CEOs on the give-and-take of hotel loyalty programs
CEOs on the give-and-take of hotel loyalty programs
04 FEBRUARY 2020 8:54 AM

The goal of a hotel loyalty program is to help brands amass a large membership of returning guests, but the costs to administer programs and the return on investment can frustrate owners.

LOS ANGELES—The hotel industry has used loyalty programs as a way to attract guests and, ideally, keep them from switching over to a competitor. While they have seen some success, hoteliers have had different experiences with them depending on their role in the industry.

During the “Boardroom outlook: Innovation and distribution” general session at the recent Americas Lodging Investment Summit, hotel executives shared their perspectives on how loyalty programs are keeping companies competitive while also proving to be an expensive endeavor.

Just about every hotel brand has a loyalty program, Virgin Hotels CEO Raul Leal said. Virgin Group doesn’t exactly have one in place, but with the millions of customers it has globally through its travel businesses, it has some built-in distribution. The company will roll out something called Virgin Red, which is its version of a loyalty program, he said.

The company’s hotels are highly activated with lots of food and beverage and entertainment, but it’s also working on learning from and following up on guests’ preferences, such as customizing things inside guestrooms, he said.

“Usually what our customers want is for us to understand what they want, their preferences, and can we in fact deliver on those preferences when they’re on-property,” Leal said.

There’s a place for loyalty programs, but consumers today are looking for hotels to understand their preferences without being creepy, he said.

There isn’t exactly consensus on loyalty programs within the industry, said David Kong, president and CEO of Best Western Hotels & Resorts. For owners, when they get their assessments for brand loyalty programs, they’re probably going to resent them.

At the same time, it’s hard to imagine taking on short-term rentals and online travel agencies without the loyalty programs, he said.

“Not all hotels are alike,” Kong said.

Referring to the newly opened TWA Hotel at JFK International Airport, Kong said that’s a hotel that is so unique and special that it won’t need OTAs. However, the vast majority of hotels aren’t like that and need a little edge to compete, he said.

Without loyalty programs, hotel companies can’t offer discounted rates, which makes it harder to attract customers away from OTAs and short-term rentals, he said.

The four fundamental strategies of marketing are acquiring new customers, retaining customers, growing the customer base and reactivating past customers, Kong said. All of those require a promotional platform and a database.

“If you don't have a database that you can actually do analytics on, you don't even know about your customers,” he said. “So you can’t even deploy any one of those four strategies. But without a loyalty program to actually give you that database and that promotion platform and the ability to offer the special member rate, how can you compete then?”

Loyalty programs are really an arms race, said Tyler Morse, CEO and managing partner at MCR Development, which owns the TWA Hotel. They have a certain value to the points within the different programs, and the only reason to have a loyalty program is if it actually drives guests’ purchase decisions, he said.

“I think the thing that is not often talked about in this business is how much are you deriving from the loyalty program as an owner of a hotel,” he said.

MCR owns several Residence Inns, and 65% of the guests to those hotels are part of Marriott Bonvoy, Morse said. For the company’s Hampton by Hilton and Hilton Garden Inn properties, about 55% of guests are program members. However, when he worked at Starwood Hotels & Resorts Worldwide, only 22% of guests were members, he said.

“You really just have got to break down the math on a reservation-by-reservation basis,” he said.

The administration of a loyalty program is stratospherically expensive, Morse said. While at Starwood, he said the joke going around the office was that if they were going to do it all over again, “we would not have created Starwood Preferred Guest.”

“We had the real estate, we had the locations, we had the brand, we had the product,” he said. “Spending a billion dollars a year on this loyalty program was not a good use of our owners’ cash.”

What the research says
Hotels control nearly half of online distribution, but OTAs control the other half, said Lorraine Sileo, SVP of research and business operations at Phocuswright, during a presentation during the general session.

However, considering how fast OTAs grew over the last 10 years or so, they have not gained a significant share, she said. More travelers seem to prefer hotels’ direct booking channels, and millions of travelers have joined hotel loyalty programs. About a quarter of a hotel’s revenue comes in through OTAs, and while that might seem high, for large hotel companies or chains, it’s actually lower as this is just an industry average, she said.

Looking at consumer preferences, Phocuswright asked travelers about where they book their accommodations. While many said they use OTAs, there was a rise in the number who book directly, Sileo said. That rise correlates with the rise in hotel loyalty memberships. The special loyalty program rates gives travelers a discount that lowers prices below OTA rates; so for travelers, it becomes a no-brainer, she said.

“For hotels, they've made millions of new members, including younger travelers,” she said. “We can debate ad nauseam the profitability of these loyalty programs, but what we can't deny is that this jump in hotel direct bookings, again, directly correlated with a 6% increase in hotel membership, which is now at about 52% of the traveling population.”

Every distribution channel is growing with the exception of offline business, she said. That’s being shifted to online business, which gives direct booking channels—and OTAs—the chance to grow their share.

About five years ago, hoteliers had their heads in the sand about short-term rentals, saying they weren’t going after the same business and they wouldn’t have much of an impact, Sileo said. Now in 2020, it’s difficult to say exactly what the effect has been.

Short-term rentals have attracted all types of travelers, and the fastest-growing demographic is older travelers, traditionally a sweet spot for hotels, she said. Sixty-eight percent of those who looked at a hotel booked a short-term rental, but also 68% of those who looked at a short-term rental ultimately booked a hotel. That tells the industry that shoppers are making their accommodations decisions based on location, the length of their stay, the size of their party and their budget, not whether it was a hotel or a short-term rental, she said.

“So this is all becoming this merging one industry and one big decision for travelers,” she said.

Twenty-five percent of travelers said they looked at short-term rentals, but they decided to book a hotel because they wanted to earn points, Sileo added.

“We can’t talk about distribution and innovation without talking about loyalty,” she said.

At the moment, loyalty has been tied to the low-hanging fruit of giving people discounts for booking directly, she said. However, 18% of people who book through OTAs are loyalty members.

“What is loyalty?” Sileo asked. “Shouldn’t it be about having a great app that provides great guest services, allowing people who are in your loyalty program to be able to maybe pick their own room or to have a virtual check-in, keyless room entry, being able to work food, being able to order activities, get information on destinations—there's so much you can do through your mobile or through guest services. Why does it always have to be about price?”

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