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C U S T O M E R

C E N T R I C

M A R K E T I N G

Professor Barak Libai, Tel Aviv University

PLAN TO INCREASE CUSTOMER LOYALTY & EQUITY AT CABO SAN VIEJO RESORTS

NANCY SAGAR UCLA Anderson School of Management August 1, 2010


Cabo San Viejo’s customers are dying off Cabo San Viejo’s executives should be very concerned about the health of their customer base and the impact on the company’s financial performance. Until 2000, the resort enjoyed doubledigit growth in visits from new and returning customers, but growth turned negative, then flat for the past five years (Exhibit A). Projections for 2005 show a 9% drop in first-time visits and a 6% drop in repeat visits. Since the resort only filled 62% of its ideal capacity (270 guests/night) in 2004, it’s reasonable to assume that their visit figures are far lower than the company desires and that growth in revenue and total customer equity have flattened/declined as well. There are numerous factors contributing to this worrisome decline.

FIERCE COMPETITION There are a myriad of luxurious products for the wealthy female segment Cabo targets, and it’s becoming harder to differentiate on product leadership alone – especially when competitors utilize increasingly sophisticated marketing tactics. As a result, Cabo is losing prospective customers (new & returning) to competitive resorts, cruise ships, day spas, gyms & more. In addition, the company’s day spas offer no differentiation and aren’t completely aligned with the company’s health-oriented brand positioning, creating further competitive challenges.

LITTLE CUSTOMER DEVELOPMENT Cabo has invested its relatively small sales & marketing budget in customer acquisition, but the company does nothing beyond simple newsletters to develop and retain existing customers, leading to lower retention rates and fewer return visits.

AGING CUSTOMER BASE Cabo’s customer base is aging with the resort. While this trend can be expected given the relative wealth and size of the Boomer segment the resort attracts, it isn’t sustainable indefinitely. The greater concern is the significant drop the resort has seen among customers under age 44 (Exhibit B). Strategically, the company cannot ignore these customers or they will build loyalty with the competition as Cabo’s older customers literally die off.

LACK OF SWITCHING COSTS Cabo customers have nothing to lose by switching to a competitor for their next vacation, spa visit, or health retreat.

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INFREQUENCY OF PURCHASE Cabo’s product is an infrequent luxury purchase, making it more difficult to increase visit frequency and profitability per customer. For example, the average customer stays 7 days per trip – the typical vacation length for American consumers. Also, there may be a ceiling on what customers will spend on treatments each day. Thus, the way to increase customer profitability is to increase visit frequency with customer development/ retention programs that Cabo has ignored.

CUSTOMER LOYALTY CONCERNS Many of Cabo’s returning customers have volunteered their disappointment that they aren’t recognized for their loyalty. And for every customer who volunteered her displeasure, there may be 50-100 more who thought it but said nothing. These concerns likely contribute to the decreasing rate of return among current customers.

PERCEIVED VALUE ISSUES 68% of first-time guests never return, and the primary reason they cite is cost. Yet most customers – even those who visit during the off-season at discounted prices – have the income to afford vacations like Cabo. Instead, the more likely culprit is perceived value. Satisfaction surveys say that customers enjoy a wonderful experience, but customers may be comparing the cost versus more exotic or cultural vacation experiences that have higher perceived value even at the same price.

LACK OF CUSTOMER KNOWLEDGE Finally, Cabo’s lack of data about resort customers, coupled with their inability to track customers at their day spas, means the company cannot glean valuable insights about customer preferences, responses to marketing offers, etc.

Increasing risk, yet tremendous opportunity These issues pose serious risks with each passing year. Fortunately, the firm has a tremendous opportunity to realize substantial improvement in customer equity:

ACQUISITION COSTS ARE LOW Most new customers hear of Cabo through WOM and travel agents. Cabo’s marketing budget is a tiny fraction of revenue and ROI is 842% (Exhibit C). This means two things.


1. Strong WOM signals strong satisfaction, and increasing satisfaction can lead to more WOM and more visits. 2. The company should be able to increase its marketing budget (targeting new & existing customers) to generate incremental visits at substantial ROI.

TRAINING SUCCESS Cabo’s reservation team has shown great success in creating customer delight (as evidenced by the many notes the reps receive). The company is obviously capable of communicating the importance of customers to employees and supporting them to deliver that level of delight.

CUSTOMERS ARE SATISFIED Cabo guests are satisfied with their visits. The problem is that they don’t come back frequently enough. By shifting focus to customer development & retention, Cabo can improve growth in return visits and new visits that are driven by WOM.

RETENTION FROM VISIT 2-3 IS STRONG While retention from visits 1-2 is low (32%), the retention rate from visits 2-3 is quite high (62%). If Cabo can understand more about customers who visit 3+ times, the company can target those customers in acquisition and development efforts and raise total equity.

DAY SPA OPPORTUNITY Cabo is missing a meaningful opportunity to grow company-wide customer equity by including the day spas in a customer-centric marketing philosophy.

Cabo should implement a rewards program to increase customer equity In fact, the company needs to evolve their entire marketing philosophy to focus on the customer rather than focusing on the performance of individual properties. In turn, they will also need to alter their marketing strategies to focus on customer development rather than pure acquisition as they’ve done in the past. They should also improve their general service to create more customer delight as well. The company has identified many sound arguments for a rewards program. They’re losing younger customers who expect rewards; it can help them build relationships with heterogeneous customers; it’s an opportunity for customer delight and fierce loyalty; it can forge synergies

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between the spas and resort; it allows them to compete with savvier marketers and prevents a tarnished image. Yet there’s more:

DIFFERENTIATE ON CUSTOMER INTIMACY This product category has become saturated, and Cabo can no longer differentiate on product leadership. Cabo must evolve and differentiate on customer intimacy, creating value through deep customer relationships that are difficult to copy.

CREATE SWITCHING COSTS A rewards program can create barriers that encourage customers to visit Cabo over competitive properties.

ACCELERATE RETENTION Cabo’s brand is so specialized that customers view it as a luxury, a place to go during “life changes,” and so the average customer only returns every 5-6 years - a drag on customer equity. A well-structured rewards program (along with customer development and service improvements) can help Cabo accelerate return visits to every 2-3 years, which has an enormous positive impact on customer equity by improving the NPV of lifetime profitability (Exhibit D).

REINFORCE VALUE Cabo may have a perceived value issue that drags down retention. A rewards program can deliver additional value that improves this perception.

REVERSE THE TRENDS Cabo can’t afford to continue losing younger customers and repeat customers at the current rates, especially in the face of stiff new competition.

DIFFERENTIATE THE DAY SPAS CaboDaySpas aren’t differentiated from the myriad of other day spas and gyms across the country, their focus on pampering rather than wellness isn’t consistent with the brand. A rewards program can bring the day spas into the brand umbrella by promoting their services as a component of total lifelong wellness.

Program Strategy: Customer Development The company’s strategy for this rewards program should be CUSTOMER DEVELOPMENT -increasing the profitability of current customers to increase total equity. Given the average customer’s long lifespan and gap between visits, Cabo’s rewards program should aim to increase


profit via two variables: 1) the frequency of visit (from 5-6 years to 2-3 years) to the resort and 2) the volume of visits (nights stayed, spa visits) to all Cabo products. Interestingly, improving retention rate alone (rather than the frequency of visits) does little to increase total customer equity, since the profit earned in future years is so heavily discounted. Alternatively, it will be difficult to increase nights per stay or average spa purchases per visit – those values may be reaching a ceiling on average. Therefore, Cabo’s best strategy is to identify customers who are most likely to visit every few years and incent /reward them with a program that’s consistent with their brand and creates that critical customer intimacy. In addition, Cabo should strive to generate customer knowledge that becomes a sustainable competitive advantage and enables the company to more effectively market to specific customer segments, including Baby Boomers and the younger segments that have different expectations. Cabo should also create opportunities for customer delight to drive social value, WOM, & future visits while strengthening the brand. This loyalty program will also help solve a variety of customer management problems:

CUSTOMER DATA Cabo will have to tie together the customer data (transactions, preferences, demographic data, responses to offers, profitability per customer and more) from all of their properties, which is a necessary step in the shift from a product focus to a customer focus.

CUSTOMER INSIGHT Without customer data, Cabo doesn’t have deep customer insights to create stronger relationships, better products, and more successful marketing initiatives.

CUSTOMER PROFITABILITY Again, without data, the company can’t market to current customers to boost retention rates, future visits, and lifetime profitability.

REFERRALS Every company needs more referrals, and WOM for Cabo likely drops as time passes after a customer’s visit. Each new visit is an opportunity to generate more WOM and referrals. Thus, increasing frequency of visit is a good strategic objective for the company.

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Program structure must increase visit frequency and volume In Exhibit E, I’ve provided a detailed analysis of Cabo’s various options for rewarding points to their resort and day spa customers. The structure must support the recommended customer development strategy focusing on 1) increasing frequency of visit to 2-3 years and 2) increasing the volume of visits, both of which will increase WOM and customer equity. Therefore, I recommend the green cells in the exhibit: •

Points per night at the resort: Points awarded per night the customer stays at the resort.

Frequency bonus: Double points awarded upon return visits within 3 years of the previous visit

Bringing friends: To increase frequency & volume while building the network effect and WOM, Cabo should award bonus points for customers who make group reservations.

$ at spas: Awarded to all day spa customers, not just those who have previously visited the resort.

In Exhibit F, I evaluated point redemption options and recommend allowing customers to redeem points in lieu of cash for major purchases (nights at the resort, treaments/ appointments). This structure is the most consistent with the reward program strategy: it can accelerate the frequency/volume of visits and enhances the guest experience to generate more WOM and social value. It also creates a switching cost and synergies among the company’s properties. In addition, I recommend creating reward tiers to deliver “delightful” services beyond the point system:

Level Strategy

Perks

PLATINUM: The top 20% of customers based on total gross lifetime points accumulated (including those GOLD: Top 21-50% that have been redeemed) Retain & reward the most profitable long-term customers

Grow – these customers have the strongest potential to return

Fruit basket, flowers, card in room

Flowers & card in room

Personal concierge

Surprise them by adding 30 minutes to selected treatments

Surprise them with +15 minutes on selected treatments

Priority appointment slots & therapists; access to small classes designed only for gold + platinum

Preferred rooms at the resort


Best rooms in the resort

Quarterly coaching calls and free one-on-one meetings

Free one-on-one coaching meetings at the resort

Access to classes for gold+platinum members only

Invitations to exclusive events

Access to platinum areas (ex: best cabanas at pool)

Grandfathering existing customers into the rewards program is challenging given Cabo’s poor data. Fortunately, they must have reservation records for the last 4-6 years at a minimum. The company can assign points based on total nights for the years they’re able to track, then assign the top 20% of customers to the platinum level and 21-50% to the gold level. (Customers would remain at each level for 2 years before recalculation.) Then they can begin rewarding points accurately for each customer action moving forward. While not perfect, this model gives customers some points (which can be redeemed in lieu of cash) along with a loose tier system for delivering additional services. To create further customer intimacy and competitive barriers, Cabo should help customers create lifelong health plans via group sessions offered every few days at the resort. Customer goals could be entered into a database so that Cabo can send reminders and motivational tips on a quarterly basis; gold and platinum members would receive free coaching sessions by phone and/or in person. This service reinforces the brand, creates greater perceived value, and increases opportunities for WOM that can drive total customer equity. Finally, guest recognition creates a cost-effective opportunity to differentiate this luxury brand and build relationships with all guests. Cabo should implement recognition efforts across the board – using customers’ names, writing personalized notes after guest visits, and remembering customer preferences during future visits. Doing so will help Cabo build the customer intimacy that is so critical in the current competitive environment.

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Exhibits A: TOTAL STAYS, 1ST TIME STAYS & REPEAT STAYS HAVE DROPPED 8-23% SINCE 2000

Yr

Total Growth 1st time Growth Repeat Growth Stays (%) stays (%) stays (%)

92

3576

93

4123

15%

1415

11%

2708

18%

94

4329

5%

1416

0%

2913

8%

95

4703

9%

1551

10%

3152

8%

96

5219

11%

1754

13%

3465

10%

97

5832

12%

2053

17%

3779

9%

98

6774

16%

2419

18%

4355

15%

99

8244

22%

3563

47%

4681

7%

00

9446

15%

4296

21%

5150

10%

01

8748

-7%

3684

-14%

5064

-2%

02

8399

-4%

3475

-6%

4924

-3%

03

8540

2%

3567

3%

4973

1%

04

8698

2%

3631

2%

5067

2%

05*

8052

-7%

3312

-9%

4740

-6%

! from 2000

1279

2297

-15%

-23%

B: CABO IS LOSING CUSTOMERS <45 YEARS OLD AT A RAPID RATE YOY growth by age Yr

<35

35-44

45-54

55-64

65+

93

13%

16%

16%

11% 29%

94

-6%

4%

4%

5% 34%

95

17%

1%

7%

14% 11%

96

6%

14%

14%

5% 11%

97

8%

7%

12%

11% 35%

98

17%

13%

-1%

34% 42%

99

7%

14%

32%

23% 24%

00

4%

13%

14%

20% 16%

01

-21%

-8%

-3%

-12%

1%

02

2%

-8%

-8%

2%

-2%

03

-14%

-12%

4%

04

-19%

-4%

5%

11% 12% 5%

3%

-8%

*Extrapolated from Q1

C: ROI ON MARKETING INVESTMENTS IS 842% MARKETING INVESTMENT PER STAY (NEW & REPEAT)*

REVENUE PER STAY Accommodation revenue/day

$

456

Total marketing budget

$

2,760,000

Service revenue/day

$

165

Budget per stay (2004)

$

323.19

Total daily revenue

$

621

Revenue per stay

$

4,349.31

Gross profit (70%)

$

3,044.52

Avg visit length (days) Avg revenue per stay

7 $

4,349

ROI *Can't allocate cost to new vs returning stays

842%


D: CURRENT & POTENTIAL CUSTOMER EQUITY WITH INCREASED VISIT FREQUENCY

E: REWARD POINT OPTION ANALYSIS *Cabo should conduct customer research to test this hypothesis! Green boxes = recommended; bold = best supports the company’s strategic objectives for the program.

Point options

Pros

Cons

# of nights at resort

• *May drive frequency

• *Might reward but not incent, particularly for wealthy customers who won’t make travel decisions based on points

• *May encourage longer stays • Easy to track and understand • Profit/night is fairly consistent, so proper reward values are easy to calculate

# of visits (regardless of length)

• *May encourage more frequent visits

• Doesn’t reward longer visits

• Easy to track & understand

• Rewards are more difficult to link to profit • Long gaps between visits may render meaningless

Frequency of visit (bonus if repeat visit is within 3

• *May accelerate repeat visits

• Harder for company to track

• Rewards customers who offer the greatest social value / WOM, which drives

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Point options years)

Pros

Cons

additional business • Reinforces branding ( lifelong health/wellness )

$ spent at resort

• Links rewards to revenue • Rewards values are easily linked to revenue

• Reminds people how much they spend, & the #1 reason guests don’t return is cost. • Wealthy customers may view this as tacky.

Bringing friends (network effect)

$ spent at spas

• *May drive frequency & volume (more fun to bring friends)

• Harder for company to implement & track

• Encourages WOM • Acquire new customers at low cost

• Could be confusing for customer (who gets the credit, what if reservations are made separately)

• *Introduces spa customers in wealthy locales to Cabo resorts; could drive new resort visits • *Might drive spa visits • Easy to track and understand

• The day spas are all in small (but expensive) resort communities, so few of Cabo’s west coast customers are going to visit them with any meaningful frequency

EXHIBIT F: REWARD REDEMPTION OPTIONS Green boxes = use for rewards program; orange = recommended for all customers (creates delight!)

Types of rewards

Pros

Cons

Enhanced recognition – flowers in room, using name, notes.

• Customers have specifically asked for it • Great way to make guests feel special • Very little variable cost to addressing customers by name

• Cabo thinks it increases expectations. (Unfounded; customer expectations will always rise; not a reason to start low, especially given the competition.) • Hard to implement at first.

Discounts & coupons

• Appeals to more budget-minded customers (eg those who visit in the off-months at discounted rates) who aren’t returning

• Customers may be insulted by monetary compensation; they prefer great service. • Appeals to wrong customer segment (the most pricesensitive, not the most profitable)


Types of rewards

Pros

Cons

Privileges – priority reservations, best therapists

• Elevates the level of service for key customers – makes them feel more special • Visible benefit that customers can aspire to

• May decrease the level of service given to other guests, who in turn may leave less satisfied • Tacky if customers are trading points for upgrades.

Points that can be used instead of cash

• Enhances the experience during a visit • Encourages repeat visits • Easy to implement & understand • Can be used across multiple properties

• Cabo may forego revenue that the customer would have spent instead of points

Gift certificates for partners

• Easy to implement • Easy for customers to understand

• Doesn’t directly encourage repeat visits • Doesn’t add to the service/ experience / positioning of the Cabo wellness brand

Grade: 100 – Excellent! Very thorough work!! Regarding question #1: Excellent answer! (40/40) Regarding question #2: Excellent answer. I would have put the cons of a reward program in the answer itself and not in the appendix. (20/20) Part b: Strategic goals: Excellent! (20/20) Regarding question #3: Excellent! (20/20)  

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Plan to Increase Customer Loyalty & Equity