marketing ROI calculator:


How does ROI apply to long-term marketing? With 80%-90% of reservations coming from the Internet, tracking the efficacy of your marketing investments is essential. No one has unlimited marketing funds, especially innkeepers, but many make the mistake of basing their buying decisions solely on the cost of a website design, photo shoot, directory listing, etc., rather than a reasonable projection of their ROI.

ROI teaches you that it’s about what you earn, not just what you spend. John Wanamaker, known as the “father of modern advertising,” is famous for saying: “Half the money I spend on advertising is wasted; the trouble is, I don't know which half.” Not anymore! A large variety of measurement tools and techniques now enable marketers to quantify the impact of advertising activities. If your B&B or inn doesn't monitor its marketing costs for ROI purposes, you need to ask why:

    We've never thought about it

    We don't know how

    We were told it wasn't possible

If you checked the first or second box, talk to your webmaster and start asking questions. If you checked the third box, then it’s time for a new company to handle your website design/hosting/promotion (website DHP), and it’s probably appropriate to purchase property management software as well.

Allocating limited resources: Since most innkeepers agree that about 80% of reservations are Internet-generated, make sure that Internet marketing is getting the lion’s share of your advertising budget. When doing your business planning, don’t spend so much on furnishings and décor that you have nothing left to spend on the Internet advertising you need to get heads in your beds.

How can we tell what works?

• Ask potential guests: Because most callers say “the Internet” or “your website” (which may be your website or a directory listing), so its usefulness is limited.
• Use tracking software: You spend hundreds or thousands of dollars to build/market your website, so use free Google Analytics to see what works and what doesn’t. Because not all websites deliver the same level of qualified traffic and conversion, tracking software goes deeper to tell you:

• How many visitors come to your website
• Where they are coming from
• Which pages are they visiting
• From which pages they are leaving
• Which sites bring you the most traffic
• Which sites’ traffic converts the best (not all traffic is created equal)
• Which sites deliver the most reservations (the more qualified the traffic, the better the conversion)
• Which sites deliver the most revenue (average reservation value will differ from one site to the next)
• And much more!

 

Google Analytics combined with fully integrated tracking can show you exactly where your online/offline reservations and revenue come from – not only in terms of traffic, but actual dollar conversion.



So, to answer the question we asked above – how can we tell what works – let’s do the math for some possible sample sites:

Site A sends you 1,000 potential guests/year in traffic

• Site A converts at a 1% conversion rate, generating 10 reservations annually.
• If your average reservation from Site A is $300, that site delivered 10 X $300, or $3,000 in revenue.
• If Site A costs $200/year, your ROI is $3,000 minus $200 ($2800), divided by $200 (cost of investment) for an ROI of 14X.

Site B sends you 700 potential guests in traffic

• Site B traffic is highly qualified and converts at a 2% level, generating 14 reservations. It brings you 30% less traffic, but 40% more reservations since the traffic is more qualified.
• If your average reservation from Site B is $325, then that site delivered 14X $325, or $4,550 in revenue.
• If Site B also costs $200/yr, your ROI is $4,550 minus $200 ($4350), divided by $200, for an ROI of 22X!

Site C sends you 2,000 potential guests in traffic

• Site C traffic is also highly qualified and converts at a 2% level, generating 40 reservations.
• If your average reservation from Site C is $350, then that site delivered 40 X $350, or $14,000 in revenue.
• If Site C costs $400/yr, your ROI is $14,000 minus $400 divided by $400 for an ROI of 34X!

As you can see, multiple variables affect your ROI more than the dollar outlay and the traffic stats. To get your ROI, determine your total revenue per channel by multiplying your traffic times the conversion times the average reservation (per channel), divided by your annual cost.

Pareto’s Principle holds that about 80% of your business comes from 20% of your sources. After all, the quality and reach of websites varies as much as the difference between an ad running during the Super Bowl does from one appearing on a local cable station at 3 a.m.

Although statistical analysis is extremely helpful, most innkeepers want to know which sources generate the best ROI (whether directories, associations, chambers of commerce, etc.) before signing up. Keep these guidelines in mind when making your choices:

• Google the phrases travelers use when searching for a B&B, like “Savannah B&Bs,” or “Cape Cod bed and breakfast” and see which directories come up.
• Check the directory’s Google page rank.

• Go to Quantcast.com and compare the traffic of the site you’re interested in with other leading B&B sites. If they don’t show up on Quantcast at all, don’t waste another minute.
• Read the directory reviews and comments on Innkeeping.org.
• Check with other innkeepers, either in person, or via online discussion groups.
   

What if I’m getting traffic to my website, but it’s not converting into reservations?

“In just one-twentieth of a second, people make aesthetic judgments that influence the rest of their experience with an Internet site. If the first impression is negative, you’ll probably drive people off.” (Behavior and Information Technology Journal)

It’s a lot less expensive to double the conversion on your website than to double your traffic. Here’s what you need to increase your website ROI:

• Good photos (click here for more information on inn photography)
• Easy, intuitive navigation
• Clear and consistent call to action
• Real-time, secure, online reservations
• Reviews (links to major review sites are more credible than guest book comments)

To illustrate the link between conversion and revenue:

• If you have 1,000 monthly visitors and get 10 reservations, your conversion rate is 1%.
• If the average reservation made from your website is two nights at $175 nightly, your monthly gross is 10 x $350 = $3,500.
• If an updated website increases the conversion half a percentage point to 1.5%, you’ve increased your monthly gross income by 50%! (15 x $350 = $5,250). That’s an extra $21,000 per year!
   

We’re in a squeeze for cash. What should we do? Look for opportunities that allow you to test ROI with minimal capital expenditure by using marketing that offers one or more of these qualities:

• Satisfaction guaranteed or your money back
• Monthly billing for easy cash flow and immediate ROI results
• Requires payment only when a reservation is generated
• Don’t skimp on a cheap booking engine or availability calendar – the most effective conversion tool on your website! Even a tiny increase in your conversion percentage will deliver thousands of additional dollars of revenue per year.

What’s the connection between ROI and branding?
Although most of your marketing should focus on areas where you can see a direct result on reservations, it’s important to reserve a portion of your budget for branding projects that increase your repeat and referral business. These range from involvement in community projects and media and public relations, to using logo’d coffee mugs, room key fobs, clothing, etc., and will be covered in a future article.
 

About BedandBreakfast.com and RezOvation products and services: All BedandBreakfast.com and RezOvation products and services are covered by a no-risk 90-day guarantee. If at any time during the first 90 days you are unhappy with the product, we refund all your money, no questions asked. Monthly billing for BedandBreakfast.com membership and the RezOvation booking engine, credit card processing, and website design/hosting/promotion keeps expenditures in line with income. BedandBreakfast.com Gift Cards and Online Reservations cost you money only when you process a reservation, unlike advertising expenses incurred in hopes of generating a sale.

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