LOYALTY AND THE BENEFITS OF BOOKING DIRECT

Loyalty plays a key role in the foundation of any successful business and is certainly a variable in a large portion of the hotel industry. Whether it is a formal, point-based redemption program in a large chain, or one in a smaller brand or hotel that inspires repeat usage because the product or service is highly valued, loyalty plays a role in the overall industry as well as within individual properties. Hotels can be disadvantaged by competitors in their market with higher levels of engagement to affinity programs. Loyalty can play a critical role in reducing acquisition costs when it drives repeat visits and when it results in a higher proportion of business to come through higher profit margin channels. Higher profit margins will yield higher asset values so the topic of loyalty is critical to the overall concept of commercial strategy. Since the purpose of loyalty is to develop a core guest base that returns multiple times, the value derived from a recurring guest is known as a “lifetime” value. 

Channel distribution may represent the most daunting challenge faced by hotels today, and loyalty may represent the most important lever to address it.  “Loyalty” is such a broad term, and this can lead to confusion.  For the purposes of this post, we will define “loyalty” as a relationship between a consumer and a hotel or set of hotels that influences the decision to stay.  Hotel brand companies often note that loyalty members I) stay more, II) pay more, and III) are much more likely to book direct. The first point is obvious, and true by definition, while the second is a matter of when and where they stay, as well as any negotiated rates that may be relevant.  But the last is an issue of guest behavior that has critical implications for hotels.    

Loyalty Points

The foundation of many loyalty programs, though certainly not the entire value proposition, is points.  Guests can earn points and then redeem those points later for a free stay.  This sounds simple, and in concept it is.  But in practice, it can get quite complex.  A few questions to consider:

• How much is a point worth? 
• How many points does one earn for staying? 
• How many are needed for a redemption? 
• How does the redemption hotel get paid? 

 Additionally, a hotel loyalty program needs to balance some competing interests:

1. The guest (loyalty member): the program needs to be “rich” enough to influence behavior.
2. The redemption hotel: the program needs to pay a “fair” amount to this hotel.    
3. The “earn” hotel: the program needs to keep the charge-out rate low enough to be appealing to the hotel.
4. The program itself: the program needs to be solvent over time, meaning it needs to bring in enough money to cover what it pays out (and cover program expenses).  This can come from charge-out rates, and perhaps some other subsidies from the brand company.  

Beyond Points

Note that for large brand companies, the foundation of a loyalty program is points, though there is quite a lot of member value beyond points, as noted below.  For an independent hotel, or a very small brand, consumer behavior may be quite different – a single hotel is unlikely (in most cases) to have the same guest frequency/repeat behavior as a portfolio with thousands of hotels.  Because of this, a loyalty play at an independent hotel may emphasize non-points benefits.   

Points can represent a significant value to loyalty members.  But other benefits matter too, and these benefits are conferred based on status.  For example, an independent hotel may have a loyalty program that has no points, only status.  Large brand portfolio companies also deliver value based on status.  While all loyalty members get some benefits, other benefits are restricted to a subset of these guests, based on their status within the program, perhaps with designations such as bronze, silver, gold, or platinum.

Status Benefits

What value can be delivered based on status?  There are many options.  A few examples:

• Early check-in or late check-out:  Certain status levels may enable the guest to check in before the hotel’s stated check-in time, and/or check-out later than the hotel’s specified time.
• Ability to specify room attributes: a guest with status may be able to guarantee connecting rooms, or a certain location in the hotel, or view type.
• Waived Fees: status guests may be able to cancel or change a reservation without penalty, or perhaps with more lenient parameters than are available to non-status guests.
• Upgrades: higher status guests may get free room upgrades, to a larger room, a better view, or a room with access to a specific lounge. 
• Amenities:  status guests may receive a welcome gift, a personal note, a bottle of wine, or something similar. 
• Dedicated support: some higher status guests may have access to a specific phone line or site that gives immediate personalized service. 

This list is just a small sample of potential benefits.  These status benefits may be, and often are, restricted to direct-channel bookings.  And some of these benefits may be available to direct channel bookings regardless of loyalty membership or status.  These benefits, and many others, are valuable offerings to anyone; why restrict them only to certain guests?

For example, let’s assume your hotel has the ability to guarantee an ocean view with a balcony at the time of reservation.  This would be valuable to any guest who is interested in those attributes, and could even be a point of differentiation for your hotel relative to local competition.  Offering this capability on a 3^rd party channel, for example, would surely increase demand and bookings from that channel – why turn that demand away?  Some benefits may be capacity constrained, meaning that, logistically, it cannot be offered to everyone; for example, there are a limited amount of upgrades or late checkouts that can be offered, for practical reasons.  But other benefits, such as the ability to specify room attributes, or waiving certain fees, could be offered to anyone, and there is value to doing so.  So why restrict access to these benefits?  Because doing so may influence guest behavior.  guests may make decisions in order to access these benefits, and those decisions may be economically beneficial to your hotel over time, in terms of loyal behavior and/or choice of channel. 

This post is an excerpt from Demystifying the Digital Market & A Guide to Commercial Strategy. Download the full version here.