How to improve Customer Lifetime Value (CLV) in hotels
19 May 2022
There are many benefits to understanding the concept of CLV. One aspect is how to improve each of the variables that make up the CLV KPI. Hotels can use these ideas to improve revenue and profitability even if they are not measuring CLV. For example, getting the guest to buy more, stay more often, and get the hotel to keep track of gross margins will increase profits.
Below there are ideas on how to improve each one of the four KPIs that determine a hotel's Customer Lifetime Value: Average Order Value (AOV), Purchase Frequency (F), Gross Margin (GM), and Churn Rate (CR) or Customer Lifetime Period (CLP). All examples have been translated to hotel vocabulary and are hotel specific to make them easy to understand and implement in any hotel.
How to improve the average stay value (ASV)
If the hotel has trouble getting guests to increase their spending, try these actions, focusing on providing incentives to increase average stay value.
Make it easy to book on the hotel website. Hotels should make everything they sell bookable on the hotel website. For example, a guest should be able to book a room, reserve a table in the restaurant, book spa treatments, a meeting room or coworking space, and anything else that the hotel can provide.
The potential functionality of a website has developed rapidly over the past couple of years. The website can now contact the hotel PMS or CRM before displaying anything. Every website visitor can quickly get their personalized web experience based on what they booked and consumed at previous stays, when they stayed, and where they live. The website can use many other variables in the hotel PMS/CRM. Personalization will increase the likelihood of getting the booking and higher revenue from each guest.
Maybe the two ideas above are a utopia, so here are some actions that any hotel can take immediately:
- Make it easy to select a room category. Do not give the potential guest too many choices and certainly not more than five.
- Update photos, videos, and room descriptions, so everything looks great and attracts the guest to book.
- Add special offers to the hotel website without violating rate parity. For example, sell a generic room at the same rate everywhere and sell the most attractive offerings on the hotel website. The cheapest offer is available in all distribution channels to comply with rate parity. Hotels sell the best (high-value) offerings on the hotel website to attract high-spending guests.
- Create packages over several days that offer high-value content at an attractive price. High spenders are more sensitive to the content than the price. Offers with unattractive content will not sell regardless of the price.
Confirmation and pre-arrival
When the guest has booked, the hotels should start a guest onboarding process with the ambition to make the guest very happy with the upcoming stay. One way of doing this is to ensure that the guest buys more products and services that enhance the stay.
The first step is to send the perfect booking confirmation to ensure that the hotel will deliver a remarkable guest experience, confirm everything that the guest has booked, and provide practical information the guest needs before arriving at the hotel.
Depending on the window, the hotel has opportunities to sell more products and services to the guest before arrival. In a short window, send one welcome email with an offer to upgrade the room and add a few products and services. If the window from booking to arrival is long, the hotel has an opportunity to send several pre-arrival emails with customized content to prepare the guest for the stay. Hotel marketers should base all add-on offers on the original price point of the room, so the hotel does not send unrealistic offers to a price-sensitive guest. Different offers if the guest booked a suite or a pre-paid non-refundable standard room.
Luxury hotels should also call the guest a few days before arrival to ensure that the hotel has prepared everything for arrival.
Arrival and stay
The guest arrives at the hotel and is ready to check in. However, traveling is always tiring, so the guest wants a fast and smooth check-in process to get to the hotel room.
Hotels with mobile check-in can let the guest choose the hotel room and, at the same time, give up-sell offers to higher room categories. In addition, the guest can check in on the way to the hotel when there is plenty of time traveling or waiting for connections. As a result, stress levels are low, and the guest would be happy to do the check-in work for the hotel.
The first impression is everything and sets the tone of the whole stay. The guest using the smartphone for check-in is already happy when arriving, greeted by a friendly staff member, and on the way to the room. Guests think that the manual check-in procedure at hotels is slow and tedious, but they are used to the process just like travelers are used to the security check at airports. The stress level is high, so trying to sell an up-grade might alienate the guest, and that is not how a remarkable guest experience starts. If the guest seems relaxed, the hotel can try to sell and upgrade.
Sell more during the stay
Hotels passively offer opportunities to buy additional products and services. Minibar, movies, room service menus, and other in-room offers sit there in the room waiting for a customer. Hotels need to become more proactive in sales during the whole stay. Apart from increasing the average stay value, guests who buy more tend to become more satisfied. Create add-on offers such as "Watch a movie for free when you order popcorn and snacks." "Drinks in the minibar are on us when you order room service." Be creative and first think about what would make the guest happy and then find out how you could charge for that.
Hotels that know the reason the guest is staying in the hotel will be able to come up with more creative offerings with a good fit as to why the guest needed to stay overnight in the first place.
How to improve stay frequency (F)
Maybe guests spend a lot, and the margin is significant, but they don't stay very often. The only way to get them to return is to understand why they came in the first place. What was the reason for their visit to the destination? Don't guess, don't assume, don't hope, don't send mass mailings, and don't pray that someone will return. The only, and still very slim, way to get someone to return to your hotel is, first and foremost, that you delivered a remarkable experience. Second, there is another good reason to travel to the destination. Nothing else works, and any attempts will waste time and money.
Hotels collect massive amounts of data that can be analyzed and used to drive revenue growth. High-quality data will lead to better decisions and faster success. There are five dimensions of data quality.
Accuracy means, for example, that the hotel spelled the guest's name correctly, coded the reservation with the right segment, all the reservation data is correct, and recorded the guest spending on the valid transaction code.
Completeness is that the hotel has all detailed information about the guest, reservation, and transactions. High completeness means that there is no missing information.
Consistency means that data stored in different systems or locations is the same. For example, the hotel PMS and CRM's guest information is the same.
Age addresses that data should be fresh and current with values that are up to date
Uniqueness is that there are no duplicates (guest, company, travel agent profiles)
If the hotel has collected and stored information about the guest, reason for travel (segment), purchasing behavior, and consumption, the hotel can use this information to attract guests to return for another stay. Try a few of these campaigns to increase stay frequency.
- Communicate dynamically. Using historical guest data collected with a true unified Single Guest Profile, you can automatically send emails that arrive at the ideal time for each guest. Of course, make sure those emails and the hotel website pages are personalized.
- Find out if you're communicating through the proper channels – does this particular guest respond better to email or SMS? Make sure each guest receives your message through their preferred channel.
- Segment your guests by the reason to travel to the destination, then re-engage with guests likely to return to the annual congress or festival, summer holiday, short break, or other reasons.
Do not create a guest or customer loyalty program in independent hotels or small hotel groups. The cost of operating a loyalty program is, in most cases, significantly higher than the revenue it will bring in from returning guests. In addition, loyalty programs only work for mega-chains where the purpose of the loyalty program is to drive guests to other hotels within the mega-chain.
The guest might never return to the destination or the hotel. Still, if the experience of the destination and the hotel were remarkable, the guest would recommend others to visit the destination and stay at a specific hotel.
How to improve the gross margin (GM)
It doesn't matter how valuable each stay is or how frequently the guest stays at the hotel if the Gross Margin doesn't allow a healthy profit from each visit. So here are some ideas for profit improvement from a revenue perspective.
Sell higher room categories
The variable or production cost (COGS) for a hotel room is almost the same for any room category. The variation is probably higher depending on the guest staying in the room. Selling higher room categories brings in more revenue without increasing the cost. The gross margin will therefore be higher for higher room categories. If the gross margin is significantly higher, add some amenities to the room to attract guests to upgrade.
Sell higher-margin products and services
Sell more add-on products and services that have a low cost for the hotel instead of over-charging for standard products to keep a high gross margin. Products and services must be relevant to the guest. Otherwise, the guest will not buy, and the hotel loses the revenue opportunity.
How to improve the churn rate (CR)
Churn is a complex metric, and many factors combine to cause a guest or customer to churn from a hotel. There are two types of churn. One is destination churn, and the other is hotel churn.
The guest has been at the destination and will never return to the destination. Many destinations are once-in-a-lifetime destinations, so there is no point in returning once the visitor has had the destination's experience. Therefore, do not waste money on marketing to get guests to return.
The guest continues to travel to the destination but is not happy with the first hotel experience and switches to another hotel. The hotel did not meet the guest's expectations or did not give the guest a bad guest experience. It is improbable that you will see this guest again unless your competitors are worse at taking care of the guest. Do not waste time on marketing. Instead, improve the products and services, so the hotel will not lose more guests due to outdated products or poor service delivery.
Instead of guests recommending the hotel to a friend or a colleague, the unhappy guest will tell many others and spread the word that the hotel is not a good place to stay if traveling to the destination. Bad reviews, ratings, and word of mouth are all devastating and increase the churn rate and actively steer guests away from the hotel.
The only way to improve the churn rate is to deliver a remarkable guest experience to avoid hotel churn and detractors.
For hotels that want to get more insights about CLV, read more about theory and practical advice in the following articles.