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Calculating (CLV) Customer Lifetime Value for Hospitality Industry

 

Every single business has clients, every single successful brand has loyal fans and clients. The value that a customer who pays for a service, or a product, goes beyond that of a single transaction. Businesses have an opportunity to create a long-lasting relationship with their clients.In our recent campaign we started our video with the following sentence:

 

In a world where people treat hotels like a one night stand, we stand up and we say let’s put a ring on our guests’ fingers.

 

What do we mean by this? Well, hotel guests book a hotel, they arrive, check-in, sleep, eat, shower, and leave, right? What do most hotels do to build a relationship with their guest? Send survey newsletters and discounts? Well it can be so much more than that. Come on, when you are trying to do your best for your girlfriend, and want her to marry you, I’m pretty sure you will want to make an effort, yes?

 

In today’s competitive market guests are looking for more than a bed, they are looking for an experience, they are looking for a story. If there is nothing there – they will be comparing the hotel by price. This notion that the cheapest wins – is a myth. If it were true we wouldn’t have Blockbusters, Maplin, Toys R Us, and other brands shut down. The reason why most businesses close their doors, is because they didn’t have enough customers walk through their doors in the first place. The reason why they didn’t have enough customers walk through their doors, is because the company treated the customer as a one night stand, and didn’t show that they care about their customer; or even worse didn’t care about the customer, which I presume in most cases it’s the second one.

When somebody is looking to book a hotel room, they are looking to book a reliable and positive experience. On average it has been found that acquiring new customers costs five times more than keeping existing customers. Engaged customers are more profitable, and it’s not just me saying that –  data proves it. According to research engaged customers deliver 23% more revenue and profitability over the average customer. Loyal customers are worth up to 10 times as much as their first purchase – again, it’s not me coming up with the number – it’s based on the White House Office of Consumer Affairs.

To fully get the picture and understand exactly how much your loyal guest will spend over time, you can calculate your Customer Lifetime Value (CLV) based on a few simple metrics. When you know your CLV it helps you justify some investments you make, including resources to enhance customer experience, implementing strategies to increase customer retention.

 

In simple English – your CLV is the metric that tells you how much a customer is worth to you, and it’s most probably higher than you think. It’s the measure of all of the expected profits you hope to gain over the length of the customer relationship.

 

How To Calculate CLV for Your Hotel 

Customer Lifetime Value (CLV) will help you make your business decisions. It will help you dedicate how much you will invest in your marketing, sales, support, and customer retention. To calculate CLV you’ll need to understand the following:

  • Average Spend
  • Repeat Sales
  • Average Retention Time

 

Average Spend 

The average spend is known as average order value. It’s basically how much, on average a customer spends at your business. Your hotel might have many different guests – a business traveller, a solo traveller , and family travellers. You might say a business traveller will spend two nights and buy something extra from your hotel, so he would pay an average of £300. A solo traveler might stay on average one night and not spend anything else, for which he will pay around £120. Now, because there are different types of guests you need to segment them and treat their average spend differently. Segmentation is important because “average” guest is hard to calculate and be precise. So that’s why we need to know what type of guest.

 

Repeat Sales 

Once we know how much a guest spends at our hotel we need to figure out how many times he is going to come back, repeat sales. So if a guest comes to your property three times per year it means repeat sales x3, if a guest comes to your property twice per year then it’s x2. So, if you are in London for example, your business travellers might book 10 times per year, and your leisure travellers book once a year.

By the way, I think this piece of data is important; The Global Business Travel Association found that business travellers tend to book 12.86 trips per year.

 

Average Retention Time

The last metric is essentially the “lifetime” in “customer lifetime value”. Retention is basically how long a customer is going to stick around. If you’ve been around for some years you can export some data and check how long your customers stick around. If you are a new business you can see from industry standards and make an educated guess.

An executive – business traveller -changes jobs around every 10 years for example.

 

Calculate 

To get the customer lifetime value for every segment you will have to do some maths right. I was bad at maths in school, so at this point I will need a calculator – thank goodness our smartphones have this option (where would we be without technology today?). So now we need to multiply Average Order Value, Number of Repeat Sales, and Average Retention Time.

  • (Average Order Value) x (Number of Repeat Sales) x (Average Retention Time) = (Customer Lifetime Value)

Let’s take an example of a hypothetical hotel called, IQD Hotel, a guest usually pays £300 for a stay, books the hotel three times per year, and on average is a client for 10 years. So:  IQD Hotel CLV is: £300 x 3 x10 = £9,000.

 

How about the social impact and social influence?

You know they say that one customer goes beyond just one transaction and I totally agree with that. What happens when a friend of mine asks for a recommendation? What happens when somebody who trusts a guest of yours asks somebody if they know a great conference space? Anybody who asks me for a recommendation in certain areas in my life, I always recommend and advocate for brands I love and I believe in what they believe. Nike – amazing company, Apple – the best brand, The Humble Brush – Awesome, TEA2 – All my gifts come from this company + I always recommend them on my Instagram stories and the list goes on.

 

Every guest will speak about their experience at your property. If it was a negative experience, don’t worry they will warn others about your business. Dirty rooms? They will post it on their Instagram stories so their 300+ people will see it instantly. Every guest has a certain number that represents their referral potential, that’s based on the size of their social influence.

 

We can all agree that today we live in a world which is hyper-connected, right? Social influence is higher than ever and I’m not speaking about influencers, I’m speaking about people like you and me. If a guest leaves a positive review that encourages additional guests to come and visit your hotel, they will come. But it’s not only the reviews, right? There are other aspects that people consider as well. Something I noticed in the hospitality industry is that there is no brand building – it’s just business building.

 

Now that you have your CLV you can make better decisions to help your hotel navigate and understand where to invest your money. Engaging customers is easier for a business than constantly trying to get new guests. Even when guests come from OTA there is an opportunity there, but we will not discuss it here. If you want you can sign up for our monthly newsletter where we share insights, ideas, and case studies on how to improve your hotel’s performance, you can sign up here: www.iqd.media/updates/

 

In marketing, we all know and have the data which shows us that it’s 10 times more expensive to acquire a new guest. An awareness of your guests CLV will help you decide what strategy you should follow, how you should acquire your guest, and understand how important the customer is. Do you think OTA’s didn’t do their research and know how much their users are worth? Of course, they did. Given all the billions of pounds that are dedicated to acquiring new customers in the travel industry, any hotel that wants to be sustainable and be around in the next five to ten years needs to maximize customer lifetime value and retain their guests.

 

On this note, I say goodbye and if you have any questions, you can always comment below or share this article with a colleague of yours.

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