"There's nothing cheap about loyalty", poetically asserts Ryan Bingham, the main character of the Walter Kirn novel Up in the Air during a dissertation about the perks and perils of Hilton and Maplewood respective loyalty programs. For those unfamiliar with the book (or with the movie by the same name), the story revolves around a cynical HR consulting firm employee whose main goal is to accumulate membership points and become the youngest person to earn ten million frequent flyer miles with American Airlines.
Even though exaggerated and caricaturistic, the Bingham character is nothing but a fictional representation of the primordial inner need for rewards that is intrinsic to all humans.
The chemistry of loyalty
When we compulsively accumulate miles and points, in fact, we are mainly lead by our own body chemistry. When we get a reward our bodies release dopamine, a substance that plays an important role in human behavior. According to Dr. Robert Sapolsky, Professor of Neurological Sciences at Stanford University, dopamine can go as far as motivating behavior for an entire lifetime. Rewarding one's more loyal guests by offering them free nights, complimentary upgrades and other perks could, therefore, possibly be the best way to improve customers lifetime value and direct revenue. A recent PhocusWright report demonstrated that loyalty programs account for up to 3/4 of all brand.com hotel bookings last year, but was it always the case?
1983: birth of the rewards programs
US 1978 famous airline deregulation inaugurated the new era of the free market in the commercial flight industry by removing federal control over fares and routes. Airlines were finally able to market their services more competitively and loyal programs started to pop up like mushrooms. AAdvantage has been the first real frequent flyer program, launched by American Airlines in 1981 (even though TIA already introduced a basic mileage-based loyalty program two years earlier). The program is still alive and well today and it counts around 70 million members.
When it comes to hotels, it is a little harder to determine which brand introduced the idea of loyalty programs, with Holiday Inn and Marriott battling for the podium. And if it's true that Holiday Inn launched its program a few months before Marriott did (respectively February and November of 1983), it is also true that Holiday Inn stopped the program for a year in 1986, making Marriott's the loyalty program that ran uninterruptedly for the longest period of time in the history of hospitality. Revisionism aside, since the mid 80's virtually every hotel chain created and developed its own membership program, plausibly with the sole exception of Four Seasons, that historically eluded the loyalty program scheme in favor of highly personalized guest service in order to retain customers. Over the years these programs evolved, changed and made countless U-turns, but a constant has surprisingly survived unscarred over the course of three decades: points.
Points, points and more points
Today Marriott offers four different levels of loyalty programs: depending on their status, members can access discounted rates, complimentary upgrades, free wi-fi and late check-outs. And, obviously, they earn points. A lot of them. And not only by staying in one of Marriott properties, but by shopping with co-branded credit cards or renting cars through partner providers, just to name a few. Hilton Honors members, together with digital check-in, free wifi and the usual complimentary upgrades, earn ten points per every dollar they spend and, just like Marriott members, extra points by traveling with partner airline, rail and car rental companies or by purchasing with co-branded Amex cards. Preferred Hotels & Resorts rewards its elite members with fifteen points for every dollar spent, while Hyatt is a little stingier, with "only" five. If you're a member of Kimpton Hotels, then, you get a free night after twenty stays, while Leading Hotels of the World’s loyal guests are even luckier, with one free night every five stays. And if you're a golfer, you can use TaylorMade clubs for free, provided that you are Fairmont member, obviously.
I could go on and on by listing all the perks and bonus each brand offers to its more loyal guests, but the bottom line is that, when it comes to loyalty programs, the pattern is pretty much always the same: members earn points, they redeem them and then they start over. But will the mattress-run-model be still efficient in 2018?
It’s easy to overcomplicate: the Wyndham case
According to a recent Ideaworks study, Wyndham has the best hotel rewarding loyalty program, with nearly twice the ROI of Marriott. What makes its loyalty program so good? In one word: simplicity. Let's face it: keeping score of points is hard: they expire, got lost or devaluated, partner providers got bankrupted and their frequent travelers' programs vanish with them. In a nutshell, keeping the score can easily become a mathematical maze. A J.D. Power study demonstrated that guests who fully understand how to redeem their points have overall higher satisfaction. The bad news is that, according to the same study, only half of the members understand how the process actually works. More often than not, that coveted free night looks like a mirage in the desert.
Wyndham loyal guests, on the other hand, do not have to deal with any of that: they get a free night every 15, 000 points, end of story. And, to make it even easier, Wyndham guarantees that its members earn a minimum of 1,000 points with every stay, making the reward realistic, relatively easy to obtain and, most importantly, reachable.
According to a Software Advice poll, frustrating sign-up systems and hard-to-earn rewards are among the main reasons that only 86%percent of Gen Y (50% of buying power by 2020) are not yet participating in any hotel loyalty programs. This means that brands that will not shift from the overcomplicated point based system soon, will very likely regret it in a few years from now. Having that in mind, it comes to no surprise than revamping its mobile app has been one of the first post-Starwood-acquisition priorities for Marriott. Being now the largest hotel chain in the world, it is also the one owning the largest hotel loyalty program and the development of an easier way for guests to join and redeem point obviously plays a very crucial part of its long-term strategy.
The Goal Gradient Hypothesis
A few years ago Columbia University published a fascinating study about loyalty programs and found out that the closer the members were to the reward, the more frequently they purchased in order to reach it. In psychology, this phenomenon is known as the Goal Gradient Hypothesis and it has been studied since the 1930's. So giving members realistic goals and a transparent way to monitor their progress will make them buy more and more often. Back to Wyndham: since it revamped its loyalty program, over one million of previously inactive members started to use it again. This is something online travel agencies know very well and that is the reason why some of the best loyalty programs are OTA's.
Hotels.com Rewards has probably the most straightforward approach: book 10 nights at any eligible hotels and get one free. Bottom line is: reward your guests and reward them often and not only by offering them free nights. It's no news that newer generations of travelers are less loyal to brands and even less interested in obsolete long-term-points-redeeming-systems. They are, on the other hand, way more keen to spend their points in drinks at the bar or in SPA treatments during their stay than to invest them in hypothetical future stays.
Rethinking loyalty: Where do we go now?
This trend is confirmed by the above mentioned J.D. Power study as well: members satisfaction is higher when they can use their points to shop, buy tickets for events, go out for dinner, etc. instead of just using them to book other room nights. According to the study, member satisfaction is 31 times higher when points can be redeemed to buy special events instead of hotel stays.
Rick Garlick, Travel and Hospitality Practice Lead at J.D. Power, states:
"The key to success for hotel loyalty programs is the variety of reward offerings and the flexibility in how to redeem points".
That is why partnerships with non-hotel providers are crucial in order to provide better loyalty programs.
This is exactly the shift we are experiencing now: recently Meliá Hotels International launched MeliáRewards Shopping, an online eStore for members to earn points while buying from almost 2.000 retailers, including brands like John Lewis and Fnac so, if you get homesick for all the traveling, you can always use your points to go Christmas gifting online. Hilton played it even bigger by being the first-ever hotel loyalty program to participate to Amazon Shop with Points, meaning that Hilton members can now buy virtually anything they want on Amazon with their Honors Points.
Mark Weinstein, Senior Vice President & Global Head of Customer Engagement, Loyalty and Partnerships, explained that Hilton Honors is now "more flexible, more valuable and more personal, providing a reason for less frequent travelers to be more engaged".
Result? Hilton Honors boosted membership by 15%. Another important shift in loyalty programs is the drop of the one-size-fits-all-approach in favor of reward personalization: business travelers prefer to accumulate points to redeem them during their vacations, while tourists prefer immediate gratifications and on-site recognition, such as complimentary upgrades, welcome drinks or gift cards.
Moving away from traditional models and offering a good mix of instant gratifications and long-term rewards based on the guest type is crucial to creating sustainable and scalable programs. And if it is unlikely that the industry will ever entirely move away from the points-for-stay model, most hotel brands are already integrating guest experience, recognition and service personalization as part of their loyalty programs, realizing that the in-house financial value of their guests is as important as their stay frequency.
Conclusions:
Over the last decade, disruption has probably been the most (over)used term in the Industry. We have literally seen hundreds of next-big-thing-start-ups appearing and disappearing overnight, but we are still discussing loyalty programs almost 35 years after the first members-only reservation was ever made. So the answer is yes, loyalty programs are here to stay, even though they will evolve into something different to what we are used to know today.
And, in case you're asking, "Hilton offers equal value and better food but the Maplewood gives out warm cookies at check-in".
Just saying.