What is the business goal of your hotel? Probably to acquire the guests who bring a lot of money to your table repeatedly. Yes, I know you also want your guests to be happy, however, if it doesn’t bring money at the end of the day, your hotel will be closed with you crying over positive reviews guests left on TripAdvisor.
By knowing who your best guests are, you can:
- Focus on acquiring more of them
- Create them from the exisiting portfolio of guests who has a potential to become your best guests
- Determine how much money you can spend to acquire such a guest
In order to achieve abovementioned, I am going to discuss two analyzes – customer lifetime value and RFM (recency, frequency, monetary) analysis.
Customer lifetime value (CLV)
Analysis of customer lifetime value is one of the easiest and most useful analysis with the direct impact to your bottom line. CLV is the amount of money spent by your customers during their relationship with you. If one of your guest is a business traveler who comes each month for one night and picks the room for 100 bucks for 4 years, then his customer lifetime value is 1 x 12 x 4 x 100 USD = 4,800 USD. Really simple equation would look as follows:
CLV = Amount spent by guest for the particular period of time x Number of time periods of relationship
Why is it useful to measure customer lifetime value?
Imagine second guest, a casual traveler who visit your hotel once and book the most expensive room for 300 bucks per night for 3 days. Now imagine that it cost you 20 USD to acquire one guest. It might look like the second guest is more valuable because of purchasing more expensive room for the same amount of money. However, even though you earned less from the first guest during his first visit, his lifetime value outperformed the value of the second guest on the long run. So in case you would make a short-sighted decision about acquiring only casual travelers, you would use lot of money.
Many times you need to spend money for your guests to come even if they already visited you. It is vital to subtract the acquisition cost from the customer lifetime value to have a real look at how much profit each guest brings. Another vital step is to discount future income as money you have today has more value than the same amount in the future.
As was already mentioned, RFM stands for recency, frequency and monetary. So you are going to track when is the last time your guests accommodated, how often they accommodate and how much money they spend in your hotel. This technique is little more granular, however, can provide you with the additional insights compared to customer lifetime value analysis. This will allow you to create more precise segments.
As a first step, you should determine what is the good frequency of visits, what is the good amount of money guests spend, and what is the vital time since guests leave your hotel until they are willing to come back.
Imagine first guest from the previous example. His frequency of visits of 12-times per year, his recent stay is no longer than 1 month into the past, however, the monetary value is little bit low. In general, this guest is really good but not perfect. However, now you know that by improving the amount of money spent by this guest, you can get the most valuable customer. Now figure out the strategy to make the guest spend more.
Now let’s skip to the second guest. The monetary aspect is certainly really good. However, the frequency aspect is poor. Let’s say this guest was accommodated one month ago which is still very recent. From data you know about your guest, is it possible to increase the frequency of this guest comming to your hotel? By answering this question or figuring out the strategy to do so, you can either lower priority of such a guest or increase its value for your hotel.
By looking at the data on the aggregate level (for all guests together), you might miss some insights and opportunities to acquire high-value guests. By starting at the individual level, you can understand the impact of the guest on the bottom line. Afterwards, you are able to make significant decisions. Start with these two analyzes and once you feel comfortable using it, deep dive into other methods of customer analytics!