In the world of consumer marketing, customer lifetime value (CLV) is a metric that is used to determine how much is reasonable to spend to acquire a new customer, or the customer acquisition cost (CAC). But for top-performing consumer-facing companies in the world, CLV is the metric on which business decisions are made.
Here’s why hoteliers should consider the lifetime value of their guests when making decisions about how to spend their marketing budgets:
- Repeat guests represent a faster path to directly-booked revenue.
- It’s an easier path to revenue, as past guests already have a relationship with your brand.
- For both reasons above, it’s a more profitable path to revenue, since less money is spent on OTA/other acquisition costs.
Unfortunately, even in a world where it costs five times more to acquire a new customer than it does to keep current customers, online retailers and other e-commerce businesses are continuing to invest nearly 80% of their digital marketing budgets on customer acquisition, and just 42% of businesses are currently even able to measure customer lifetime value, let alone accurately. Those two stats are more closely related than they seem at first glance.
By simply using some rough approximation of customer lifetime value to justify acquisition spend, consumer-facing companies are focusing on the wrong side of the equation. What they don’t realize is that investing in maximizing CLV is indeed the most profitable—and, increasingly, the fastest—path to revenue growth.
Consider, for example, that for each 1% of shoppers who return for a subsequent visit, overall revenue increases approximately 10%. That means if online retailers retained 10% more of their existing customers, they would double their revenue. Here’s another way of looking at it: Reducing your customer defection rate 5% can increase your profitability 25% to 125%.
Growing revenue by driving up customer lifetime value can also be viewed as the easiest way to do it. Though customer marketing is complex, technology is making it incredibly more manageable and effective. For example, the probability of selling to a current customer is 60-70%, on average, whereas the probability of selling to a new shopper is 5-20%… not to mention returning customers spend on average 67% more than first-time customers!
Think about how this might apply specifically to hotels. If a first time guest books through an OTA, you’ll easily lose 30% of that booking fee to OTA commissions. That price is well worth it to acquire a new guest, but what if he or she wants to book again? Wouldn’t you rather have him or her book directly with you? You might only have to pay 4% to your booking engine, if anything at all, keeping that chunk of the booking for your own profits. This is how you grow the lifetime value of your guests in a way that is most profitable to your hotel – by building direct relationships with your guests.
So if growing customer lifetime value is so fast and easy, why isn’t every hotel marketer talking about it?
The reality is that although increasing CLV is, for most businesses, generally a faster, easier, and more profitable path to revenue, it takes a significant shift away from the traditional marketing focus on volume and a re-focus on the quality of every customer interaction.
Here’s the good news:
Focusing in on, and maximizing, the lifetime value of your guests isn’t difficult if you’re committed to it and have the right tools.
So what should you do next? We’ve laid out the four key steps to maximizing CLV:
1. Model your guest lifecycle. Doing so is not as daunting as you think. When you understand where your guests are in the lifecycle, and how and when they are interacting with your brand, you can harness that information to engage customers when and where doing so will be most effective. For example, the most effective messaging for a guest who will be arriving on property in the next week might be an email upselling his or her room selection. Or, you could send a welcome email that informs the guest of special events on property during his or her stay.
2. Unify your systems of record. This is no longer a luxury; it is a prerequisite to finally achieving customer-centricity, which will in turn unlock your ability to maximize customer lifetime value. Your PMS system should talk to your CRM and email marketing solution, so that all of the guest data essential to your marketing efforts is in one place.
3. Identify the key drivers of lifetime value. Hotel marketers still struggle to tie ROI to campaigns, especially if they don’t have revenue attribution tied into their email marketing systems. But today it is not only possible but also critical to attribute revenue to investments like email. Take it a step further by identifying the key attributes driving customer lifetime value, and double-down on those investments.
4. What to do next: Become customer-centric. Once you have a model of your guest lifecycle, the ability to leverage your guest data in email campaigns, and the ability to attribute revenue to specific campaigns, you can start to tailor your messaging to specific types of guests. Target incoming guests with different messaging than guests who are currently on property and guests who have recently checked out. Create unique campaigns for guests who previously stayed with a family versus those who traveled on business. With all of this information, you can segment your guest database and tailor your messaging to the lifecycle of each guest.
It is true that the proliferation of point solutions, especially in the hospitality industry, has caused guest data to be more fragmented than ever, making it difficult to understand and engage customers when and where it will be most effective. But the technology exists today for hotels to integrate their systems, allowing them to focus not merely on maximizing the lifetime value of a guest, but creating a tailored, cohesive experience that is relevant to each guest. When hotels can understand and engage customers when and where it will be most effective, they will see increased profits.
If you take no other step, take step 1.
The most important step—because all others depend on its being done well—is step 1. The careful unification of guest data across hotel systems is a prerequisite to doing the other three steps well.