What’s the point of points?
11 APRIL 2014 10:04 AM
A strong guest frequent-traveler program can drive value to a hotel, but it’s difficult to conclude whether it also drives loyalty.
Look in your wallet. If you’re like most people, you have six or seven loyalty program cards jammed in there. Seinfeld character George Costanza would be proud.
Today, businesses of all kinds—from local coffee shops and supermarkets, to car washes and movie theaters—offer points or loyalty incentives to their customers. It has become a common approach to establishing a tether between you and any number of businesses.
For hotels, loyalty programs are big business. Marriott International issued more than $1 billion in Marriott Reward points last year. And access to a loyalty program is one of the top reasons independent hoteliers consider joining a chain.
However, maintaining these programs is a considerable expense for hotel owners. According to HVS, frequent-traveler program costs at a chain property can range from 1% to more than 5% of room revenue. Based on the HVS estimates, a typical Crowne Plaza Hotel will pay nearly $180,000 a year to participate in InterContinental Hotels Group’s Priority Club loyalty program.
Guests ask for these programs and enroll in droves. But do loyalty programs really work? At first glance, it seems they do. As a group, guests who are members of a loyalty program stay more often than non-members. Case closed.
But wait a second. How can we be sure points change guest behavior? Certainly it’s a hotel’s best guests who disproportionately enroll in these programs, so we’d expect loyalty members as a group stay more often. So are hotel loyalty programs increasing stay frequency or do these programs just draw a circle around a hotel’s best guests? And if it’s the latter, are hotels then giving points to the guests who were already loyal to their hotel?
It’s the old causation versus correlation problem, a question at the center of the debate over hotel loyalty program value. For us loyalty nerds, the answer is as elusive as Fermat’s Last Theorem and as mysterious as Jimmy Hoffa’s burial spot.
A team of professors from Cornell University, Ithaca College and Michigan State University recently concluded a two-year quest to answer the question “Do hotel loyalty programs actually change guest behavior?” The solution to the correlation versus causation conundrum came from an innovative methodology pioneered by researchers trying to answer analogous questions in a very different field: epidemiology.
Scientists studying the impact of public health initiatives also faced the causation versus correlation challenge: Does the use of mosquito nets account for fewer cases of malaria? Or is there some other factor play? Does exercise lower the risk of heart disease? Or do people who exercise make other healthy choices that resulted in the change? They, too, needed to isolate the signal from the noise.
To do this, the epidemiologists developed a new statistical tool, a complex algorithm that, with enough data and computing horsepower, could create virtual control groups based on the past behavior of pairs of participants in the study.
A team of hotel researchers adapted this same method for their study, titled “Assessing the benefits of reward programs: A recommended approach and case study from the lodging industry.”
A set of computers churned through two years of stay data for more than 50,000 hotel guests. When the smoke cleared, the computers had identified thousands of sets of virtual twins, travelers with nearly identical stay behavior—with one exception. At some point, one twin joined the loyalty program, while the other twin (the control) did not. Now, impact of the loyalty program could be clearly seen.
The result is the most thorough statistical analysis of a hotel loyalty program ever conducted.
As loyalty program skeptics guessed, the hotels’ best guests disproportionately enrolled in the loyalty program. What the skeptics wouldn’t have predicted is that enrollment triggered a huge increase in stay frequency, especially among those best guests.
For example, at one group of hotels in the study, a collection of upper-upscale independent hotels in major metropolitan markets, nights stayed per year jumped 49% after a guest enrolled in the loyalty program. Specifically, guests who on average stayed six nights a year prior to joining now stayed nine nights a year. That translated into $781 in incremental annual revenue for each guest enrolled in the program.
At the other set of hotels in the study—upscale hotels in tertiary markets—impact from the loyalty program was “remarkably similar.” Guests enrolled in the loyalty program increased nights per year by 45%, and they also showed a slight increase in average daily rate. Together, enrollment in the loyalty program delivered a 57% lift in room revenue.
The authors found that “hotels in the study are seeing a substantial revenue increase when their guest enrolls,” and “a properly conceived and executed program can and does deliver positive results in terms of revenue, stay frequency and consumer spending.”
So what does this mean for those of us below the ivory towers of academia? For one, hoteliers now have substantiated proof of a loyalty program’s impact. They also have a benchmark by which to calculate a program’s contribution. A 50% increase in frequency of stay due to loyalty program enrollment means 33% of stays earning points were driven by loyalty program membership.
So what’s the point of points? Do they create value? Yes.
Do they create loyalty? That’s more difficult to say. In my mind, loyalty is more about trust and connection with a company, product or organization. A points program can be the start of that relationship, but true loyalty comes from great guest experiences.
Jeffrey Low is Founder and CEO at Stash Hotel Rewards, the largest loyalty program for independent hotels in North America. Stash helps great independent hotels fill more rooms, win more groups and meetings, and recognize their best guests. US News & World Report recently ranked Stash as one of the Top Hotel Loyalty Programs in the US. Stash has also been featured in numerous publications including The New York Times, Inc., and Condé Nast Traveler, and it was named an Innovation of the Year by Hotel News Now.
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