Should You A-ward or Re-ward Your Guests?

By Bonnie Knutson Professor, The School of Hospitality Business/MSU | November 28, 2010

Blame it on the airlines. They ruined it for all business. They started those blasted frequent customer programs. Way back in 1981, American Airlines launched the first modern airline mileage program. Within a week, United followed suit. Before the year was out, TWA (remember it?) and Delta brought their own programs to travelers. And the race was on. But even before the friendly skies became the bonus skies, the seeds of awarding points to reward customers were planted by various companies. The best known was probably the S&H Green Stamp scheme. Many of us can still remember collecting those little stamps, licking each one (and did they ever taste terrible) and lovingly pasting them in little booklets that could be redeemed for merchandise. At the height of its popularity, S&G was printing three times as many stamps as the U.S. Post Office.

Today, customer frequency programs are commonplace in many industries and known by many names…customer relationship programs, reward programs, discount programs, loyalty programs, rebate programs, frequent traveler programs, ad infinitum. But no matter what the name, two things are clear. First, the common element is rewarding customers for their purchases. Second, consumers have come to expect to be given an award for their purchases. So whether it is an airline, a coffee shop, a bread shop, a shoe store, a supermarket, or your hotel, every time customers spend something, they are asking, not what they can do for you, but what you will do for them. And I don’t mean just the benefits of staying in your hotel. I mean points. In other words, it is the old WIIFM syndrome – what’s in it for me.

In the interest of full disclosure, I have to admit that, from a marketing perspective, I am not a big fan or frequency programs. But from a customer perspective, I sure am. I know my frequent flyer number by heart, and I whip out my loyalty card every time I go into Starbucks, Barnes & Noble, Great Harvest Bread Company, and Kroger’s. I’m as hooked as you are. So from a business perspective, are they worth it? By most accounts, they are. There is a reason these rewards programs are called loyalty programs. Not only do they reinforce a relationship with your guest, but it done right, they also offer them an incentive to stay at your hotel – or at least in one of your brand’s hotels. These positives increase the “switching costs” to your competitor – even though they might offer lower room rates.

So if your hotel does have a frequency plan, or if you are thinking about instituting one, make sure it follows the silver, gold, and platinum rules for any loyalty program:

  • Silver: Carefully review sales for the past year to see what percent is supported by repeat customers. While we all work under the premise that 80% of sales come from 20% of customers, in this highly competitive lodging environment, the numbers are probably closer to 60%. Knowing who spends what and how often will help you structure the rewards or point system. Deciding on the right rewards levels can be a scary task, especially for small or independent properties. The most effective rewards are the ones that accomplish two goals: First, they bring the guest back to your website or hotel by offering a special value on something you already sell. But please don’t call it a discount! That cheapens the value of the brand. Instead, call it a savings. Second, let guests think they are in charge by awarding them their choice of several rewards for each level. Great Harvest Bread Company has this one down pat. When a customer reaches her rewards level, she gets her choice of any loaf of bread. This personalizes the connection between your brand and your guest and makes it harder for the competition to pull him or her away.
  • Gold: Entice your guests to enroll. Enticement has three elements. To begin with, it has to be easy to sign up. If you have an online presence, you can capture them when guests are completing their booking process by giving them the option to join your reward program. In the hotel, the same thing can be accomplished at during the check-in and checkout process. If you already have a good guest data base or email list, invite each to join. This brings me to the second element: provide an incentive to enroll. This can be an infusion of points into their rewards account, which is what airlines often do. It can be an immediate savings (notice I didn’t use the word “discount”) on their purchase (i.e. room), which is what many retailers do. Or it can be a value-added award on their next stay, which is what restaurants often do by offering a complimentary (notice I didn’t use the word “free” here, which also devalues the brand) appetizer, dessert or beverage. Finally, be sure to clearly spell out the rules of the program. People must clearly understand exactly what the rewards are and what they must do to get them in order to be persuaded to participate.-
  • Platinum: Use your program to increase revenues and profits. The biggest advantage of a successful loyalty program is that the information gained allows the business to tailor future rewards, promotional offers, and marketing messages to purchase histories. You can monitor what offers result in the highest reservations, sales, and Revpar, and which traveler segments are responding to which media message. Plus, graduated rewards can encourage guests to try higher-priced products and services that they may not otherwise buy. For example, suppose a guest have bought enough two-topping pizzas to earn sufficient points for a pizza supreme. Once he tries it, he may like it so much that he'll order it the next time.

To say the lodging industry is in a highly competitive environment is an understatement. To say that every hotel is looking for ways to control cost while protecting Revpar numbers is another understatement. What is sometimes lost in efforts to protect and expand businesses is the fact that it is far more cost effective to have loyal customers that come back time after time, than to constantly go out and find new ones. Bill Marriott is often quoted as saying that it cost $10 to get a new guest but only $1 to keep one. If the same numbers apply to your hotel, which would you rather spend -- $1 or $10?

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