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Loyalty matters. It's a matter of how

Is there anything more important today than a customer wanting to use your services again? Perhaps not, but it's not all about repeat business, and where do Loyalty Programs fit in the Hotel world when the majority of guests that stay may never return?


Serious questions surround the holistic effectiveness of costly Hotel loyalty points programs, often coming at a higher delivery cost than a third-party reseller such as booking.com. Couple the high cost of sale with recent STR research revealing points programs have little effect on a consumers hotel selection, and grave doubt is cast on their commercial viability. However, loyalty still matters—big time. A customer's desire to use your services again is, after all, the ultimate form of validation.



"loyalty still matters—big time. A customer's desire to use your services again is, after all, the ultimate form of validation."


In today's world, a customer's willingness to use your services again, irrespective of industry, is vital even if they don't use your services again. I recently had the pleasure of speaking to an Alaskan Hotelier from a destination where most customers only visit once in their lives. You might ask the question; why would they care about creating loyalty? Is a points program relevant to their business? The answer is no but is it still vital their customers leave with the emotions associated with loyalty? Yes, it is. Why? Upon returning home, their customer's emotions will dictate the tone of review they offer online and what they tell their friends and family.


Given most customers will never return to the same hotel again, a good review from a happy customer is perhaps more important and relevant than gaining a second stay. Online reviews, after all, are now the third-highest driver of a consumer's decision to book a particular hotel, according to STR's recent consumer research.

Now let's consider the local bakery in such a seasonal destination. Things are great for the bakery in season when all the hotels and restaurants are full and their product is in high demand, but when the season ends, who does the baker turn to for a steady trade? It's the loyal local residence who will keep the bakery afloat and feed the bakers family. If the baker ignores or doesn't make time for the local market in the good times, they may be forced to shut in the downtime, or worse, the business fails.


Do hotel loyalty programs make a material difference?


When it comes to hotel loyalty programs, big data is masking the big picture in much of the published analysis. Countless studies point to increased basket value and higher propensity to repeat within the brand as indicators of success; however, in business, there are two ways to improve profit: Decrease your total costs or increase your total revenue.


"When it comes to hotel loyalty programs, big data is masking the big picture."


Let's consider the cost element first. Hotel loyalty programs are sold as a mechanism to decrease Online Travel Agent (OTA) commissions by encouraging direct business. Most global brands charge between 9-18% of Gross Rooms Revenue (GRR) at contract maturity. Brands will often attribute the GRR payment partly towards the recovery of invested key money and a superior average daily rate. Of course, one might argue, the product, location, a decent Revenue Manager and the local operations team are what drives the average daily rate, not the sign on the front door, but that's another conversation altogether. In addition to the GRR, loyalty points are usually charged around 5% and often, both GRR and the loyalty points fee are on top of a paid marketing fee. Loyalty point fees are even paid on business delivered directly to the hotel by the local team and have nothing to do with the brand.

When all of these fees are analysed comprehensively and compared to an OTA such as Booking.com (between 15-18% retail) or Expedia (between 18-25% retail), the cost argument suddenly becomes somewhat murky.


So what about the revenue side? Maybe a hotel loyalty program delivers an enhanced holistic revenue performance. For that to be true, the loyalty program would need to influence customer buying behaviour materially. In a recent study conducted by STR, the most prominent factor considered when selecting a Hotel was, and always has been, location, with more than 70% of respondents considering it. Second to location was, and always has been, price/value for money, underlining the importance of hiring a quality hotel Revenue Manager. Third, shooting up the ranks from nowhere in the last two decades is online customer reviews. 25% of customers said online reviews were a factor in selecting a Hotel. Hotel Loyalty points programs came in 10th, with under 10% of respondents considering it a factor when choosing a hotel.


Of course, the ultimate measure is the Revenue Generation Index (RGI) or a hotel's relative market share. I have worked with several national brands in the last ten years, all without the presence of a loyalty points program and far exceeding their fair market share at brand level with RGI's above 1.30. So, where does this leave hotel loyalty programs costing close to, or more, than an OTA and unable to influence a material gain in market share?


The loyalty points program dilemma.


The elephant in the room is the enormous income brands receive from loyalty programs funding their brand placement on international sporting team shirts and Formula 1 steering wheels. In a study published by CBRE way back in 2017, loyalty fees accounted for the most significant share of franchise revenues (30.7% of total US franchise revenues). Imagine their share today with the continuously enhanced exposure coming from the vast incomes and profits retained. So besides customers collecting points when they most likely would have stayed anyway, it would appear the primary beneficiary of the loyalty points programs are the brands themselves. Brands have built their marketing budgets, staffing structures, and profits based on income from loyalty points programs, which isn't easy to unravel.


Besides the colossal income generated for the brands, there is also the matter of customer data ownership. Loyalty programs provide a mechanic for brands to negate the surrounding data challenges. But, of course, there are other, less costly ways to manage customer data and new thinking is required to overcome. Will the big brands be bold enough to acknowledge the significant flaws in loyalty points programs and innovate with more effective, less commoditised owner-friendly strategies?


Operations create real loyalty, not Marketers.


In a crowded marketplace, loyalty points programs fail to engender true loyalty to a single Hotel brand. However, there are some great success stories of operators committed to creating loyalty amongst their customers and a hotel's most important asset – the team of employees. For example, consider John Angus, the Managing Director of Switch Hospitality Management. John and his team recently took out UK's best Hotel award at the prestigious M&IT awards for the Park Regis in Birmingham. They also won the Caterers best place to work award amongst many other accolades.


John and his team at Switch have built a culture based around investing in people, and it delivers a positive return not just morally but commercially. As a result, Switch already exceeds 2019 revenues post-covid when most Hotels without a government contract are not projected to reach 2019 revenues until 2023. In addition, Switch has doubled its opted in database this year, and direct business is up 7% versus 2019.


John credits the investment in his team to deliver a back to basics, truly personalised service to every customer. John has implemented a team solely focused on creating loyalty through a back-to-basics personal service program. And we're not talking about using a guest's name in an auto-generated email; that is not personalisation - a mere buzzword for Marketers, meaningless in reality. Instead, switch directly contacts every leisure guest before arrival by phone and has a process to ensure the entire guest journey runs smoothly. In a crowded marketplace where Marketers obsess with digital automation, John and his team stand out, and so do their commercial results.


Conclusion


Hotel owners are forced to analyse all money going out the door as the recovery period to pay down the debt incurred in the last 18 months hasn't even begun for many locations. While the cost scrutiny increases, so do the awareness and questioning of Loyalty Points Programs. As a result, brand Marketers have a growing dilemma on their hands to manage the complexities of data ownership, the income they generate from Loyalty Points Programs and the needs of their primary customer; Hotel owners.


"Owners are wising up to the great con of Loyalty Programs, and a shift in thinking is emerging."


Could we see a pivot away from ineffective Loyalty Points Programs to exclusive Membership Clubs based on experience and personalised service? Accor has run an effective subscription program in the Asia Pacific region for decades, currently branded AccorClub. Could we see brands investing more time and effort into subscription programs? These are questions Brands Marketers cannot ignore. Owners are wising up to the great con of Loyalty Points Programs, and a shift in thinking is emerging.


On the Hotel owner side, it may be time to consider the quantum of spending going to brands and diverting to more practical and influential strategies. A shift away from the brands would allow owners the freedom and flexibility to divert that spend into a modern, genuine open API, cloud-based Property Management System (PMS) like Apaleo or Mews. Such PMS platforms deliver significant operational efficiencies and an improved customer journey allowing local teams to focus on the guest and exceed service expectations. In addition, a shift towards modernising the technology stack would enable improved Revenue Management, easily connecting next-generation AI Revenue Management Systems (RMS) like Pace and Infinito.


"After all, it is the hotel staff who engender true loyalty, not Brand Marketers."


Most importantly, a highly engaged and incentivised front line team like Johns team at Switch has always held the keys to a hotel's ultimate success. But, perhaps, now the light is being shone on the need to redress the way money is spent – less to brands and more to the staff taking care of guests on the front line. After all, it is the hotel staff who engender true loyalty, not Brand marketers.


About the author:


Rob Paterson is the former CEO of Best Western in Great Britain with over 25 years of experience in the hospitality industry. He recently left the industry to launch Grind Equity, supporting startup entrepreneurs in the UK and USA.

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