Mr. King

Sales & Marketing

When Structured Loyalty Programs Aren't the Answer

By Robert King, General Manager, Travel & Hospitality, ClickSquared

"Repeat business or behavior can’t be bribed. Loyalty has to be earned."
Janet Robinson

Earning customer loyalty is the goal of virtually any commercial enterprise, and is especially important in industries like travel and hospitality where ongoing patronage is essential to success. A loyal guest is someone who actively seeks your brand, uses it and advocates for it. Guest retention rates, repeat rates, share of wallet, lifetime value and a host of the other common key performance metrics attest to the importance of “loyalty” to business health and growth.

Contrary to common opinion, creating loyalty is not the exclusive responsibility of the marketing team. Guest loyalty is achieved through the successful delivery of all aspects of service, and how well that service aligns to the overall brand promise (i.e., the entirety of the guest’s experience relative to the guest’s expectations, from initial reservation through check-out). Guests generally reward an organization for meeting its brand promise with increasing loyalty over time. When expectations are not met, (or not met as well as the competition) customer loyalty is difficult to achieve.

That said, marketing can and should play a key role in promoting customer loyalty. While marketing’s role is multi-faceted (development of the brand promise, product/service design, customer research, promotion, etc.), no aspect is more critical than the means by which the organization communicates directly to its customers. In the travel and hospitality industry, structured, membership-based loyalty programs have become a common approach for the larger brands to identify and engage with the “best guests” and grow the guest relationship over time. However, as we will explore below, there may be far more appropriate –and far more effective – loyalty-building alternatives for the vast majority of travel and hospitality providers.

Structured Loyalty Programs... and their limitations

While the origin of the “loyalty program” can be traced back to S&H Green Stamps in 1896, it was arguably American Airlines which transformed the travel industry with its AAdvantage frequent flier program in 1981. According to the 2009 Colloquy Loyalty Marketing Census, airline loyalty programs now include over 277 million U.S. members, and hotel loyalty programs boast nearly 170 million U.S. members. While there are a myriad of permutations, these programs are typically highly-structured, membership-based schemes where a member can earn a given currency (miles, points, stays, etc.) for specific patronage or behavior that can later be redeemed for some benefit or reward (free ticket, free night, upgrade, etc.).

These structured loyalty programs can offer substantial marketing advantages to many organizations, even becoming a brand in and of itself (Starwood Preferred Guest, or SPG, is such an example). Through cooperative partnerships (credit cards, airlines, rental cars, retail affiliations, etc.), loyalty programs can offer members a broad range of benefits and earning opportunities.

While these programs have the potential to be strong differentiators, their characteristics make them sub-optimal for many hospitality organizations:

• Programs tend to be membership-based, meaning a guest must first join the program.
  -For T&H organizations without sufficient breadth and scale to enable high stay frequency, membership is less compelling.
  -For luxury brands that differentiate based on their ability to know their guest and provide highly personalized service, asking a guest to join a program to be recognized can be fundamentally misaligned with their brand promise.
• Program tiers can prove problematic.
  -It’s easy to tell a loyal guest that they are now Platinum. But it’s much more difficult to later tell this guest that he or she is now Gold – no one likes to be told they are less valuable. Demoting guests is particularly challenging for luxury brands. -If program tiers are not structured correctly, you can find that too few (or too many) guests qualify – making the program frustrating, or tier status undifferentiating and expensive, respectively.
• With structure comes inflexibility.
  -Since the specific terms and conditions in structured loyalty programs are widely communicated, it can be difficult to refine terms quickly without disruption, particularly if changes might be construed as disadvantageous to certain members.
  -Because loyalty programs affect emotions (loyalty) and influence behaviors, it is notoriously difficult to predict the impact of specific changes. Unintended impacts can be quite common.
  -Deciding to substantially change, or even terminate, a structured program can be quite disruptive to the membership, and the fall-out difficult to manage.
• Membership programs can be expensive.
  -Program administration costs can be costly, both in terms of people and systems.
  -Depending on the reward accrual schemes and expiration policies, ongoing liability costs can grow over time.

Despite these risks, many travel and hospitality organizations will still continue to conclude that launching and maintaining structured loyalty programs is the best way to establish competitive equilibrium or advantage. For others that conclude that structured loyalty programs are simply the wrong answer, there are a number of alternatives available.

Beyond Traditional Loyalty Programs

If a traditional structured loyalty program isn’t the answer, what is? A well thought-out Customer Dialogue Management (CDM) Program – monitoring behavior and orchestrating cross-channel communications – instead of miles, memberships and points, is a much more viable loyalty-enhancing marketing strategy for many (if not most) travel and hospitality organizations.

Employing a Customer Dialogue Management approach enables travel and hospitality organizations to provide tailored services and create an ongoing personalized dialogue that allows the traveler to interact with the brand in a way that, over time, engenders deep loyalty. The company decides whom they want to target, what they want to offer, and when they want to communicate by understanding guest stay and purchase history, response history to targeted communications, as well as any declared or inferred guest preferences.

With CDM as the new framework for gaining and maintaining customer loyalty, many of the other limiting elements of a traditional structured loyalty program fall away. For starters, a traveler doesn’t have to join anything. Instead, the company identifies and selects the right guests to target based on insights gleaned from past stay patterns and preferences captured in its marketing database. This way, the individual traveler feels recognized without having to ask for recognition through program membership – a much more appealing alternative for many brands targeting the affluent traveler, or for smaller properties/chains that can’t offer massive scale.

With a Customer Dialogue Management Program, the program’s value proposition, guest selection criteria and offers are not transparent to the customer. As a result, communications can be more flexible and personalized to individual needs. Additionally, as the needs of the company (or its guests) change over time, the CDM program can be more easily tested and adapted. Things like the cost of rewards, the accounting treatment of unused points or free stays, and tier-level demotion risk (a particular concern in the luxury segment) are much less of a factor when Customer Dialogue Management is the approach. Even exit strategies become a non-factor. See Figure 1 for more details.

Figure 1

Marketers need to not only look at the content of the communications they’re sending, but also the communication channel by which they’re sending it. There are very real differences in how communication channels are adopted and consumed within different demographic profiles. Direct mail, email, SMS and social media such as Facebook and Twitter need to be part of your channel mix to optimize loyalty communications. For example, don’t underestimate the improved guest engagement that can result from giving your guests the ability to share experiences and upload photos or video of their stay. And you might be pleasantly surprised how the rich content and testimonials that these sources provide that can be easily incorporated into future loyalty marketing efforts.

To optimize loyalty, the “dialogue” aspect of guest communications is key. The goal is to give the customer a voice, take what they’ve said to heart – although some of it may be difficult to digest – and then act on it.

A recent Wall Street Journal article describes a newly arrived conference guest tweeting to the other attendees about his awful room that overlooked the air conditioning units. A front-desk employee saw the tweet and responded with both an apology and an offer to re-locate his room. In another example, a conference attendee musing about a cold beer at the end of the last session was invited to share a complimentary bucket of his favorite brand with his friends on the hotel patio. In both instances, it's fair to say that the loyalty created by actually listening to each customer, accompanied by a (low-cost) response, far exceeds the loyalty that could be generated by any “earn double points” offer.

Get Started

"Loyalty demands participation, the rest is simply wishful thinking."
Unknown

Loyalty is earned by engaging in a relevant and respectful dialogue with your customer over time – it goes far beyond points or free stays. While traditional loyalty programs can be powerful motivators, they are, at most, a component of an overall customer loyalty program and, for many, not a viable answer at all.

Instead, make loyalty a part of every interaction you have. Start slowly with a well thought-out cross-channel Customer Dialogue Management program and grow it as you find out what works (and what doesn’t). There’s a wealth of information about your customers residing in the data you already have. Use your existing CRM and PMS data to understand your guests and what’s important to them, and develop compelling offers that marry those guest preferences with what your property has to offer. For some ideas, see my previous article “New Approaches to Filling the White Space.”

Since the program is invisible to customers, it is a lot easier to test the waters. Try something out and grow it as you have success. Quickly adjust if you receive unanticipated feedback or encounter unexpected customer demands.

Structured, membership-based loyalty programs are not for everyone – but that doesn’t mean loyalty programs aren’t important. There are plenty of alternatives to a tiered reward program that are significantly less costly, and often more effective. Don’t try to put a square peg in a round hole – but don’t ignore the round hole, either.

With more than 20 years of experience in the travel and hospitality industry, Robert King has held marketing, sales and senior management positions at a variety of organizations. Mr. King works with ClickSquared clients throughout North America, Asia and Europe to develop and implement highly targeted, timely, interactive customer relationship programs that result in increased ROI. Mr. King can be contacted at 480-603-9403 or bking@clicksquared.com Extended Bio...

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