The Customer Lifetime Value (CLV)

Imagine what happens when the market gets tough and room occupancy wobbles. The majority of hotel operators begin to worry on how they can sell more rooms and on how they can find new customers. In a shrinking market place, there really are not many new customers and it comes down to grabbing someone else’s market share. In the process, room rates take a tumble and soon it turns out to be a ‘price war’. In such a situation, very few hotels consider going back to their existing customer base to try and turn the ‘one time’ buyer into a second time customer into a loyal guest. Experts tell us that it is 6 - 7 times more expensive to acquire a new customer than it is to keep a current one.

This is when people in business need to go back to the tried and proven ways of business development. Simply put; you need to retain your existing customer base and look at ways to optimise them as well as maximise their growth potential. Very few hotels have a strong understanding of customer lifetime value (CLV). The value of a customer who pays for goods or a service is more than that single transaction -it’s an opportunity to begin a long-lasting, prosperous relationship. The majority of hotels operate on the ‘3S Principle, In other words, its ‘Seek’, ‘Sell’ and ‘So Long’.

By closely examining how a customer is acquired, retained, and (potentially) lost – referred  to  as the customer lifecycle - you can determine the points of strength and weakness of the process, and attach relative values to your customers based on how long they've bought from you and the journeys they've taken. In simple terms, CLV is the metric that tells you how much a customer is worth to you – and it’s likely to be higher than you think. It’s the measure of the total potential profits you hope to gain over the length of the customer relationship. Additionally, it would help you to improve your effort and marketing spend – after all, the first room, a first time guest pays for… barely covers the costs of acquiring him or her in the first place.

Over two decades ago, as the Front Office Manager at a 5-star city hotel, I recall permitting a late checkout, to a regular guest without any charge on a particularly busy day. The following day, the hotel’s Financial Controller questioned the potential loss of US$ 40/- owing to my discretionary action. When I showed the CL value of this regular guest one, who, had stayed with us for more than 6 years until then, averaging 3 visits each year, with an average 16 days length of stay, per visit…everyone appreciated  that my action was a ‘no brainer’.

Calculating the lifetime value of your guests’ is a fairly uncomplicated process, if you use this simple formula:-

• Average spend: Also known as the average booking value is simply how much, on average, a guest spends during each stay. It is useful to segment those guests (Corporate, Leisure, etc) as their average spend can vary.
• Number of repeat visits: Once you have calculated how much the guest spends at each visit, on average, you’ll need to find out repeat visits i.e. on average, how frequently a guest makes a visit again, in the same year. If your guests usually stay three times per year, your repeat sales number is 3. If your guests only make a booking every two years, repeat sales number is 0.5. Hereto, you will need to segment your guests. For example, if you are a hotel in the city, your business travellers tend to book several times a year, whereas, a leisure traveller might book every year or once in three years.
• Average Retention period: The final metric is the ‘lifetime’ in customer lifetime value’. Retention time is, based on average, how long you can expect a guest to be around. If you have been in business for long, this information can be extracted from historical data. A new business may have to make some projections based on a lesser number of years or from industry standards.

The Calculation

To get the customer lifetime value for each of your segments, you’re going to multiply Average Spend, Number of Repeat visits and Average Retention Time. (Average Spend) × (Number of Visits) × (Average Retention Time) = (Customer Lifetime Value).  

So the next time, a customer rings up for some free advice, it may be an inconvenience at the time, but always remember they are worth a great deal to you in the long run. Here is a quick example to prove the point:-

Average guest spend (Corporate) = Rs 50,000

Number of repeat visits per year = 3 visits

Average retention period = 5 years

Lifetime value = Rs 750,000+

No. of such guests on your database = 60

Apart from the financial rewards from CLV, the social impact and influence is sometime immeasurable. Each of your guests will speak to others about the experience they had with you, and recommend (or warn) others about your hotel. In mathematical terms, each guest has a certain number that represents their referral potential – dependent upon their circle of social influence.

Remember, the probability of selling to an existing customer is easier and quite high compared to that of selling to a new prospect.

Shafeek Wahab – Editor, ‘Hospitality Sri Lanka, Consultant, Trainer, Ex- Hotelier

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