FlyerTalk Forums - Hotel loyalty cards/ programmes

I am an Indian on a sabbatical from my job as the CEO of India’s ITDC/ Ashok group of hotels, which used to be India’s biggest hotel chain but has now dropped to perhaps no.4. I am posting this article in the hope that you will correct me wherever I am out of date or am factually wrong OR have missed some important point. If you find my India-related examples excessive, do say so and I will reduce them. If you think that I have given irrelevant details please point them out. On the other hand if you would like to see more or my research on hotels across the world, I will be happy to post articles on flatscreen TVs in hotels, the cable channels that they offer, hotel mattresses...many more.

Hotel loyalty cards/ programmes

by Parvez Dewan

You know, I have this customer reward program. It is kind of expensive but, I feel like
I have to have a program because everyone else has one. Honestly, I don’t know what,
if anything, it actually does for me.

-an anonymous manager of the Millennium Hotel Group.

Bless the Millennium manager. He was perhaps the first to suggest that the emperor didn’t seem to be wearing any clothes. And he pithily summed up all the main policy issues.
The Ashok group of hotels had a discount card but no points-based loyalty programme. Everyone else had one. Therefore, I told my team, we had to have one. I sat in on at least thirty sessions with consultants and experts. After two years’ work my team concluded that i) the programme would be expensive and would cost more than the likely returns, and ii) it was not clear what it would actually do for us.
I found this advice ridiculous because, after all, ‘everyone else had one.’ Despite my faith in the team, headed by a very dynamic Vice President, I decided to cross-check—and research every interesting little detail.

The two main schools of thought
Traditional hoteliers support reward points. However, even they have veered around to the view that blackout dates and complicated reward structures put off frequent guests. The other school has replaced points with unique privileges and experiences.

Till 2011 Hilton belonged to the old school. While it has not abandoned points, its revised ‘goal is to shift the conversation from earning points to creating memories.’ ( ‘Imaginative rewards: experiences instead of just room nights’)

Should be easy to enrol in
Gran Melia has an extremely fast system of enrolling guests as members of its loyalty programme. There is a stack of credit-card sized plastic loyalty cards at the check-in desk. Each has a unique ten digit number. It could easily have had only eight-digits, because the first two digits are zeroes anyway. Gran Melia is obviously planning for 999 million card holders, and why not? They also have to provide for inactive members.

You pick up a card while checking in. Your name and the month and year in which you got the loyalty card can be printed on the card at the reception itself, if they have the equipment to do so, or a supplementary card can be mailed to you later to replace the one you had collected while checking in.
The card need not be ‘smart’ or with an electronic strip (which Gran Melia has) or hologram. It is normally just an identity card (without a photograph or even name), something to make you feel you belong among that chain’s customers. The number embossed on it is what matters. Those ten digits should be in sufficiently high relief so that they don’t get worn out over time, as the numbers on a certain leading bank card do.

You are also given some literature about the Sol Melia group’s loyalty programme. It mentions a website that you can visit, enter your name and relevant details and then the number printed on your card. This activates your account. Thus, Gran Melia efficiently answers the first question that the customer asks, namely, ‘How will I enrol?’

If labour is cheap in that city, then one of the hotel’s staff can log in to its website at the reception itself, activate this new account, and also credit the reward points of that first transaction (plus any bonus sign-in points). The new cardholder is pleased to find that he has a handsome credit in his account already.

Travelodge’s paper membership form has a plastic card attached. It can be used even before the form has been filled up. After a new member has stayed with them for roughly nine nights (i.e. accumulated 750 points), Travelodge mails a VIP card with the member’s name embossed on it.
The Global Hotel Alliance (GHA), like the Sol Melia group, requires just one stay at a member hotel to enrol a guest as a Gold member.

The benefits have to be uncomplicated
The Air India-American Express credit card has a very simple answer to the next question, ‘How will I benefit?’ You are told that every time you spend Rs.100,000 (and most business class travellers do that in five trips) on AI tickets through that credit card you will get a free one-way economy class ticket to any national or selected international destination that AI flies to. Plus you will get a certain discount on each ticket that your employer or you pay for. Other benefits (such as reward points) are mentioned, too, but the free ticket and the assured discount are easier to understand than reward points. People want uncomplicated answers: please spare them technical jargon. (Actually, sometimes this is the first question.)

Perhaps your hotel can say that for every five nights that a loyalty cardholder spends in your hotel at the printed tariff he will get one night free. (This works out to a 20% discount.) And if his company or he get a corporate discount, then (depending on how big that discount is) he will have to spend more paid nights in your hotel to get that one free night.
This makes the basic attraction of your loyalty card clear. In smaller print you will naturally mention that this free night can be exchanged for so many free meals (worth so many dollars) or for two nights at a less expensive or leisure-oriented hotel (or region) within your chain.

Of course, the ‘one free night for five paid nights’ idea is only an illustration (based on the ideal practice). The major chains work on points earned per dollar spent. Besides, redeeming points in Latin America might be more attractive than in hotels of the same chain in Japan.

Incidentally, the low frequency traveller needs to spend between five and ten nights—seven nights being the typical figure—in average-priced rooms of most international hotel chains to collect enough points to get one free night in the lowest-priced hotel of that chain.

Among the leading hotels Best Western had the worst ratio—almost 9.5:1, while Choice had the best—4.75:1. Hilton’s rewards, too, are very good. The majority of hotels have a 7:1 ratio. In 2011 Hotels.com required ten paid nights and Leaders Club five stays during that calendar year to entitle a member to one free night—but then neither is a hotel.

The Ashok has as many as 120 suites (out of a total of 550 rooms). We find suites difficult to sell. So we often upgrade our most loyal guests to suites, even though we are not obliged to do so. An Asian airline assures its loyalty cardholders two upgrade vouchers every year. However, often when they have a full Economy class but extra seats in Business, they informally upgrade their frequent fliers. Builds loyalty.

Should not be time consuming
Enrolment in a loyalty programme should not in any way delay the check-in or check-out even slightly, a Cornell study indicates.
Why a loyalty programme?
American Airlines started AAdvantage, the first modern customer reward programme, in 1981. Its aim was to increase repeat purchases. Major hotel chains signed on as partners. In January 1983, Holiday Inn launched Priority Club, the first programme operated by a hotel.

The idea was to retain customers—and to identify those who brought in more business and used the hotel’s services more frequently. This also helps the hotel create a database of customers. Their e-mail IDs and cellphone numbers are particularly useful for mass mailing campaigns about events and promotions.
This database can also be utilised for ‘permission-based marketing initiatives.’ This means that holders of loyalty cards can get discounts on a variety of goods and services (ranging from jewellery and spa treatments to airline tickets). Those who produce those goods and services, in turn, pay the hotel for helping them reach the hotel’s cardholders.

Through e-mail the hotel will not only update the guest’s monthly or quarterly ‘mileage’ statement (points accumulated), it can also keep informing them about all its latest promotions.
Guests are given reward points each time they stay in, or dine or drink at the hotel, or use any of the hotel’s own services (the spa, gym, pastry shop and, if the hotel has its own travel agency, then on taxis used and airline tickets purchased). However, they do not get points for, say, using shops that happen to be in the arcade but are not managed by the hotel.

The rewards
Loyal guests should get free rooms or meals or other services as rewards.
In addition the guest gets upgraded whenever a higher category of room is vacant—and, as we have seen, suites generally are.

Who should be rewarded: the guest, his employer or the travel agent?
The room rent of many hotel guests is paid for by an employer. The industry is divided on whether the reward points should be given to the employer or to the actual guest. One person to consider is the employer’s office superintendent who is based in the same city as the hotel and who gave the hotel that, and much other, business. Why can’t he encash the points collected by him over a lifetime at, say, his daughter’s wedding?
Radisson Worldwide has a Reward Programme for Travel Agents as well.
‘The Taj [group] also runs loyalty programmes for corporate clients and travel agents,’ a trade journal points out.

The sharing of reward points and rewards
Now, most hotel chains consist of hotels owned by different people. So, how do points accumulated at Miami get redeemed at the Bangkok hotel of the same chain? Two very different companies own the two hotels, even though they pay a franchise fee to the same chain for the use of its name and standards (and some staff).

The Ashok group consists of hotels in which the company has a 100%, 98% or 51% stake, as well as some franchisees. To add to the complications we have many restaurants run by private licensees . While working on the loyalty programme, the question that bothered me most was: How do points accumulated at an outlet within our chain, with a particular ratio of ownership, get redeemed at another outlet, with another pattern of ownership? Over the decades chains have evolved fairly straightforward, mathematical solutions and our consultants shared them with us.

Should budget hotels also offer loyalty programmes?
Travelodge was among the pioneers in the budget segment. It targeted leisure travellers and senior citizens.

Independent hotels join alliances
Independent hotels as well as hotels that belong to small chains normally do not have their own loyalty programmes, because i) the economics of such programmes do not work well for these hotels, and ii) loyalty cards make sense to frequent travellers only if that hotel chain has a wide presence.
Beginning in the early 21st century, independent hotels started joining alliances such as GHA Discovery (established in 2004), Leaders Club (estd. 2005), Stash Hotel Rewards (2010) and Voilà Hotel Rewards (2008).

Voilà is meant for independent luxury hotels while Stash confines itself to hotels in the USA. Leaders Club Rewards are restricted to bookings made through The Leading Hotels of the World—and not directly at the affiliated hotel.
In addition, there is the hotel booking site, Expedia.com, which awards points based on the money spent through it. Its affiliate Hotels.com gives free-night vouchers depending on the number of nights booked.

Naming a loyalty programme
Loyalty programmes almost invariably have names that hint at exclusivity: e.g. Elite and Inner Circle (both of the Taj group, for two different categories of room guests), and Preferred Guest (Starwood). Hilton HHonors Worldwide and Marriott Honored Guest Awards also hint at privilege. (Marriott has since renamed the programme Marriott Rewards.)

Hotel groups that have more than one kind of programme use evocative names that clearly indicate what the programme is about. Thus, the Taj group’s Epicure card is obviously meant for its restaurants alone.

The administrative work involved
Loyalty schemes involve maintaining the accounts of cardholders and sending them updates by e-mail or, God forbid, through paper printouts. Some hotels let members see their accounts on the hotel’s website. Others allow toll-free telephone call facilities (called 1-800 in many countries). Most hotels do not have the wherewithal to handle all this themselves. So they outsource.

Redemption
How will customers redeem benefits?
A friend persuaded me to join a particular airline’s loyalty programme. However, he warned me that when it came to claiming the reward ticket that airline’s first reaction was the same as that of an insurance company—to tell you that you did not qualify yet.

My experience with that airline has been better, but I came across an unpublished case study about loyalty programmes that ‘as a matter of policy, discourage redemption and pray for breakage. A lot of programmes cannot support redemption.’ The study went on to ask, ‘Now, how's that building loyalty?’

To counter this, Starwood has a Cash & Points programme designed to ensure that even guests with a small numbers of points—as few as 1,200 (vs. 2,000 in some programmes)—can redeem their points. (Actually, Starwood does even better than that. It gives a fifth night free when redeeming for four nights.)

Travelodge’s awards start after just three nights (or 250 points).
Moral: Redemption should be a simple affair, and encouraged.

Types of loyalty programmes
Discount Programmes: Discount programmes reduce the amount that a cardholder has to pay by a specified percentage of the printed price. This discount is given right then and there, when the cardholder settles the bill. Infrequent customers prefer this option. In some discount programmes the discount is a fixed dollar amount in case the purchase is very big. Besides, the discount that a hotel offers on food need not be the same as on alcohol or rooms.
Discount programmes are also the easiest to administer. But discounting products for members is the most expensive option for your company.
You will be told that discount programmes send the signal that the printed price is higher than it should be. This is true if the programme is meant for shops that cater to middle-income groups. But when a guest goes to a luxury hotel or nightclub he knows that profit margins are high, that the place is overpriced. Therefore, he appreciates the discount.
Many restaurant chains—including restaurants located within hotels—offer discount cards to regular diners. So do India’s national and regional federations of hotels and restaurants.
In Rebate (or Cash Back) Programmes on the other hand the benefits keep piling up over time. The rebate is often a gift certificate, given on purchases made over a month, a quarter or a longer period. It is normally calculated as a percentage of the amount spent, but apparently in some schemes it is a fixed dollar value. It need not even be a fixed percentage. You can offer 10% off on purchases below a certain amount, 20% on the next slab, and much more on the highest slab. If you don’t, you will end up rewarding profitable as well as unprofitable customers.
Gift certificates bring the customer back. So does the feeling that their benefits are adding up and can be redeemed for something substantial after some time.
Rebate programmes are easier to administer than those based on reward points. They are also the least expensive for the company.
I have not personally come across any hotel or restaurant that has such a programme. However, a 2009 study suggests that ‘certain consumers may be particularly attracted by incentives like rebates.’

Points Programmes avoid the negative signals that discounting sends. Nor are points as expensive for the company as discounts. Besides, many cardholders do not redeem their points. By and large, this is the programme favoured by almost all the major hotel chains.
Guests earn points for using your hotel, your restaurant, your paid sports facilities and, perhaps, your spa. Such programmes can include bonus products, bonus thresholds and partner opportunities. They also allow more targeted, flexible and imaginative promotions e.g. reward points for special purchases.

The Taj group has cards for those who stay and dine at their hotels, and separate cards for those who only dine there.
Some luxury brands do not allow discounting. There is nothing to prevent a hotel from issuing reward points for purchases of these exclusive brands. Indeed, some hotels, as a policy, give bonus points instead of discounts.
However, many guests find it wearisome to have to collect thousands of points in order to earn a benefit. For instance, you need 160,000 Hilton points to spend one night at the Waldorf Astoria. (The cheapest Hilton hotel room nights come for as little as 7,500 points.)

For the hotel, too, this is the most difficult programme to administer.

Credit card-based loyalty programmes
All hotels and restaurants whose loyalty programmes I am aware of have free membership. However, affinity (or co-branded) credit cards are another matter altogether. (An affinity card is a credit card offered by two organisations, of which one is a ‘financial, lending institution’—normally a bank.) However, a study suggests that a fee ‘should lead to more positive associations with the choices made’

I pay a hefty $140 or so every year for my airline gold card, even though I already have platinum cards from other companies. I do so because I get free airline tickets—and very quickly so—over and above my frequent flier miles and the points that the credit card company gives me.
Starwood believes that co-branded credit cards help the holder earn points faster and also ensure that points don’t expire.

Neither hotels nor credit card companies are monogamous. In addition to their own loyalty cards Hilton has program affinity credit cards with American Express and Visa; Marriott with Visa; and Starwood with American Express. Visa also has Program Affinity Credit Cards with Priority Club. For its Points & Miles programme, Hilton HHonors has tied up with more than 50 airline partners. Starwood has more than 30. Incidentally, research shows that ‘frequent travelers [sic] view their participation in hotel programs as secondary to their participation in airline programs.’

The annual fee: Neither Hilton/ American Express nor Hilton/ Visa has an annual fee. Both provide an automatic upgrade to silver elite membership. InterContinental/ Visa, Marriott/ Visa and Starwood/ American Express charge nothing in the first year. But after that they expect between $30 and $45 every year.

‘Year’ normally means not the calendar year but the anniversary of the card member’s original enrolment. (InterContinental/ Visa)

Redemption of co-branded card-based loyalty programmes is different from a stand-alone card because both partner brands promise you benefits. Starwood’s Nights & Flights gives you a 30,000 point discount if you redeem the hotel nights and airline miles together, rather than separately. Indeed, most programmes give a bonus for not redeeming separately.
Starwood gives one bonus point for every 5 that you transfer to one of the airlines participating in its programme.

Award of points on co-branded/ affinity credit cards: With Hilton/ American Express every dollar spent at the hotel gets the same 5 points as at grocery stores, drugstores and gas stations. But if spent at other sites, it earns 3 points. Hilton/ Visa awards 6 points for a dollar spent at the hotel, 3 points if spent at grocery stores, drugstores, and gas stations, and 2 points at other sites. With InterContinental/ Visa as well as with Marriott/ Visa the member gets 3 points for a dollar spent at their hotels and 1 point at other locations. Starwood/ American Express awards 2 and 1 points respectively for every dollar spent at its hotels and other locations.

Bonus points: Hilton/ American Express awards 10,000 points bonus for the first purchase within the first year of card membership and 2,500 bonus points for each of the first four Hilton Family hotel stays paid for with the card. Hilton/ Visa gives you an enrolment bonus of 15,000 points if you make a purchase within two months of card membership.

InterContinental/ Visa offers 30,000 bonus points after the first purchase for first-time card members. It also puts a one-time $20 credit on the statement after the first card purchase. In addition it gives a 10,000 bonus points for the first purchase made after spending $15,000 or more in the card member’s year.

Marriott/ Visa awards first-time card members 20,000 points after the first purchase or balance transfer and another 5,000 points after the first purchase. Starwood/ American Express gives a bonus of 10,000 points after the first purchase during the first year of card membership for first-time card members.

Why should there be tiers— Platinum, Gold, Silver, whatever?
Not all customers are equally profitable. Therefore, all customers should not be treated alike. As the great Vilfredo Pareto (1848-1923) would have said, the top 20% guests give you 80% of your profits. According to a specific estimate, the bottom 30% uses up half the profits generated by the top 70%. I believe this. When I first started travelling, I would sample almost every one of the hotel’s facilities. Today I don’t have the time to do so.
Another estimate claims that 70% of sales are represented by loyalty programme members. The truth perhaps lies in the middle—literally. Brian Wansink conducted a thorough study (not in the hotel sector alone) and concluded that ‘brand managers may overestimate the importance of targeting heavy users (or frequent users) and may underestimate the effectiveness of inexpensive reward programs. In reality, low and moderate reward programs that target light users may generate higher incremental sales and may tend to be more profitable than is generally expected.’
However, let’s face it, even some of the most polished people sometimes let you know that because they have a platinum or gold credit card, or because they are a United Airlines Global Services member, they were able to get such and such non-monetary benefit (such as skipping a queue or tickets to a major sporting event). One the one hand they are letting you know that they are important.

On the other hand, that benefit is obviously worth enrolling in a loyalty programme for. Speedy check in. Check-in inside the room. Or no check-in at all. Priority reservation of a table at a prestigious restaurant. Free Internet service. (Omni hotels) A choice between free Internet, 1,000 HHonors bonus points, and a room upgrade on the one hand and breakfast on the other. (Hilton)

Anything like that.

In Starwood’s experience, members who consolidate stays ‘within one program are more likely to reach elite levels where the earning is greater than at the base level.’

How much should the loyalty programme give back to the cardholder?
Depends on which aspect of the hotel and restaurant business we are talking about.

In 2010, with the US recession continuing, Ryan Sheltra surveyed more than 25 casinos in Reno, Sparks, Carson City and the surrounding area about player-loyalty programs, Typically, they gave back between 5 and 20 percent of their gross profits to customers in various base-level loyalty-program perks, Some clubs returned 40 percent in the form of advanced promotions, parties, cash back and free play. (Mr. Sheltra was a board member of Nevada's Commission on Tourism and also the general manager at the Bonanza casino.)

Margins in casinos and alcohol are much higher than in, say, food. Our consultant mailed me this advice, ‘The general principle is that if your gross margin is 10% or more, you should be giving back at least 100 basis points. All hospitality loyalty programmes have different perceived values, which hover around 3-5%. A point-per-dollar offer tends to have a higher perceived value than a gift certificate or discount offers (even if they have the same perceived value of approximately 3%).’

A basis point is equal to 1/100th of a percentage point per annum. 100 basis points mean 1 percentage point. So, in plain English, if your gross margin is 10%, you keep nine percentage points and return the tenth percentage point to the cardholder. [Basis points are not the same as reward points. The latter are specific to loyalty programmes.]

‘Perceived value’ is the price of a product that is fixed arbitrarily on the basis of the value that its buyers think it has.

On what basis and on which items are awards calculated?
Marriott’s members earn points on the amount they spend rather than on the number of nights they stay. Many Starwood hotels let members earn points on other spending such as at the hotel’s bar, and on the fax, mini-bar, phone, restaurant and room service. This is partly to discourage them from going to bars and restaurants outside the hotel.

If a member agrees to receive Marriott Rewards e-mails, he is given additional offers including Marriott’s E-Breaks for weekends, at considerably lower rates. Those who sign up for e-mails with Starwood are assured that they will get promotional offers.

Awards: the industry practice
Unlike airlines, hotels do not have a similar or even comparable set of awards.
Some hotel programmes have ‘earning values’ of between three and five reward points per dollar spent. (Hyatt has both 5 and 3) The majority of hotels credit the member with ten points (Best Western, Choice, Hilton, InterContinental, Marriott and Wyndham) Hilton gives five bonus points on every ten base points. The ‘goldpoints plus’ programme (which covers the Carlson, Radisson, Regent, Country Inns, park inn and Park Plaza hotels) goes all the way up to 20 points per dollar. Starwood is at the other end, with two points.
Normally, members of a family are allowed to share a single hotel account and accumulate points together.

Bonus points for elite cardholders
Holders of elite cards (silver, gold, platinum and diamond) get bonus points, which are a percentage of the base points earned by ordinary cardholders. This bonus could be 10% (Choice gold, InterContinental gold), 15% (Best Western platinum, Hyatt platinum), 20% (Marriott silver), 25% (Choice platinum, goldpoints plus silver and Hilton gold), 30% (Best Western diamond. Hyatt diamond, Marriott platinum), 40% (Choice diamond) and 50% (goldpoints plus gold, Hilton diamond, InterContinental platinum and Starwood platinum).

Starwood gives a whopping 50% bonus points even to its gold cardholders: but, as we will see, its base points are among the lowest in the industry. On the other hand, Hilton’s elite bonus is over and above the 50% bonus it gives all cardholders.

All cardholders of the Choice group get 10 points for every dollar spent. But those who have its gold card get a 10% bonus, taking their total to 11 points per dollar.

The awards

In 2010, the InterContinental, Indigo and Holiday Inn brands made it possible for holders of its loyalty card to redeem their points even at rival hotels, though for this the member had to pay some money as well.
Guests who are highly involved in your hotel’s programme would prefer hotel-related awards, which would include restaurant meals. But local diners, especially those who are involved with your restaurant alone, would probably want awards only in terms of restaurant services. Research shows that ‘indirect rewards, typically, for extraneous goods or services, is a suboptimal reward practice and may even be harmful to promoting loyalty.’ (A customer buys an airline-credit card at a hefty fee--$140 a year in India. When the money that he spends at the supermarket brings him points that will contribute to his next trip to Paris he appreciates the scheme, because air trips are what he bought the card for. But he won’t be amused if his airline- or hotel- card’s points count towards a mere discount on a luxury watch or pen.)

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Negatives
The mistake some programmes make is to charge stiff fees, have steep award prices and keep a small number of award rooms on hand. By doing so they cease to be of much use to the member. Many airlines make you pay for points transfer and point re-deposits. Starwood, for one, steers clear of all five mistakes.
As of 2011, Leaders Club charged $100 a year for enrolment in the Access Level and $1,200 a year for the level that assures room upgrades.

Some surprising things about loyalty programmes
Customer reward (loyalty) programmes are expensive. They might cost more than the likely returns. It is not clear what they will actually do for you. And yet, everyone else has one. So, unless yours is a huge chain (and even if it is one), go in for a co-branded affinity card with a financial, lending institution—a credit card company, perhaps?—and/ or an airline. (Ideally, both.) Finally, go the way Hilton has with American Express as well as Visa and do away with an annual fee. This is critical. Hilton makes it even better by providing an automatic upgrade to silver elite membership.