Building Lifetime Customer Value and Brand Advocacy in the Hospitality Industry. December 2009 Chris Cunnane, Sahir Anand

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1 Building Lifetime Customer Value and Brand Advocacy in the Hospitality Industry December 2009 Chris Cunnane, Sahir Anand

2 Building Lifetime Customer Value and Brand Advocacy According to the March 2009 Cutting Edge Customer Loyalty report, the top two pressures facing hospitality organizations are increased competition in a tough economy and less loyal customers shopping around for the best price. For the different segments within the hospitality industry, these pressures manifest themselves in different ways to impact lifetime customer value (see sidebar). For a hotel, motel or resort, comparative websites are having an effect on sustained customer loyalty, as consumers are able to quickly compare locations and make choices based solely on the cheapest option. Hotels, in turn, are lowering prices or creating low price properties to meet market expectations. This creates a classic conundrum: at what point does an organization risk the brand to retain long-term customers. Between October and November 2009, Aberdeen surveyed 74 hospitality enterprises to determine how Best-in-Class organizations are utilizing loyalty programs to maximize lifetime customer value. This Analyst Insight will outline the core capabilities and enablers that have a direct impact on customer retention, attrition, and lifetime value. Evolving Customers, Increasing Loyalty Pressures According to Aberdeen data, the top pressure hospitality organizations are facing today around customer loyalty is the dynamic nature of customer preferences in today's distraught economic environment. Figure 1: Customer Evolution December, 2009 Analyst Insight Aberdeen s Insights provide the analyst perspective of the research as drawn from an aggregated view of the research surveys, interviews, and data analysis Lifetime Customer Value (LCV) LCV is defined as the present value of future cash flows through long term customer relationships. 60% 54% Percentage of Respondents 50% 40% 30% 20% 10% 0% 12% Rapidly evolving customer preferences Best-in-Class All Others n=74

3 Page 2 As customers preferences evolve, hospitality organizations must evolve as well. The use of the online and mobile channels for research, reservations, feedback, payments, and promotions have become more rampant compared to the last few years. This means hospitality organizations must adapt their messaging, brand image, promotions, and outreach to accommodate these channels. By bringing customer loyalty into new channels, hotels, resorts, casinos, and restaurants can meet the changing needs of their customers and grow with them; as the relationship grows, so too does customer loyalty. The Maturity Class Framework Aberdeen used three key performance criteria to distinguish the Best-in- Class from Industry Average and Laggard organizations. Table 1 provides a framework with which companies can benchmark themselves and identify the category into which they fall. The three Key Performance Indicators (KPIs) include: current customer retention rate, percent change in customer retention rate over last year, and the percent change in customer attrition rate over last year. These metrics are critical for any hospitality organization to measure the short-term and more importantly, the long-term success of their loyalty initiatives. Table 1: Top Performers Earn Best-in-Class Status Definition of Maturity Class Best-in-Class: Top 20% of aggregate performance scorers Industry Average: Middle 50% of aggregate performance scorers Laggard: Bottom 30% of aggregate performance scorers Mean Class Performance Current customer retention rate: 81% Increased year-over year customer retention: 13% Reduced year-over-year customer attrition: 5% Current customer retention rate: 62% Increased year-over year customer retention: 5% Increased year-over-year customer attrition: 4% Current customer retention rate: 46% Decreased year-over year customer retention: 5% Increased year-over-year customer attrition: 6% The Best-in-Class PACE Model Table 2 shows a roadmap to the key Pressures, Actions, Capabilities, and Enablers (PACE) prioritized by Best-in-Class hospitality organizations to build lifetime customer value. This will help identify the key capabilities and enablers that are being considered part of their loyalty initiatives.

4 Page 3 Table 2: The Best-in-Class PACE Framework Pressures Actions Capabilities Enablers Rapidly evolving customer preferences Identify lapsed customers for reactivation Coordinate personalized promotions across all channels Fulfill brand promise at all times Loyalty program sign-ups at point-of-service Frequent buyer programs based on customer tiers Incentivization of customer loyalty registration Tracking of loyalty program redemption rates Tracking of loyalty program sign-up rates Loyalty card processing application Loyalty mailing application Database marketing solutions Loyalty database hosting application Customer analytics application End-to-end customer loyalty platform Enterprise-wide CRM application Best-in-Class Strategies In response to rapidly evolving customer preferences, top performing hospitality organizations have identified three key strategies for furthering their loyalty programs: identify lapsed customers for re-activation, coordinate personalized promotions across all channels, and fulfill the brand promise at all times (Figure 2). Identifying lapsed customers is a critical factor in today's economy as re-activating lapsed customers can add to the net profitability of the company. With travel and leisure spend still suffering from a down economy, hospitality organizations cannot afford to lose existing customers. By identifying lapsed customers, organizations can begin the process of re-engaging and re-building customer experience and lost sales. "Our loyalty application enabled analysis of our customer database and supported the development of new marketing programs geared around personalization." ~ Marketing Manager, Large Resort Casino, Singapore Figure 2: Best-in-Class Strategic Actions 40% 38% Percentage of Respondents 30% 20% 10% 31% 31% 0% Identify lapsed customers for re-activation Coordinate personalized Fulfill brand promise at all promotions across all times channels n=74

5 Page 4 With more customers utilizing the Web and mobile channels, coordinating personalized promotions across all channels and fulfilling the brand promise at all times are incredibly important strategic actions. When a personalized promotion has been developed, the customer must be able to access the promotion through the channel of their choice. At the same time, the delivery and redemption of the promotion must provide the same experience regardless of the channel. For example, a direct mail promotion offered by a hotel must be redeemable through the corporate Web site or call center. While the deliverables may be an upgrade to a better hotel room, or coupons for a dinner package, the promise of the brand is what the organization is really selling. Customer loyalty is dependent upon brand affinity and developing a strong relationship over time. Fulfilling the brand promise at all times, across all channels, and in all locations is one step in turning a satisfied customer into a loyal customer, and eventually into a brand advocate. Capabilities and Enablers Based on the findings of the survey and interviews with end users, Aberdeen s analysis of the Best-in-Class reveals that these organizations are taking a closer look into customer data and rewarding employees as part of the loyalty process (Figure 3). The foremost capability to emerge is loyalty program sign-ups at the point-of-service, which Best-in-Class organizations are twice as likely to possess compared to all other companies (Industry Average and Laggards combined). For a hotel or resort, this includes the front desk, concierge desk, self-service kiosks, online, customer service departments (phone or in person), and at other customer-facing interaction points. For a restaurant, these points-of-service include at the host desk, cash register, and online, amongst others. This capability must be part of the organizations fully integrated multi-channel sales and service environment. Allowing the customer to sign up at any of these interaction points demonstrates the organizations commitment to meeting their customers changing channel interaction preferences. "The biggest benefit of our loyalty program has been improved information from analytics to improve the overall relation with our best customers." ~ General Manager, Large Hotel, North America Figure 3: Core Loyalty Capabilities Percentage of Respondents 100% 80% 60% 40% 20% 0% 86% 85% 52% 42% Loyalty program sign-ups Frequent buyer programs at point-of-service based on customer tiers 69% 39% Identification of most profitable customers Best-in-Class All Others n=74

6 Page 5 In terms of the second most important capability, Best-in-Class organizations are 1.6 times more likely than all others to possess the ability to develop frequent buyer programs based on customer tiers. By segmenting out different customer tiers and offering separate loyalty programs, an organization is able to make compelling offers while keeping an eye on the customer's spending propensity and share of wallet. For example, in the case of a hotel, a business traveler that frequents the hotel chain (whether it is location specific or across multiple properties) on a weekly or bi-weekly basis will receive different promotions than the business traveler that visits once a quarter or less frequently. Room upgrades and improved offers help to keep that specific property as a topof-mind destination on future business travel, as well as leisure travel. Developing this lasting relationship is the foundation of maximizing lifetime customer value. A related capability, utilized by 69% of Best-in-Class organizations compared to 39% of all others, is the identification of an organization's most profitable customers. The ability to identify these customers is crucial for loyalty success. Once these customers are identified, targeted campaigns and offers can be utilized to keep them coming back. With high profit customers in place, organizations are able to use more aggressive marketing and promotional campaigns to bring in new customers at lower margins to ensure capacity and enhance the possibilities of cross-sells and up-sells, while building a loyalty based relationship. Moreover, the most profitable customers are also most likely to become brand referrals or advocates. Technology Best-in-Class organizations are outperforming their peers across a number of key technology enablers (Figure 4). Top performing organizations are more than twice as likely as all other organizations to possess an application for loyalty card processing. The processing application consists of scanning the loyalty card, accepting the information into the loyalty program, capturing customer data, and accruing loyalty points or perks. The lack of a processing application makes it nearly impossible for an organization to successfully implement or track a loyalty program. When a loyalty program is not successfully implemented, organizations are unable to identify their most profitable customers, and miss out on the opportunity to create customized offers for these customers or any other customer groups based on product affinity or preference. It is no surprise that Best-in-Class organizations are able to identify these customers, and develop multi-tiered rewards plans based on customer spending patterns. "We have focused on more targeted services using analytics from the past year. We use travel patterns to set revenue management strategies. We have seen more movement to properties closer to traveler s homes that they drive to instead of flying, and our promotions have been adjusted accordingly." ~ Consultant, Mid-size Resort, North America

7 Page 6 Figure 4: Technology Enablers 70% 62% Percentage of Respondents 60% 50% 40% 30% 20% 10% 27% 54% 35% 50% 46% 27% 27% 0% Loyalty card processing application Database marketing solutions Customer analytics application Enterprise-wide CRM application Best-in-Class All Others n=74 The final three key enablers found in Best-in-Class organization work in conjunction with each other for customizing promotions to existing and potential customers: database marketing solutions, customer analytics applications, and CRM applications. These three enablers are vital for building lifetime customer value within the hospitality industry. The use of customer analytics, CRM applications, and database marketing are ways of building a personal connection with a customer. The CRM application allows for the gathering of customer data, from demographics to spending patterns. Best-in-Class organizations are 1.7 times more likely than all others to have an enterprise-wide CRM application which allows customer data to be pulled at all customer touchpoints within the property. This data can be utilized for clienteling, upselling, or cross-selling at the property, on the phone, or online. Customer analytics applications are equally as important to the hospitality organization. Best-in-Class organizations are nearly twice as likely to implement an analytics application, which allows data from customer behavior to be made actionable. The data that is gathered is used to predict future customer behavior, and marketing campaigns are designed around these predictions. An example of customer analytics in a golf resort would be analyzing prior guest visits to identify when they are most likely to book a round of golf, dinner, or other activities on the property. The CRM system is the backbone for a database marketing solution, where Best-in-Class organizations are 1.5 times more likely to utilize this technology. Utilizing the CRM system, hotels, resorts, restaurants, and casinos can develop highly personalized direct marketing promotions, consisting of direct mail, , web couponing, and SMS offers, amongst others. The database marketing solution also allows the organization to develop separate campaigns based on predetermined criteria, such as "Our loyalty program has allowed us to provide customers with the expected services, and use feedback as a popularity indicator. We are focusing on web-hosted platforms and additional strategic partnerships for 2010." ~ Michael Wetzlar, Vice President, Corporate Management, Vantage Hospitality China (International Hotel Chain)

8 Page 7 customer demographics and spending patterns or thresholds. This is another area where identifying the most profitable customers can be utilized for a specific dollar rewards or point perks rewards campaign (e.g. new hotel property launch door buster offers, friends or family referral or special rewards shopping day). Customer Loyalty Tracking In order to fully evaluate the success of a loyalty program and attain lifetime customer value goals, proper procedures need to be in place for analyzing loyalty customer value. Best-in-Class organizations are far ahead of their peers in a key component of this analysis: tracking. These organizations are much more likely to track loyalty program sign-up rates, redemption rates, and satisfaction rates (Figure 5). Tracking the loyalty program sign-up rates allows the organization to see how new loyalty program members stack up against those that are opting out of the program. This metric is also important to see where the growth is coming from, whether it is geographical, demographical, or for a hotel chain, based on leisure versus business travel. Best-in-Class organizations are 1.7 times more likely than all others to track loyalty redemption rates. Tracking the redemption of loyalty rewards, whether it is purchase promotions, price promotions, frequency promotions, rewards points, or perks, amongst others, allows the organization to identify the most successful loyalty elements. Once these elements have been established, hospitality organizations make better use of these elements, while revamping those that do not have high redemption rates. Organizations can also measure the types of elements redeemed against a variety of criteria (demographics, etc.) to further their use of personalized promotions. "We are looking at pay by text and CRM via PDA. We are driving trials for the next few weeks in University sites, where we are not relying on EPOS or Web based sign up. In 2010, we are focusing our loyalty spend on text payment and pixel recognition programs." ~ Stephen Minall, Owner QSR Brand, Wrapid Ltd, UK Figure 5: Loyalty Tracking Percentage of Respondents 90% 75% 60% 45% 30% 15% 0% 77% 77% 53% 45% Tracking of loyalty program Tracking of loyalty program sign-up rates redemption rates 54% 36% Tracking of loyalty satisfaction across all channels Best-in-Class All Others n=74

9 Page 8 The final aspect of loyalty tracking where the Best-in-Class outshine their peers is the tracking of loyalty satisfaction across all channels. In the current digital age, customers are cognizant of whether they are receiving the same brand experience across all channels. By measuring how loyalty programs rate across all channels, organizations are able to identify the gaps that exist and address the areas where they are lacking. Customers need to have the ability to enroll, redeem, update, and view loyalty elements in the channel of their choice. This capability must be part of a fully integrated, multi-channel loyalty program. Key Takeaways Whether a company is looking to implement a loyalty program or improve their loyalty performance to Best-in-Class standing, the following actions will help spur the necessary performance improvements: Focus on existing customers. Acquiring new customers is important, however, the cost for acquiring new customers greatly outweighs the cost of retaining existing customers. To start, organizations should look at all lapsed customers over the last 12 months and develop promotions specifically geared around getting them to the property. Additionally, hospitality organizations must identify their most profitable customers and develop personalized promotions for these customers. A multi-tiered rewards plan for customers allows for greater flexibility within the organization from a pricing and promotion standpoint. Utilize customer analytics. A customer analytics application, coupled with a CRM system and database marketing application, are the foundations of personalized marketing. Organizations should implement a customer segmentation process based on customer tiers, spending patterns, preferences, and demographics. These segments should then be analyzed to develop the most appropriate marketing promotions and campaigns. Monthly updates to the segments must be included in the process, as customer wants and needs change. The customer data needs to be actionable, rather than simply collected and forgotten about. Track loyalty programs. A loyalty program is not going to be successful unless hospitality organizations are diligent in their monitoring and measurement of loyalty program sign-up, redemption, and satisfaction rates. An organization needs visibility into the key metrics to see how the number of loyalty members changes within a given time period, which rewards have been redeemed and which have not, and most importantly, how satisfied loyalty members are with the program they have signed up for. As a starting point, hospitality organizations can incorporate reporting of sign-ups, redemption, and satisfaction rates as part of their monthly performance dashboards at both the headquarter and field level. Incentive plans should be put in place for top performing locations.

10 Page 9 If a customer is not satisfied with a loyalty program, they are not going to remain a loyal customer. As travel and leisure spend remain low, personal connections are of utmost importance for weathering the storm. Best-in-Class organizations have proven that the ability to segment the most profitable customers, combined with the use of customer analytics, CRM applications, and database marketing solutions are yielding results when it comes to customer retention. However, these promotions need to keep the brand in mind, and must be consistent across all channels. Maintaining a lasting relationship will build lifetime customer value, turning a loyal customer base into brand advocates. For more information on this or other research topics, please visit Winning Strategies for Upgrading the Hospitality Guest Experience; September 2009 Cutting Edge Customer Loyalty: Retail Best Practices for Acquiring, Retaining, and Re-engaging Customers; March 2009 Related Research Next Generation Hospitality: Upgrading and Restructuring Enterprise Systems; June 2009 Online Customer Loyalty: Converting Occasional Shoppers into a Loyal Consumer Base; October 2009 Author(s): Chris Cunnane, Senior Research Associate, Retail & Hospitality, (chris.cunnane@aberdeen.com); Sahir Anand, Research Director, Retail & Hospitality, (sahir.anand@aberdeen.com) Since 1988, Aberdeen's research has been helping corporations worldwide become Best-in-Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter the facts that enable companies to get ahead and drive results. That's why our research is relied on by more than 2.2 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500. As a Harte-Hanks Company, Aberdeen plays a key role of putting content in context for the global direct and targeted marketing company. Aberdeen's analytical and independent view of the "customer optimization" process of Harte- Hanks (Information Opportunity Insight Engagement Interaction) extends the client value and accentuates the strategic role Harte-Hanks brings to the market. For additional information, visit Aberdeen or call (617) , or to learn more about Harte-Hanks, call (800) or go to This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc a