How to calculate the customer lifetime value (CLV) in the airline industry

By Hélène Dubos | Personalization

Jun 27
calculate the CLV of airline passengers

Interrogating the data you hold on your passengers can provide powerful insights which impact on the way your airline markets itself and the strategies you put in place to boost loyalty. And one especially important question to ask is about the customer lifetime value (CLV) of each of your passengers.
Customer Lifetime Value is a calculation which tells you:

  • How much each individual customer spends in all their interactions with you, as well as the average spend of all customers
  • How much it costs you to win new customers
  • How much different types of passengers spend when flying with you

 
Once you have calculated CLV, you can then begin implementing strategies which will help boost how much each customer spends over the course of their relationship with you. Remember that it costs five times as much to attract a new customer as it does to retain an existing one, so this kind of data can be hugely valuable. CLV also helps you figure out which segments of your customer base are most profitable, meaning you can target marketing messages more effectively at the highest value buyers.

Let’s look at how airlines can calculate CLV, and then explore tactics to improve those figures.

How to calculate airline passenger CLV

Established airlines tend to collect a wealth of data over the years which provides the information required to calculate CLV – learn about tools to collate data held in different silos here. Bring together the following data on your passengers and then carry out the calculation described below.

  1. Average order value
    For all the passengers who have flown with you over a given period of time, calculate the average amount they spend on flight tickets
  2. Number of repeat sales per year
    For each passenger, work out the average number of sales per customer per year
  3. Calculate average retention time
    Some of your customers will only fly with you one or two times, others will travel much more often

CLV is then calculated as followed:
Average Order Value × Number of Repeat Sales × Average Retention Time = CLV

EXAMPLE: CLV of an airline passenger

Let’s see how an airline passenger CLV could be calculated for a low-cost European airline that was established 10 years ago:

  • The average customer spends 100EUR on a flight
  • They fly once per year on average
  • They are fairly loyal and keep flying with the airline for at least five years

The calculation would be as follows:

      100 X 1 X 5 = 500EUR

So, the airline’s CLV is 500 EUR per passenger. The obvious next question is: what can we do with this data?

strategy calculating clv

Next steps

Once you have calculated the CLV of your passengers, there’s plenty more you can do with your data to begin drawing powerful insights. Let’s look at some potential actions you can take with this information.

  • Segment your passengers

CLV gives a high-level view of the value of your average customer. However, if you begin segmenting the data, you can begin to reveal interesting insights. For example, how much more do long-distance fliers spend than short-distance travellers? Which demographics have the highest CLV? What is the profile of customers with the lowest CLV?

  • Map CLV against other data you hold

For more context, you could begin mapping your CLV against other data you hold and activities you carry out. For example, you could map the CLV of customers who chose to fly with you after a specific marketing campaign. This can then give you powerful insights into a campaign’s true ROI

  • Cross-reference with ancillary sales

By using powerful passenger data tools, you can begin tracking ticket sales and mapping these against ancillary on-board sales too. This will give you a greater insight into the CLV of individuals. For instance, one passenger may only fly with you once every couple of years yet spends significant sums on in-flight purchases.

  • Use to build accurate marketing personas

The data your CLV calculation provides can be used to create insightful marketing personas – this will help your marketing teams fine-tune their messaging by understanding how much different customer profiles tend to spend and how regularly they fly.

  • Create strategies to build loyalty

Finally, and perhaps most importantly, CLV can give you powerful insights that help you design strategies to boost loyalty and increase overall CLV. By understanding which kinds of customers spend more, and which kinds of marketing, flight schedules and ancillaries appeal to them, you can confidently create strategies which will help boost how much individuals spend

Why it is more important than ever to track passenger CLV

In sectors like eCommerce or retail, the most effective ways of boosting CLV is, of course, to increase frequency of sales to a customer over their lifetime. However, in the airline industry we know that increasing the number of flights that individuals take is constrained by many factors - not least annual vacation allowance. What’s more, flying is now largely seen as a commodity, where most passengers will opt for the lowest price for their route, rather than loyalty to one particular brand.

Does this make measurement of CLV redundant? Quite the opposite. By using passenger profiling tools, airlines are able to gain ever deeper insights into who exactly their customers are. This then allows them to better know their passengers and create more targeted marketing and special offers. By going the extra mile to truly know your passengers, airlines can increase loyalty and the chances that a passenger will choose them again in future. It is exactly because flight has become commoditized that airlines need to go further to convince customers that it is worth choosing them.

Overcome the data challenge

In theory, CLV is straightforward to calculate. However, when airline passenger data is stored in multiple different silos, it becomes challenging to join up that information and start drawing insights.

And this is why airline digital transformation is so important. By taking a sophisticated approach to the way airline data is organised, it becomes much easier to calculate metrics like CLV and draw powerful insights. To learn more, read our in-depth airline digital transformation guide to find out how your airline can collate data from multiple sources and boost airline passenger customer lifetime value.