Mr. DiLeva

Guest Service / Customer Experience Mgmt

Barriers to CRM and True Customer Loyalty

By Michael DiLeva, Executive Vice President, The IDT Group

After the much ballyhooed success of Customer Relationship Management (CRM) in some of the other areas of the travel supply and value chains - including airlines, casinos and even credit card companies - it's been prophesized that CRM will be the panacea to cure many of the hotel industry's current ailments. And considering that our industry, while traditionally late to the game, does eventually play "follow the leader" on a wide variety of technologies and services, it's not surprising that so many pundits have expected us to jump on the CRM bandwagon. Unfortunately, CRM as it's being described (and in some instances being deployed) appears destined to be just yet another futile treasure hunt - the heir to TQM, ERP, Six Sigma and the rest of yesterday's magic cures. Not to say that CRM offers no value - quite the opposite. The issue, however, is that to be truly valuable to the hospitality industry, CRM needs to be dramatically altered from its traditional view as a transactional technology into a more beneficial operational service that has a meaningful impact not just on the marketing department, but on our guests themselves during their visit.

Since CRM is really just a mechanism or a path, however, one needs to first take a look at the end goal or destination... which is the creation of customer loyalty. Customer loyalty has long been the Holy Grail of hospitality (and really any service industry for that matter) and in today's operating environment, it's more important than it's ever been. That's because with the impact of new distribution channels and the reemergence of the merchant model, lodging in general has become commoditized and with that commoditization, rates and margins have shrunk dramatically. If we can increase customer loyalty, we can better "lock in" a predictable occupancy stream, allow rates to inch up as our guests will no longer be comparing us directly to our competitors on rate alone, and equally important, we can improve margins as the cost of customer acquisition would shrink dramatically - particularly if we can migrate that loyal guest to our "direct connect" channel booking engine as opposed to booking them via more costly GDS or third-party sites.

Quantitatively, the projections are dramatic. Stowe Shoemaker of the University of Houston's Conrad Hilton College of Hotel Administration has done some of the most interesting research on the impact of improved customer loyalty. Shoemaker's studies show that (emphasis added):

• Increasing customer retention 2% is the equivalent of cutting operating costs 10%
• As much as 40% of customers who say they are "satisfied" defect each year
• A 5% reduction in customer defection can result in a profit increase of 30% to 85%
• A loyal customer in a luxury hotel tells a median of 12 people
• Nearly 20% claimed that they would go out of their way to mention the hotel when the topic comes up
• "Totally satisfied" customers are six times more likely to repurchase than merely satisfied customers

So clearly, increasing loyalty is a noble cause and it pays substantial dividends. The problem, however, has been not with the goal, but the mechanisms put in place to get there. First, most if not all of the industry's efforts in this area have been directed not at creating or generating loyalty, but in buying it. I'm talking about loyalty programs, which in essence should be more aptly called "frequency" programs.

Certainly, point programs encourage brand selection when all other factors are the same (i.e. price, location, class of property and amenities) and once reward levels are achieved, they do somewhat inhibit switching behavior. But in marketing terms, points are really just a means of reducing the price of the product for frequent guests and price is never effective as the sole means of competition. Just as someone can always come up with a lower price (I'm sure many of us have experience with competitors who have offered unsustainable pricing at times), someone can always come up with a more lucrative rewards program that will lure away guests that you thought were loyal. Case in point... Hotels.com announced last year an initiative to develop their own loyalty program. And while that front has been quiet since that initial announcement, perhaps indicating a change of heart on their part due to what I would suspect is a very negative reaction from their hotel suppliers, it does indicate the frailty of loyalty programs. A Hotels.com program that would offer points for stays across all properties and brands represented on their site and with such flexibility, proprietary programs would be effectively rendered second-tier citizens.

Secondly, with all of the effort that we place on guest feedback, those efforts are focused on measuring "satisfaction" as opposed to "loyalty." Of course, satisfaction and loyalty are somewhat intertwined, but not to the degree that many of us acknowledge. Traditionally, guest comment cards or satisfaction surveys involve a Likert scale (i.e. 1-5, with "1" being Totally Dissatisfied and "5" being Totally Satisfied) rating system. And generally, with consumers being as fickle and sophisticated as they are, a 4.x rating is pretty much the best that could ever be expected. But while a 4.5 would equate to an "A" in school, it's really an "F" in terms of customer loyalty. Why? Because when measuring loyalty, it's really more of a pass/fail scenario. As Shoemaker noted, "as much as 40% of customers who say they are "satisfied" defect each year." Simple "satisfaction" is not enough to create loyalty. After all, if we "see through the eyes of our guests," we have to acknowledge that satisfaction is in fact simply an "order qualifying" criteria, and not an "order winning" or differentiating criteria. Guests expect to be satisfied when they book a hotel and if that satisfaction was achieved, they are no more likely to return to your property as, in their minds, they would expect to be similarly satisfied at any competing property.

Work ranging from the acclaimed "Service Profit Chain" research (and subsequent book of the same name) by Professors James Heskett, Earl Sasser, Jr. and Leonard A. Schlesinger at the Harvard Business School, to that conducted by Professor Noriaki Kano of Science University of Tokyo, all recognized the same thing - that loyalty is only linked to customers who are at the far end of the satisfaction scale, i.e. "Highly Satisfied." So in other words, anything less than a "5" rating is a failing grade.

That's why Kano's research was focused on shifting efforts from simply measuring customer satisfaction and loyalty to influencing it. Much like the "Service Profit Chain" defined the "Zone of Affection" as the intersection between high degrees of loyalty and satisfaction, among Kano's four types of customer requirements, he identified the "Excitement Area" as the region most closely linked to creating customer loyalty. Specifically, "Exciting" features are ones that, while they have little or no negative impact if they are missing, have an extremely positive and influential effect when present.

Case in "point" (please excuse the pun). Points are not exciting. They are basic, "Must Be" requirements. Of course, the 64,000 room-night question is, "what is exciting to my guests?" That's where CRM comes in. CRM allows us to identify what requirements are truly "exciting" to the guest and would influence their property selection in your favor. And why CRM is important is because with today's savvy customer and with so many "micro" segments emerging, the traditional means of implementing products and services that meet the least common denominator is insufficient. Today, customers and guests want to be recognized as individuals and treated as such. Internet services and even manufacturing and fulfillment models to provide personalized products that were unheard of just 10 years ago are becoming commonplace. For example, consumers can log on to landsend.com or ralphlauren.com and build their own custom clothing fitted to their unique measurements or desires - all for the price of a standard off-the-rack item. And at sites like reflect.com, consumers can even personalize commodity products, like shampoo for example, based up upon their ethnic background, hair thickness, hair length, hair treatments and over 25 other personal criteria. With such increasingly personalized services in the marketplace, guests are beginning to expect such treatment everywhere they go - including hotels.

So, unfortunately, what "excites" our guests is not something that can be generalized. "Exciting" criteria is unique to the individual. With an effective CRM program, we can reach the guest in a meaningful manner, extract information on what motivates them and then act upon that information to enhance satisfaction to levels that creates loyalty. The good news it that hotel executives "get it" regarding CRM. A study by Hotel Business Magazine showed that that nearly 95% of all hotel brands are in the midst of some type of Customer Relationship Management initiative. The bad news is that much of this work is still being done at the database marketing and call center levels. That's a start, but it does nothing to impact the experience of the guest when they are on-property and that on-property experience is the factor that is most impactful in creating repeat visitation.

That may be because, on-property, there unfortunately exist several barriers to CRM. The critical paths for CRM involve gathering and disseminating information. Because so much of a hotel's customer interaction is transactional (reservations, check-in, check-out, etc.) it inherently limits the amount of quality customer information that can be collected and returned in a meaningful manner. One solution is to expand an operational focus and add staff to be responsible for extracting this information from the guest and acting upon it. Wyndham's By Request program, for example, utilizes this model and their program has been one of the more successful initiatives relative to their peers. In this current economic climate, however, it's often difficult to justify such an expense and the impact may still be somewhat limited.

A guest's favorite newspaper, snack and soft drink are great. But what about things that are truly "experiential?" In today's heavily media-dominated and influenced society, our favorite bands, music, books and TV shows tell as much about us as anything. And since listening to music, reading and watching TV are three core activities that guests do while on property, being able to adapt the room environment to the guest along those dimensions is extremely impactful and goes a long way towards creating a unique and differentiated experience for that hotel. And perhaps best of all, since this experience is based upon information provided by the guest, hotels that have not yet interacted with that guest cannot replicate that experience - creating not just a competitive advantage, but a sustainable competitive advantage and one that cannot be easily replicated by the competition.

So the question is then, "how can this be done?" Hoteliers still hurting from the "triple witching hour" of the combined effects of the September 11th attacks, a weak economy and new patterns of consumer behavior including the emergence of new online intermediaries, will be pleased to hear that one of Kano's tenets was to maximize customer satisfaction without necessarily increasing cost. CRM is not necessarily about expensive software. CRM can be just as effectively implemented using 3" x 5" index cards as it can be using the most expensive software package on the market. However, if the foundation of a hotel's CRM commitment and strategy is sound, technology can greatly expand CRM's value.

One innovative way to approach CRM is to start with where guests spend the most time and are thus, most likely to be available via that channel to provide you with information and allow you to return personalized services. One such area is the television. It's been estimated that guests spend upwards of three waking hours in their room watching TV, which compared to a three-minute check-in or check-out experience clearly offers a better chance to influence the guest's experience. With Video on Demand becoming more commonplace in hotels, such systems can be enhanced to create an interactive TV experience where guests can load in their preferences for everything from favorite musical genre to preferred wake-up call times to favorite room service items. Such content can then be easily stored and via a link to the PMS system, can be automatically loaded into the system the next time the guest turns on their set or visits the property. Imagine then the personal impact on the guest of having their favorite type of music (from an Internet radio site) playing for them via their TV as they enter their room. Or finding amazon.com-like "suggestions" offered when they click on an electronic room service menu. While these experiences have been predicted in the past, they are now possible both technologically and economically. And to the delight of the owner, GM and Kano, having such functionality integrated into a VOD system allows for the movie rental income to partially if not completely offset the cost of the incremental programming - effectively creating a self-funding CRM initiative.

Overall, hotels do need to integrate CRM into their operations and marketing strategies. However, taking the extra time to ensure that their implementation is not simply internal, but guest-facing and well as innovative in the creation of guest interaction can reap significant rewards in today's ultra-competitive marketplace.

Michael DiLeva is executive vice president of The IDT Group. He has near experience in the hospitality and gaming sectors, and has provided marketing, technology, CRM, networking and consulting services for major hotel companies in the US, France, UK and UAE. He holds a BS in Marketing Management from Rutgers University and a MBA from Saint Joseph's University. He completed an executive leadership program conducted by the University of Virginia's Darden School of Business and serves on the Technology Advisory Board for Penn State's School of Hospitality Management. Mr. DiLeva can be contacted at 215-487-3522 or mdileva@theidtgroup.com Extended Bio...

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