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Loyalty for Sale

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October 24, 2006
Loyalty | Programs
Mark Haley

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© 2006 Hospitality Upgrade. No reproduction without written permission.

The intent of hospitality loyalty programs is to drive customer loyalty and to make the guest want to continue to choose to stay at a brand’s hotel again and again.  Many observers argue that points-based programs have become a commodity and are merely a cost of doing business now, since all large chains have them.  Not having one becomes a negative attribute, but having one is simply the price of entry.

Both varieties of programs have their place, including points-based. Different organizations establish different programs according to their size, competitive posture and other attributes.  These choices lead to other decisions about what technology to deploy and how to administer it.

Large, multiple segment operators with broad geographic distribution (such as Marriott, Starwood, and Hilton) build out points-based programs like beavers building dams.  It is in their nature to do so and guess what—hotel guests like them.  Points-based programs have numerous virtues:

>>They are voluntary:  the guest decides to join and decides to share their personal information.
>>They are easy to understand:  You stay. You spend. You get points.  Then you get free stays for points.
>>They are straightforward to administer, with the right investments in technology and business process integration.
>>They support non-points-based awards also, such as special registration lines, or upgrades.
>>They are effective:  Market Metrix1 reports that 34 percent of hotel guests say that a loyalty program was a key factor in hotel choice, from a sample dominated by points-based programs.  And do you think these 34 percent are infrequent stayers or regulars?

If points-based programs have all these positive attributes, why would someone build a recognition-based loyalty program?  Simply, because they have to.  In order to accumulate enough points to fund a meaningful stay or partner award, one needs quite a few stays.  But for a single hotel or small chain, it is difficult to assign enough value to a given stay to accumulate enough points to give anything away.  You need lots of opportunities to have stays to make a points-based program effective.  Plus, you need plenty of locations that members can redeem awards in (such as Hawaii), probably different from where they earned them.
Rather than creating “me-too” points-based programs, many smaller brands and independents wisely try other formats of loyalty programs.  One format, briefly offered, gave frequent customers the opportunity to earn shares of Jameson Inns stock.  More commonly, these other loyalty program formats revolve around guest recognition. 

The essence of a guest recognition-based program revolves around capturing guest preferences and making them available to enhance future stay experiences.  Some of these programs call for enrollment and use of a member ID number.  The Wyndham By Request program is a great example of this class of program.  Others are based on staff observations, where line personnel are incented to record relevant guest behaviors, so that the request can be anticipated on the next visit.  Denihan Hospitality’s MAGIC (Marketing and Guest Information Center) represents this class of program, using sophisticated database tools to match up guest reservations with existing profiles, and no enrollment or member number is called for.

Of course, the points-based programs support elements of guest recognition.  Examples include flagging elite members as such to associates or populating reservations with key preferences such as nonsmoking or smoking.  The difference is that in a points program, the points are the currency valued by the guest.  In a recognition program, the experience becomes the currency and thus a tangible extension of the brand.

Technology Strategies
Different types of programs call for different technology strategies to support them effectively.  A points-based system, generally used by major brands, typically bolts onto the CRS with two-way integration into the brands’ designated property management system.  Some of these systems allow associates to interact with the loyalty program to update member addresses or other profile elements or even to allow associates to award extra points as a means to resolve a service issue that a guest may have encountered.

Stay transactions in a points program also incur an accounting transaction, where the hotel that got the stay has to pay the brand for the points.  The technology needs to support these transactions as well.  This money funds the program’s operation and promotion and a portion is accrued to pay for future award redemptions.  When an award is redeemed, the hotel or partner is paid out of that accrual account on a pre-defined basis.  The perceived cost of points and perceived low reimbursement rate for redemptions often become points of contention between brands and their hotels.  Everyone wants to offer guests the programs, but no one wants to pay for them. 

These accrual accounts are actually liabilities on the balance sheets of the points-based frequency programs.  As many member point balances sit for years before redemption or write-off, these liabilities swell to very significant amounts in larger programs.  Alleviating the balance sheet impact of these accruals can induce programs to make it relatively easy to redeem awards (good for members) or engage in aggressive write-offs of stale points (bad for members). 

Strategies for making redemptions easier include:
  • Point-swapping agreements with other frequency programs (such as airlines).  Point-swapping agreements can also increase liabilities, of course.

  • Allowing for merchandise awards (golf clubs and other leisure items).

  • Using points to purchase upgrades to suites or nicer rooms, where the traveler can stay in an ocean view suite at their negotiated corporate regular room rate.

These all require enabling technology applications with external partners or property management systems.
Another major class of technology impact on points-based programs comes from the many ways one can earn points in addition to hotel stays.  Most large programs offer private label credit cards, where members can earn program points for spend on the cards, often with double points for spend in the brand’s properties.  Others have tie-ins to telephone companies or others that are willing to pay the brand for points awarded to members that they can market to.  These connections call for the necessary interfaces, typically at the mainframe level.

All of this enabling technology is complicated and expensive.  They demand people, systems and resources to build, manage and maintain them.  These costs are another reason that points-based programs are the province of large hotel companies, and smaller organizations need to find another way to compete.

A recognition program typically calls for richer interaction with the loyalty program database from the PMS.  If the program does not utilize member ID numbers known to the guest, then tools for matching reservations and profiles become more important.  This technique is called householding in the database marketing world, and is usually coupled with data hygiene tools to standardize things like addresses and name formats.
Recognition-based programs are generally spared the need to build or buy technology to connect with third parties for point-swaps, external point awards and so on. 

As noted above, this is one reason smaller companies are more likely to choose a recognition program.
Different organizations need to do different things to encourage repeat patronage and commit the customer to their business.  In practice, many programs share attributes of both of these approaches.  The code to crack for any hotelier wishing to invest in a loyalty program is to build the model that fits their organization and services their guests the best way possible, using the right combination of valuable resources.

Mark G. Haley, CHTP is a member of The Prism Partnership, LLC, a boutique consultancy servicing the global hospitality industry with practice areas in technology, marketing and research.  Please visit http://theprismpartnership.com. 


Doing it Right
Situated on a private island in the midst of New York’s spectacular Lake George, The Sagamore has stunning views and elegant accommodations supported by extraordinarily high service levels, outstanding conference facilities, four-season recreation amenities and a full-service spa.  The Sagamore benefits immensely from a loyal customer base cultivated over 100 years of outstanding service, drawn largely from the Northeast market.  The top management team, led by renowned hotelier S. Lee Bowden, knew that they could not risk taking the loyalty of those valued guests for granted.  “We knew that we needed to recognize and reward our loyal guests for that loyalty.  Guests would inquire about airline points and so on at the point of reservation or front desk and we wanted to address that guest need,” said Director of Marketing Tricia Hayes. “As an independent hotel committed to the variety and uniqueness of the independent hotel experience, we did not want to imitate the points-based guest relationship that chain hotels thrive upon.  We needed to find another way.”

And so they did.  The Sagamore’s Valued Guest Program is a unique blend, sharing some attributes of a points system, but purpose-built to enhance the guest stay experience.  The currencies include upgrades, special services, complimentary services and F&B discounts only available to members.  Members earn their way into the program by demonstrating their loyalty.  On a guest’s 10th lifetime room night, they are welcomed into the program.  Truly loyal guests enjoy an elite program when they achieve 40 lifetime room nights.  The Karl Abbott Society members receive complimentary stays and invitations to special Abbott member-only events.

So how does a single property manage this loyalty program and control the extensive benefits to members? Front Office Manager Michael Mulligan is responsible for the day-to-day administration of the valued guest program, coordinating closely with the executive offices. “We start with our SMS|HOST property management system, although we do not use their frequency program module.  Valued guest reservations are flagged in the reservations tile using specials codes in the PMS.”  Each day the front office team generates a special arrivals list showing all valued guests, Abbott Society members and other VIPs.

Then the team swings into execution mode. Valued guests want what they want whether it is a specific room, a view or other preference. Mulligan said, “If we fail to deliver on that, then the entire promise of the program breaks down and all the discounts in the world won’t help.”

Other aspects of the Sagamore program include personalized pre-arrival letters, welcome amenities and a discount on F&B purchases. The Sagamore has learned that the valued guest program brings more value to the resort than cementing the loyalty of the members: They become advocates for the resort as well, telling their family and friends about the wonderful resort on Lake George.  Recently members were offered $100 in resort bucks in exchange for providing referral information for three friends that might enjoy the resort experience.  Tricia Hayes said, “The offer was immensely popular, with an impressive 22 percent of members providing referrals.”

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