This article originally appeared on Tambourine.
With the hotel industry enjoying a period of record performance, posting all-time highs for occupancy, ADR and RevPAR, one of the most talked-about ways to improve performance (and delight ownership) are to reduce the cost of guest acquisition.
And that begins with fully understanding a vital metric: your hotel’s CLV-to-CAC ratio.
But unlike many other industries that have already embraced the concept, too many hotel marketers are still unable to quantify their CLV-to-CAC formula.
This can be overcome with a little effort, offering a major potential boost to the bottom line and a far stronger bargaining position when asking ownership for more marketing dollars (and a raise)!
What Does It Mean?
To get started, there are some basic principles to know, beginning with terminology.
CLV stands for “Customer Lifetime Value,” meaning the revenue your hotel can expect to earn from each guest over the lifespan of that customer’s relationship with you. CAC, meanwhile, is short for “Cost to Acquire Customer,” or your total sales and marketing spend to attract each customer and obtain the aforementioned CLV. The premise behind the CLV-to-CAC formula is to maximize that ratio as much as possible.
There are multiple benefits from having a strong CLV-to-CAC ratio, including enabling hotel marketers to ask owners for more investment dollars, for example, imagine being able to tell ownership: “We spent $300,000 last year to attract 5,000 NEW guests, who represent a LIFETIME VALUE of three million dollars in revenue… in other words, for every dollar you give me, I’m giving you ten dollars back in gross revenue.”
So how do hoteliers calculate their CLV to CAC ratio?
According to Kissmetrics, a well-known web/data analysis company, Starbucks CLV is more than $14,000.
Here are the core steps:
1. Making the Calculations
To come up with your CLV, first, consider how many times a guest typically stays at your hotel(s) over a multi-year period. Then, deduce the total value of those stays. Multiply that value by the total amount of visits per guest and that is the CLV you will use in the formula.
Next, to arrive at a value for CAC, simply divide the TOTAL amount your property spends on sales and marketing for each segment (ie: transient vs group vs corporate) by the total number of guests from that segment.
So, if a hotel attracts 1,000 new guests this year and spends $100,000 to do it, the CAC equals $100.
2. What to include in CAC?
When calculating CAC for each demand segment, be sure to include salaries, expenses, technologies, advertising and any other investments made specifically to attract bookings for that specific segment. That may include, for example, a customer relationship management (CRM) system and trade show booth that is part of the CAC for your hotel’s sales efforts for attracting the corporate business segment.
Other costs, like Google pay-per-click (PPC) advertising, email marketing, and social media fees should be attributed primarily to transient guest CAC calculations. On the other hand,
your hotel’s website, the salary for your director of sales and marketing (DOSM) and other “shared” costs can be distributed evenly across all segments that your property targets.
3. The Results:
Using the calculations described above, divide the CLV by the CAC to arrive at the ratio.
For example, if a hotel has a CLV of $5,000 per transient guest and the CAC for each transient guest equals $100, then the CLV-to-CAC ratio is 50x. In other words, for every dollar spent on sales and marketing to target that guest, the hotel will earn back $50.
That is the kind of return owners love!
And that is the kind of math that separates serious hotel marketers from those just focused on pretty pictures!
Now compare results to your OTA costs!
Once you know your own CLV-to-CAC ratio, you can compare it to the CLV-to-CAC of bookings derived from third-party online travel agencies (OTAs).
You’ll most likely be pleasantly surprised by what you find: Typically, OTA-driven guests are less loyal and will have a lower CLV as a result. Also, the commissions on those bookings may be higher than the CAC you are achieving on your own.
So, in the quest to drive hotel profitability even further into the stratosphere, make it a top priority today to learn your CLV-to-CAC ratio for each customer segment you target. By offering such compelling insight, the CLV-to-CAC ratio can be an incredibly powerful stat for hotel marketers to cite to owners when requesting more marketing dollars.
You’ll be much more likely to obtain the budget you need when your owner is assured their investment will lead to a far better payoff down the road.
Tambourine uses technology and creativity to increase revenue for hotels and destinations worldwide. The firm, now in its 33rd year, is located in New York City and Fort Lauderdale. Please visit: www.Tambourine.com
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