plan to increase customer loyalty & equity

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 Liba i , Te l Aviv Univers i ty

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

NANCY SAGAR UCLA Anderson School of Management

August 1, 2010

C a b o S a n V i e j o R e s o r t s P l a n t o i n c r e a s e c u s t o m e r l o y a l t y & e q u i t y

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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 double-digit 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 reve-nue 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 uti-lize increasingly sophisticated marketing tactics. As a result, Cabo is losing prospective cus-tomers (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 rela-tive 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.

INFREQUENCY OF PURCHASE Cabo’s product is an infrequent luxury purchase, making it more difficult to increase visit fre-quency 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 develop-ment/ 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 cus-tomers – 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 cultur-al 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 custom-ers at their day spas, means the company cannot glean valuable insights about customer prefer-ences, 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.


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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 im-portance 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 includ-ing 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 cus-tomer 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 heterogene-ous customers; it’s an opportunity for customer delight and fierce loyalty; it can forge synergies

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 improve-ments) can help Cabo accelerate return visits to every 2-3 years, which has an enormous posi-tive 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 de-liver 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 re-wards 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 cus-tomer’s long lifespan and gap between visits, Cabo’s rewards program should aim to increase


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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, improv-ing 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, & fu-ture 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 relation-ships, 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.

Program structure must increase visit frequency and vol-ume

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 rec-ommend 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 pre-

vious visit • Bringing friends: To increase frequency & volume while building the network effect

and WOM, Cabo should award bonus points for customers who make group reserva-tions.

• $ 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 re-deem points in lieu of cash for major purchases (nights at the resort, treaments/ appoint-ments). 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 PLATINUM: The top 20% of customers based on to-tal gross lifetime points accumulated (including those that have been redeemed)

GOLD: Top 21-50%

Strategy Retain & reward the most profitable long-term cus-tomers

Grow – these customers have the strongest potential to re-turn

Perks

• Fruit basket, flowers, card in room • Personal concierge • Surprise them by adding 30 minutes to selected

treatments • Priority appointment slots & therapists; access to

small classes designed only for gold + platinum

• Flowers & card in room • Surprise them with +15

minutes on selected treat-ments

• Preferred rooms at the re-sort


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• Best rooms in the resort • Quarterly coaching calls and free one-on-one

meetings • Invitations to exclusive events • Access to platinum areas (ex: best cabanas at pool)

• Free one-on-one coaching meetings at the resort

• Access to classes for gold+platinum members only

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 ac-curately for each customer action moving forward. While not perfect, this model gives custom-ers some points (which can be redeemed in lieu of cash) along with a loose tier system for deliv-ering additional services.

To create further customer intimacy and competitive barriers, Cabo should help customers cre-ate 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 in-creases 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.

Exhibits

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

Yr Total Stays

Growth (%)

1st time stays

Growth (%)

Repeat stays

Growth (%)

92 3576

1279

2297

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 -15% -23% -8%

*Extrapolated from Q1

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% 11% 12%

04 -19% -4% 5% 5% 3%

C: ROI ON MARKETING INVESTMENTS IS 842%

REVENUE PER STAY

MARKETING INVESTMENT PER STAY (NEW & REPEAT)*

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 Avg visit length (days) 7

Gross profit (70%) $ 3,044.52

Avg revenue per stay $ 4,349

ROI 842%

*Can't allocate cost to new vs returning stays


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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 • *May encourage longer stays • Easy to track and understand • Profit/night is fairly consistent, so prop-

er reward values are easy to calculate

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

# of visits (re-gardless of length)

• *May encourage more frequent visits • Easy to track & understand

• Doesn’t reward longer visits • 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 • Rewards customers who offer the great-

est social value / WOM, which drives

• Harder for company to track

Point options

Pros Cons

years) additional business • Reinforces branding ( lifelong

health/wellness ) $ spent at re-sort

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

enue

• Reminds people how much they spend, & the #1 reason guests don’t return is cost.

• Wealthy customers may view this as tacky.

Bringing friends (net-work effect)

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

• Encourages WOM • Acquire new customers at low cost

• Harder for company to im-plement & track

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

$ spent at spas

• *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 com-munities, so few of Cabo’s west coast customers are go-ing to visit them with any meaningful frequency

EXHIBIT F: REWARD REDEMPTION OPTIONS Green boxes = use for rewards program; orange = recommended for all customers (creates de-light!) 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 spe-cial

• Very little variable cost to address-ing customers by name

• Cabo thinks it increases expec-tations. (Unfounded; customer expectations will always rise; not a reason to start low, espe-cially 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 price-sensitive, not the most profita-ble)


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Types of rewards

Pros Cons

Privileges – priority reser-vations, 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 ser-vice given to other guests, who in turn may leave less satisfied

• Tacky if customers are trading points for upgrades.

Points that can be used in-stead of cash

• Enhances the experience during a visit

• Encourages repeat visits • Easy to implement & understand • Can be used across multiple prop-

erties

• 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 re-peat visits

• Doesn’t add to the service/ ex-perience / 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)

plan to increase customer loyalty & equity

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