What is customer expansion and what does it mean for hotels?

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In common with many businesses, hotels tend to focus the bulk of their sales and marketing efforts on winning new customers. This is known as customer acquisition

But the sales process doesn’t stop the moment you have secured a new booking. There are still plenty of opportunities to increase revenue by selling upgrades and additional products and services to your guests both before and during their stay. This is called customer expansion.

Being a hotel sales professional is a challenge at the best of times. That’s why there are several very good reasons why hotels need to pay more attention to customer expansion.

If you don’t already have one, now is the time to think about introducing a dedicated and systematic customer expansion strategy.

What is customer expansion?

Customer expansion is a term used by sales and marketing experts that refers to making existing customers buy more of your products and services. The term is widely understood in retail, ecommerce and other commercial sectors.

Instead of customer expansion, hoteliers might feel ‘guest expansion’ is more appropriate for the hotel sector, but until now, the term ‘guest expansion’ has not been widely used or recognized.

Successful customer expansion creates more value and satisfaction for your guests and, as a result, directly increases your bottom line profit and makes it more likely that these guests will return.

In addition to being one of the most cost-effective marketing methods, customer expansion is mutually beneficial to both the customer and your long-term profitability.

Why is customer expansion important?

According to academic research, having a successful customer expansion strategy results in higher levels of profit and repeat business.

Many hotels can offer extras such as food and beverage offers, spa or wellness packages, late check-out and retail items. Your hotel may also sell tourism and leisure experiences.

Extras that surprise and delight customers will make them return. Hotel guests who are already familiar with your property on their second, third, and fourth visit, are much more likely to spend more due to their heightened level of trust.

Customer acquisition versus customer expansion

One study of a retail business found 40 per cent of the store’s revenue was generated by repeat customers who represented just 8 per cent of the total customer base.

In other studies, the percentage of revenue generated by existing customers can be much higher – up to 80 percent –  says consultancy Corporate VisionsAnd yet most businesses only allocate around 15 percent of their sales and marketing budgets for customer expansion.

Attracting new hotel customers costs five times more than keeping an existing customer, says research by Prism Hotels & Resorts.

Certainly, there’s a lucrative but overlooked opportunity for sales and marketing professionals to redress the imbalance in their budgets between investing in customer acquisition and customer expansion.

Stay profitable even at low occupancies

The ideal scenario for all hotels, whatever their type and size, is to have high occupancy and high levels of ancillary spend by guests.

The pandemic has shown that when both are not possible it makes sense to allocate greater resources to maximizing the spend of the guests that you do have.

During government-decreed lockdowns, spending the marketing budget on customer acquisition, when most people were not allowed to travel, would have been wasteful.

Instead, many hotels demonstrated their resourcefulness by creating new revenue streams such as office facilities for remote workers and F&B delivery.

In any case, whatever the circumstances, focusing too much on achieving high occupancy levels while not addressing other areas of revenue growth can be damaging to profits, as we explained in our blog on inventory optimization.

Lessons hotels can learn from the airlines

Over the years, the airlines have changed their pricing models, from a starting position of full prices that included all services. Little by little, prices have come down but the components of the flight have become paid-for options.

Low-cost carriers in particular have become experts at unbundling services so travelers pay individually for what they need: luggage check-in, priority boarding, seats with extra legroom, etc. European carrier Ryanair even went as far as to consider charging passengers to use the bathroom during flights.

In many cases, customers now pay more for their flights, but the way they spend their money has changed – the perception now is that when we fly we are only paying for what we need.

As consumers, we are used to this pricing model, and airlines have been very good at generating extra revenue from existing ticket holders by selling upgrades or extra services. In 2019, they made $109b from ancillary services.

Some hoteliers have recognized the advantages of unbundling services (giving guests products and services that better match their needs – personalization –  and thus maximizing revenue).

But in truth hotels are still far behind the airlines in this respect and there is much more they can be doing to boost average spend because hotel guests are very interested in enhancing their experience.

The wide-open opportunity for hotels

According to the latest Phocuswright research into the US market, nearly two-thirds of hotel guests would like to purchase extra services and products during their stays and one-third would pay extra for more tailored experiences.

Amongst business travellers the findings are even more compelling. Across all age groups, eight out of ten business travellers are interested in paying for in-room dining and other pre-paid meals; parking; early check-in or late check out; in room entertainment; golf, leisure and spa services.

However, the survey found that only 10 percent of hotels offer add-on services and products to their guests in a systematic manner.

This situation is expected to improve as 57 percent of the hotel general managers surveyed said they plan to increase their investment in ancillary revenue generation.

What is a customer expansion strategy?

Now you can start thinking about your customer expansion strategy, or your guest expansion strategy if you prefer to give it a slightly different name.

The two main types of customer expansion relevant to hotels are upselling and offering value adds.

No doubt you are already actively upselling and offering value adds to your guests, but are you doing it in the best and most consistent way possible?

Let’s assume that all of your front desk employees have been trained to offer room upgrades to every guest as they check in. There are a number of problems with this method:

·   It may not be appropriate to sell upgrades to all of your guests.

·   Upselling is a complex skill that requires a high level of judgement and empathy that, even with training, is not within the grasp of every hotel employee. You may have one member of staff who is very good at upselling and others who are not, resulting in inconsistent results.

·       Check-in is one of the worst times to attempt to sell a room upgrade. Just-arrived guests who are tired and impatient to get to their rooms and unwind will not be in the best frame of mind to listen to a sales pitch.

·       If face-to-face upselling is done badly and the upgrade is considered too expensive, this can create a negative impression on the guest.

·       Increasingly, many guests prefer to bypass the front desk and check-in digitally so the option to sell an upgrade in person is not even available.

To overcome every single one of these issues, smart hoteliers are turning to digital solutions like UpStay which give guests the opportunity to name the price they are willing to pay for a service or an upgrade. There are several advantages to this approach:

·       UpStay lets the guest decide, in her own time, whether to upgrade.

·       Naming a price puts the guest in control of how much extra they are willing to spend.

·       UpStay removes the risks of face-to-face upselling.

·       Instead, hotel employees are freed up to act as ambassadors for the hotel and the destination.

How to implement a customer expansion strategy at your hotels

When thinking about your customer expansion strategy, you first need to lay the essential groundwork by segmenting your customer base.

Who are your new customers? Who are your existing customers? How do you define and segment your existing customers (more than one stay per year, more than one stay in the last two years, etc …)? Since convincing an existing customer to purchase something extra is slightly easier than convincing a new one, knowing who your customers are is vital.

As well as selling room upgrades, UpStay sends tailored offers straight to the guest’s smartphone before and during their stay.

For example, the UpStay data tells you that German leisure tourists over the age of 50 are likely to buy a package trip to the mountains, or locals will be very receptive to spa or wellness packages.

As previously mentioned, Phocuswright’s research says that very few hotels offer ancillary products and services to guests in a systematic way, so here is an enormous and overlooked opportunity to boost revenue. Working with a partner like UpStay to create an intelligent customer expansion strategy that sets parameters and delivers predictable results will remove a huge amount of guesswork from your sales activity.

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Ben Walker has 20 years of experience in the hotel and travel sectors. He has worked as PR & communications manager for TRI Hospitality Consulting London, the creators of HotStats, the hotel market benchmarking, financial analysis, and performance reporting solution. He has also been the business editor of The Caterer, and communications manager and editor for the international professional body, the Institute of Hospitality.

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