Customer Lifetime Value - the “Holy Grail” for Hotels
By Kelly McGuire Vice President, Advanced Analytics, Wyndham Destination Network | July 08, 2012
Most managers appreciate that understanding customer value, and more importantly customer lifetime value (CLV), can help them plan strategies to encourage loyalty behavior, increase revenues, and ultimately drive profits. In fact, companies invest heavily in loyalty and rewards programs primarily to collect customer data that they can ultimately use to calculate customer lifetime value. Casino companies are well known for collecting information on their patrons' spend on the casino floor and across the enterprise, and using this information in marketing, rewards, and pricing. Because of this success, hotel managers are also interested in exploring the opportunities associated with CLV .
It's easy to understand why some consider CLV to be a "holy grail" metric. We all know that customers are not created equally, and with limited resources, firms simply cannot afford to "roll out the red carpet" for everyone. Focusing on "best" customers helps firms to maximize revenues while minimizing their investments. But that's the trick – what do we mean by "best"? Is it the high roller who drops tens of thousands of dollars a visit, the weekly slot player at a couple of hundred, or a mediocre gamer whose spouse is a "shop-a-holic" addicted to $300 bottles of wine? (Caesar's bet on the weekly slot player, and has been very successful, but recently some in the casino industry are thinking of this a bit differently). Is it the international traveler who flies long distances every time the fares drop, or the one who buys a last minute, full-fare ticket for their weekly trips from NY to Boston? (Most airlines reward you for both miles and segments, but you earn points with Jet Blue based on dollars spent). In all of these cases, CLV becomes the great equalizer – but that's assuming you're using the right data and the right calculations to derive it. This is no simple task.
What is Customer Lifetime Value?
At a very basic level Customer Lifetime Value(i) (CLV) is a measure of the economic value of a customer. It's easiest to think of it as the sum of all profits from a given customer, over the "lifetime" of their relationship with you. So the basic formula would be to calculate customer-level profitability, project it into the future, adjust for retention probability, discount to present value and sum it all up. The challenge is that when you dig into each of the steps, you begin to realize that not only is the right data hard to get (for customer level profitability), but the right answer can involve some fairly complicated analytical techniques like forecasting (for future profitability) and predictive modeling (for retention probability). Companies need to make some complicated decisions about each component of the formula, and continually refine the metric over time, so it stays relevant.
How can hotels get started with calculating CLV?
The best approach for starting a CLV project is to plan a phased approach, start simple and improve from there. Some of the biggest mistakes that happen in this area are firms who try to bite off too much and end up in "analysis paralysis" – they never actually get to implement their plans and realize the benefits because they're too busy trying to derive the perfect formula. I'd further suggest that you should start by thinking about where and how you want to actually use CLV, and let that refine your phased approach.