Barriers to CRM and True Customer Loyalty
By Michael DiLeva Executive Vice President, The IDT Group | January 27, 2012
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.