| Dynamic Aspects of the Asian Hospitality Industry
To illustrate the power of the CPM framework and CPLV model, I will explore five characteristics of the Asian hospitality industry: (1) unprecedented growth in the industry, (2) the effects of increased competition and the eroding of profit margins, (3) the differences between "high touch" and "low touch" services, (4) the rapid diffusion of service innovations, and (5) the effects of cost shocks in the system. Following Johnson and Selnes (2004), we will simulate the CPLV under these different market conditions and report the resulting contributions, over time, for acquaintances, friends, and partners. The simulations presume a market diffusion process that reflects a pronounced period of market growth (time periods 1 through 50) followed by a period of market maturity (time periods 51 through 100).
Growth in the Asian Hospitality Industry
The current boom in the global hospitality industry is being driven by the economic growth of countries like China and India. Unlike markets in the US, where new hospitality concepts (such as hotels and restaurants) diffuse or grow through a given population of customers or market segments, the overall growth of Asian economies means that there is growth in the base population of potential customers as well. This begs the question, what are the CPM implications of combining a classic market diffusion process (e.g., the Bass Model) with a sustained growth in a market´s customer population? To explore this condition, I use the base model scenario from Johnson and Selnes (2004), define the time periods (t) in our simulation as months, and add a 10% annual growth rate to the population of customers in the market.
Figure 1: Portfolio Contributions in a Growth Market
Figure 1 shows the profit contributions by relationship type for this scenario. The results reveal how contributions from acquaintances are initially negative and take longer to materialize, as the margins are lower and it takes time for economies of scale to make these customers profitable. Over time, however, acquaintances become the main contributors to a company´s profits, while the contributions of friends and partners also grow. Going forward, I will use these results as a baseline for comparing other conditions.
Competition and Eroding Margins
One of the inevitable consequences of growth in Asian hospitality markets is that more and more competitors will enter the industry. As more and more competitors enter the hotel, restaurant, gaming, and other markets, competition will evolve toward the concept of zero economic profit and margins will erode. The evolution of Chinese manufacturing in recent decades is a case in point. After an initial period of success among manufacturing pioneers, a more recent increase in local competitors has dramatically eroded margins (Kynge 2006). I expect the Asian service industries to follow this same dynamic.
To illustrate the effects of eroding margins on a customer portfolio, we simulated the CPLV model in Figure 1 but added a 25% reduction in base customer revenues over time. The results are shown in Figure 2. The overriding observation is that eroding margins will turn a large population of profitable acquaintances into a large population of unprofitable acquaintances. While the contributions from acquaintances begin to recover as economies of scale are 11 realized up through the middle market periods, eventually the eroding margins result in large losses for the acquaintances.
Figure 2: The Effects of Competition and Eroding Margins
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