Customer Acquisition Through Intermediaries (vs. Brand) Shapes Lifetime Value: Evidence from the Hotel Industry

Third-party distribution channels or intermediaries have become ubiquitous across a wide range of industries, offering firms access to new prospects and an opportunity to expand their customer base. Although prior work has investigated the short-term aggregate demand implications of intermediaries, the long-term customer relationship perspective has remained unexplored. Using customer-level data from a large U.S. hotel brand, we show that customers acquired via travel intermediaries (such as online travel agents or OTAs) have persistently different behaviors on several dimensions that matter for long-term value. Compared to customers acquired through brand-owned (direct) channels, intermediary-acquired customers spend 4.1% less per stay and purchase 3.8% less frequently. Intermediary-acquired customers, while displaying stronger channel inertia and lower multichannel engagement, purchase across a wider variety of brands (multibrand behavior). When we combine these behavioral estimates into a customer lifetime value (CLV) computation, we find that while intermediary-acquired customers have positive CLV, their CLV is 19.94% lower than customers acquired through brand-owned channels, revealing, for the first time, the long-term implications of such customer acquisition strategies. Through an optimal allocation model we show that, although the CLVs are lower for intermediaries, a firm maximizing customer value typically invests in both channels: the optimal share allocated to intermediaries rising proportionally with the intermediary’s acquisition efficiency and accessible prospect pool, and falling when the hotel is operating at capacity. In sum, our results show that although using intermediaries may be a viable strategy for customer acquisition, the purchase behaviors of these customers are significantly and meaningfully different from customers acquired via brand-owned channels, thus urging managers to adopt a more nuanced ‘frenemies’ approach to building a channel portfolio.