Will hotel loyalty disappear?

28 September 2016

No doubt, loyal customers are as important to hotels as to airlines. But hotels might make it unnecessarily difficult for their customers, undermining the whole concept of traditional hotel loyalty in face of changing market conditions.

Looking at the Marriott-Starwood merger, it can easily be seen that one clear management focus is on the loyalty programs. Days within final approval of the merger, a reciprocal recognition of elite status between Marriott Rewards and Starwood Preferred Guest was announced, as well as the possibility to transfer points freely between the programs. Some major concerns for members of the two programs were hence resolved immediately, well ahead of the full merger of the two programs, not expected to happen before 2018.

The reason for that focus has been made clear by Marriott itself in a public statement: 50% of its revenue is generated by Marriott Rewards members. Which means 50% of direct bookings and cost savings compared to other booking channels.

Which brings me straight away to the parallels and differences between the airline and hospitality industry when it comes to loyalty strategies. The historic motivation to introduce programs was indeed the same for everybody: to get to know customers – and historically we were simply talking about contact details, not about following their Twitter accounts. This information was meant to be used to push strategically direct distribution channels.

And this led quickly to the major difference. Airlines were trying to pursue this objective carefully, e.g. by offering bonus miles for direct bookings. This has not really changed until today and, take the example of Lufthansa, they rather introduce costly direct distribution solutions and unpopular fees for bookings made through GDS than simply telling frequent flyers what most hotels do: Book directly with us if you want to earn any miles – or f*** off.

Admittedly, the issue of distribution costs is much more a concern for hotels than for airlines. They can easily exceed 30% of the revenue of a booking. Even when airline commissions were at their highest level, they never reached even only half of that value and the fact that GDS fees are now the major concern for distribution departments at airlines underlines the difference of urgency this issue has today between the two sectors. But in spite of the understandable logic hotels apply here, they forget one rather important thing in that context: the customer.

The general underlying question – beyond the concrete context – is why should you punish your customers if they simply choose something you offer for good business reasons? If an airline offers discounted fares, why should customers not earning any miles on them? If hotels need online travel agencies (OTAs) to support their distribution reach, why should customers choosing them be punished and excluded from points accrual (and even status benefits)? This is something very hard for hotels to communicate and for customers to understand – especially given the major difference in this specific question between the two main segments in the travel industry.

Add to this distribution issue all the other restrictions hotels tend to impose, such as eligible rates, and you quickly get to loyalty programs and FFP partnerships, which do not make too much sense for anybody.

When looking at some data at an FFP the other day, we’ve realised that virtually all their hotel partnerships were underperforming. As a matter of fact, the FFP management didn’t choose the wrong partners as their members loved them and stayed there frequently – but in 99% of all cases at rates not included in the agreements. While hotels might even be happy about that – they got all the marketing exposure and new customers without having had to pay for miles -, this is nevertheless short-sighted as the two other elements in the picture, the members and the FFP operator, are frustrated for not getting the miles they were expecting and for not seeing any revenue out of these partnerships respectively. This is obviously not a healthy basis for a lasting relationship.

Looking at my own recent hotel activities, I understand how much these frustrations have added up and started, mostly unconsciously, to change my behaviour: For about one third of my stays, I’ve played the game of the hotels and booked directly. One third of my business has gone to the new kinds of mileage-focused OTAs such as Rocketmiles, Kaligo or PointsHound, or to larger OTAs like booking.com playing catch-up with these guys – and honestly, I usually earn much more miles like this than with direct bookings while benefitting of a much wider choice of hotels in all categories. For the last third of bookings, I’ve got the weirdest excuses why I didn’t earn any points or miles at all – from rates exclusions to the fact that somebody else had booked or paid etc. Useless to say that I obviously never return to such hotels. And I might not be the only one.

This may illustrate to what degree the old loyalty model of lasting relationships has started to be outdated. If you impose too complicated rules and too many restrictions, you encourage people to turn away, at the risk that they find more advantageous options with immediate rewards on the spot since they do exist.

If hotels want to remain relevant in the loyalty game – and especially if they don’t belong to this very limited number of big guys like Marriott/Starwood with a corresponding weight on the market -, it might be time for them to reconsider whether the vision somebody had for hotel loyalty programs some decades ago, to use them as vehicle to steer booking channels, is still viable for them today.

If ever it has been at all.