By Steve Murch, Chairman
Are you spending the right amount of money to acquire a new relationship with a guest? Or an owner?
To answer this question, a key figure you need to know is how much each new guest or owner is worth to you. (You also need to know your conversion rate(s), something you may already know; we'll be discussing this further in a future post.)
The Customer Lifetime Value (CLV) is a specific dollar figure, unique to every business and customer class, which represents the present value of all expected net cashflows of a relationship with that particular type of customer. In other words, you take all future net cashflow (received revenues minus paid expenses), and discount these cashflows back to the present at your "cost of capital". For simplicity, you can assume in today's environment a discount rate of about 12%, though it may be marginally higher or lower for you.
While notoriously hard to pin down to the nearest dollar, a general estimate of your CLV (within, say, 10%) is a very important decision-making tool, and once estimated, I believe it's good for everyone in your company to know. One reason: it nearly always puts into sharp focus just how important long-term relationships are. It can also be a critical benchmark in determining how much you should be willing to invest to create a new, long-lasting customer relationship.
We all know that it costs significantly less to keep a current customer (and have them re-purchase) than it does to gain a new customer. But where does this extra profitability really come from? You gain this added profit from long-term relationships due to (a) profit from increased purchases/reservations over time, (b) profit from being able to move them up the price-curve (e.g., a renter of a single condo might turn into a renter of a luxury home some day; a condo renter might turn into an owner), (c) profit from reduced operating cost serving that customer -- for instance, they call you less per reservation, and (d) profit from referrals.
In leisure travel, I'd argue that Las Vegas casinos know their Customer Lifetime Value (CLV) economics particularly well; it's why you can get $5 lobster and filet mignon with no strings attached. Casinos have calculated that the lifetime value of a gambler dwarfs the expense of the food, and they know the conversion rate (the rate at which eaters turn into gamblers) at their facility. They're counting on you to play and pay when you're in their facility; they know the ratios that make their economics work, and they aggressively subsidize food and entertainment to get you in the house.
Vacation rental property managers have at least two very important relationships, on the owner and guest side. Each relationship should be worth some distinct level of investment to acquire. You're likely to arrive at least one overall CLV calculation for guests, and a separate one for owners. But of course you can and probably should segment each of these further, doing a lifetime value analysis for affluent families, one for seniors, or one for guests residing within 200 miles and another for far-away guests, etc.
You can estimate customer lifetime value by opening a spreadsheet and trying to figure out how much net cash (i.e., all received revenue minus all paid expenses) you'd receive in Year 1, then Year 2... Year 5, plus a "terminal value", which is an summed estimate for all subsequent years for a given prototypical customer.
Let's look at guests for a moment. Let's say that if a guest stays with you, you might receive an average of $500 for the rental fee (revenue minus expenses) plus $100 in add-on service margin for that first stay. You might be tempted to think that this customer is therefore worth $600 to you.
But that's only the beginning. Guests' potential contribution to your bottom line doesn't end when they check-out -- if you're serving them well, some percentage of them are only just starting their relationship with you. Be sure to take the annual repeat percentage for that guest, plus a referral/recommendation percentage, and account for this in your calculations.
If you've delighted them, they are effectively joining your marketing team; some may even turn into buyers and even future rental owners. If you operate a real estate agency, the buying process yields a lot of additional found revenue. In fact, you might be surprised that a guest who provides you with $600 in net cash today actually is likely to provide you much more net cash for all the future years, combined, even when you apply an estimated conversion-to-ownership and/or future-stay percentage.
One resource that you might find interesting is the Lifetime Customer Value Calculator, an Excel Spreadsheet from the Harvard Business School. You can use either the Basic Model (which asks you to enter things like the time between purchases, your average total margin on each purchase, etc.), or the Complex Model, which asks for far more information.
Don't have time to calculate a CLV? You might want to reduce the problem to just calculating relative lifetime values for various customer segments. For instance, a quick scan of your reservation history may yield some interesting insights into which type of guest tends to be a repeat renter (e.g., zip code, party size, type of accomodation, etc.), and who tends to be a one-timer. It's nearly certain that your repeat visitors have a much higher relative Customer Lifetime Value.
At Escapia, our goal is to give you the tools to analyze past reservations, and plan to continue to invest in analytics that help you run your business. You can access lots of useful data today in over 20 reports, and you'll find big improvements in our data extraction and reporting tools in the future. Knowing the Customer Lifetime Value for various segments of your business can help guide key marketing and relationship-investment decisions for the long-term.
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