Mr. Bernstein

Guest Service / Customer Experience Mgmt

Are You Relying Too Much on Loyalty Programs and Too Little on Customer Experience?

Understanding the limitations of loyalty programs can lead to new and more reliable ways of building customer loyalty

By Laurence Bernstein, Managing Partner, Protean Strategies

Many hotel brands, especially those within a portfolio of other brands, are defined by the master-brand loyalty program (Hilton, Marriott, Starwood, Accor, IHG, etc.). There is a reliance on “smart” loyalty program strategies to drive business to the individual properties within each brand, supported by revenue management systems and online traffic generators.

But is this really the best way to market hotels? We’ll look at the problems with loyalty programs and the realities of the way customers experience the hotels, and see whether a mash up of the two might make a lot more sense.

Like it or not, loyalty programs area fact of life in the hospitality industry, as they are in many other retail and transactional categories. While it is likely that many companies would thoroughly endorse the idea, it is not possible to put this particular genie back in the bottle: 1.3 billion loyalty club memberships exist in the US alone, roughly four times the entire population(1) and according to Jupiter Research, more than 75% of US consumers now have one or more loyalty card, and two thirds of the shopping population has two or more cards(2).

If the question, therefore, is not “to loyalty or not to loyalty,” then the question must be, “how to loyalty?” or, more to the point, “how much to loyalty?” Should the entire marketing plan rest on the shoulders of the loyalty program, or should the loyalty program be one pillar of a multifaceted plan designed to maximize customer loyalty? In other words, is customer loyalty a marketing tactic or is it the essence of the business?

Loyalty, in my and many others’ opinions, is a misnomer – as marketers when we use the word loyalty, we are in fact referring to loyal-like behavior, which we are happy to describe as increased frequency. True loyalty, as defined by Wikipedia, is “faithfulness or a devotion to a person, country, group, or cause,” none of which generally is thought to include brands of hotels! Sure, it would be wonderful from a business point of view to inspire faithfulness or devotion to our brand in our customers, but it is unlikely, given that more than 50% of American have trouble maintaining loyalty to their spouse(3).

The underlying principle of loyalty programs is that the program, by the way it is structured and the rewards it promises, can persuade people to choose our hotel rather than another hotel which would meet their needs more effectively. After all, if our hotel meets their needs more effectively than another hotel, why would we have to reward the guest for staying with us? The stay would be the reward. Loyalty programs, therefore, are designed to get people to compromise one thing (the level of satisfaction with the experience) for another (the promise of a future reward). In the hotel business this equation is not as judgemental as it looks, as the compromise very often revolves around convenience factors (location) or (depending on who is paying for the room) value (guests might pay a little more to stay in a hotel where they are being rewarded, especially if their company is footing the bill). It would appear that as a means of building repeat business, loyalty programs might be well suited to hotels. In principle.

We know, however, that the principle breaks down when all brands offer loyalty programs that are, from the customer point of view, pretty interchangeable. The response has been to reframe loyalty programs as frequent visitor programs where hotels improve the quality of the traveler’s experience in the hotel, but having tier-based “value-adds.” In other words, the brands have come full-circle and are now offering frequent guests experiences that meet all the needs of the travelers. But, they also have to pay the guest (through loyalty points) to stay in the hotel.

Harvey Thompson, author of “Who Stole My Customer,” summed it up this way: Mainstream rewards programs already show signs of being competitively pressured into a steady state where companies are giving away very similar benefits, unable to pull back because of the threat of lost business and unable to give more because of high costs.”(4)

The underlying reason for this commoditization of loyalty programs is that, effectively, they are all fundamentally feature and amenity based – even the elevated “experience” is only a feature to the degree that it can be easily replicated. Bernstein’s First Law of Differentiation (“There is nothing that cannot be made a little better and sold for the same, or made a little worse and sold for much less”) applies: no matter what the added value, the competition will match it and then raise the bar. As amenities creep nearly drowned the industry in the nineties, frequency benefits creep will drown the industry in the next five years.

Point made. If loyalty programs aren’t fragile enough on their own, airlines and other much larger players are conspiring to denude branded loyalty programs of any remaining differentiating proposition.

More problematic is the revenue environment in which this is happening. Room rates are being suppressed by the evils of transparency which leads managers, understandably, to try to suck costs out of the system, inevitably by chipping away at the value proposition for non-frequent guests. “They’re paying less,” so the logic goes, “so they should expect less. Besides, they are unlikely to notice there is one less bar of soap, or two fewer towels, or only one robe, etc. in the room. Our frequent guests – our best customers -- are enjoying an enhanced experience. So it’s all good!” (A good example of this de-contenting process is the case of a hotel chain where they delivered daily newspapers to guest each morning. In order to add value to the loyalty program, they made the newspaper a benefit “exclusively” for program members, and non-members no longer found newspapers outside their doors. They could look longingly at the newspapers outside the doors of program members, and perhaps be driven by acute jealousy to enroll in the loyalty program. More likely, they would wonder at why the standards of the hotel are declining and newspaper delivery has become so sporadic.)

So, is it really all that good? As the distance expands between the way frequent guests experience the hotel and the way everybody else experiences the hotel, the more difficult it becomes to convert occasional guests to frequent guests. What happens is occasional guests don’t see the value in the experience and either move somewhere else, or look for ways to decrease the rate (Hotels.com please stand up!). This starts downward spiral that can permanently affect the ability of the property (or brand) to deliver the required R.O.I.

Besides which, today’s best customers will not be tomorrow’s best customers, and today’s most active loyalty program members will not be tomorrow’s most active members. Loyalty program aggregators (plans that allow members to convert other program points into a single point system) and other products that divert your members away from your program, are increasingly muddying the waters.

To Harvey Thompson’s point, while all these factors conspire to make loyalty programs increasingly more questionable as an investment, most brands simply cannot back out of them. But, should they lavish as much money and attention on them, or is there another way to build customer frequency?

If today’s best customers will not be tomorrow’s best customers, then the “brand” goal must surely be to build tomorrow’s best customers, today. But, the basic premise of providing a truly differentiated experience only to your best customers runs counter to this goal. A better approach might be to make every customer feel like your best customer, every time.

Imagine a world in which every guest felt like your best customer every visit. What would this feel like to the guest? What would the experience have to be like in order for a guest to say, “I really felt that I was the only guest in this hotel”?

To answer this question it is important to understand two basic realities about the way hotels fulfill the needs of their guests:

1. Each guest has a unique set of needs that change based on where they are, why they are there and how they feel at the time
2. Guests experience and evaluate the hotel experience in the here and now, not the everywhere all the time. This means that regardless of how many time a person stays in hotels within a brand, they evaluate the specific stay based only on the property they are in and how it meets their needs at that time and in that place
3. Collecting points is a universal behavior that spans time and place, and as such is motivating only to a specific kind of person, who’s immediate need for membership rewards transcends other immediate needs. Unfortunately, chances are this particular group are members of other programs as well, negating any advantage the property might derive from the program.

Understanding these three realities leads to the conclusion that, regardless of brand standards and promises, each individual property must understand what specific role it plays in the life of guests, based on where it is located and why they are there. In order to make every guest feel like your most important guest, you need to demonstrate that you understand him or her only in relation to your city, your hotel and why he or she is there, standing in front of the reception desk. If you can do this, you can make every guest feel like the most important guest, every time.

There are three steps that will enable you to build this kind of need-fulfilling level of service:

1. Inventory your offering – clearly understand what the brand promise is, but more than that, understand the full range of amenities you offer, both internally (traditional amenities such as soap and swimming pools) and externally, such as distance to places of interest, office parks, airport and so on
2. Find out who your guests are – not by means of expensive market research, or, heaven forbid, satisfaction studies, but by asking them and listening to their answer. If the front desk associates ask everybody who checks in why they are visiting our “fair city,” and subtly makes a note of this, you will easily be able to determine what, in general terms, role your hotel is playing in relation to the city (close to the business park during the week, close to the art gallery on the weekends, etc.)
3. Genuinely match amenities to the needs of the guests: offer shuttle service to the Business Park and gallery at appropriate times; advise people that it takes ten minutes longer to get to the business park when it snows; suggest alternate galleries; provide gallery brochures in the guest's room. The number of individualized, low cost amenities and services you can add that specific relate to your guests in your hotel in your city, are limited only by your imagination; which is why…
4. ...you need to ask your staff to help you build this portfolio of amenities (each person in the hotel has a slightly different perspective on what’s so great about the city). Hold informal brain storming sessions, or ask for ideas with some kind of reward for the best, and so on.

Some readers may think this goes against the principle of multi-unit brands, where the idea is that the brand promise supported by the loyalty program should be strong enough to keep heads on beds. Not so. The role of the brand in positioning the hotels against other brands and clarifying a broad set of brand promises that are reassuring and convincing, is extremely important, especially in bringing guests to you the first time. But the hard job of making every guest feels like your best guest every time, falls squarely on your shoulders.

References:
1. Colloquy, www.colloquy.com
2. Quoted by Kyle LaMalfa in his article: Buying Loyalty: Do Rewards Programs Translate into Customer Engagement”, http://knol.google.com/k/buying-loyalty-do-rewards-programs-translate-into-customer-engagement#
3. The divorce rate in the US is currently estimated to be around 50%. This figure is, however, much disputed, and many pages could be dedicated to the discussion. Those interested are encouraged to visit: http://www.divorcerate.org.
4. Harvey Thompson, “Who Stole My Customer?? Winning Strategies for Creating and Sustaining Customer Loyalty” 2004, FT Press.

During a highly successful 20 year advertising career, Laurence Bernstein launched and nurtured numerous global hospitality, foodservice and financial service brands, on behalf of Saatchi and Saatchi Advertising, Young and Rubicam and Chiat Day. Prior to becoming an ad-boy, Mr. Bernstein cut his teeth in sales and marketing with Westin Hotels. In 1998, in response to the rapidly changing marketing environment, he founded the boutique strategy and research agency that he now runs, Protean Strategies. Conceived as an agnostic strategy development and outsourced planning partnership, Protean has developed into a world leader in research innovation and brand strategy development. Mr. Bernstein can be contacted at 416-967-3337 x101 or bernstein@proteanstrategies.com Extended Bio...

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