In this age of e-commerce, many wonder if loyalty programs still have a role to play in the hotel sector. A recent study by the Hong Kong Polytechnic University provides evidence that justifies investments in such marketing strategies and provides further suggestions on how to fully capitalize on the approach.
Most hotels are no strangers to loyalty programs. They were first introduced by American Airlines, and soon caught on in the hospitality sector. Investments in loyalty programs in the industry are common, and this is to be expected as they are considered a more efficient means of building brand loyalty than other forms of marketing. Indeed, the loyalty programs of major hotel groups had over 300 million members by 2015, although researchers believe the number of active members was likely to be far fewer.
The potential benefits of loyalty programs to hotels are clearly apparent. For instance, loyal customers increase repeat business, hence raising profits as well as reducing the hotel’s need to attract new customers. The “emotional commitment” of loyal customers is likely to prevent them from switching brands.
Moreover, these emotionally committed customers often perceive the hotel’s products and services to offer good value, hence they are less sensitive to the company’s price premium. These customers act as brand ambassadors, recommending the company through word of mouth. The researchers note that such recommendations tend to be highly effective.
Nonetheless, loyalty programs bring about challenges to the marketers. Gaining the customers’ loyalty is challenging, as well as pricey. The profits they generate are also difficult to track, given that they are hard to separate from profits resulting from other marketing efforts. The researchers noticed that because of the high maintenance costs of adding value to customers’ experiences, marketers struggle to manage profitable loyalty programs, given that each customer has different needs and interests. Overinvestment in loyalty programs is thus an ongoing concern.
Loyalty programs also open up hotels to the possibility of “service encounter failures”. When this happens, the customers’ emotional commitment and the hotel’s reputation will be destroyed. Another damaging effect is that bystander customers can potentially perceive unfairness in comparison to target customers, possibly leading them to switch brands.
So, what makes investing in loyalty programs really worthwhile? Given the surprising contradiction between the popularity of the programs and the lagging number of active members, the researchers were motivated to study the impact of such programs on the key operational and financial indicators of hotel performance.
Information on the expenditures of 2,120 hotels on loyalty programs from leading hospitality consulting firm, CBRE, was analyzed. The scale of each hotel chain and hotel’s operational performance was taken into consideration.
To take account of other contextual factors that could influence the impact of the programs and hotel performance, the researchers included information on hotel franchise expenses, noting that franchising is an important contributor to the “overall revenues” of a hotel; the experience and resources available from the franchisor increase operational efficiencies, thus providing added value to the hotel.
The researchers believe that investing in the e-footprint of a hotel can improve room revenue, therefore they took into account the design, delivery, fulfilment, communication, promotion and evaluation of the hotel experience. Hence, they also considered other e-commerce expenses. Likewise, advertising and other forms of marketing data were included.
The researchers then conducted a series of analyses that took into account these factors when assessing whether loyalty program expenses had an effect on the hotels’ performance one year later, as measured by the revenue per room, the average daily room rate, and the room occupancy rate.
After a series of analyses, the researchers found that hotels’ expenditure on loyalty programs was associated with better performance, measured by the average daily room rate, revenue per room, and occupancy rate. Spending on loyalty programs paid off in terms of hotels’ gross operating profit. This implies that loyal customers not only increase room occupancy, but also their spending on food and beverages at the hotel, as well as spas or other amenities, contributes to better overall financial performance.
Even when factors such as the amount spent on e-commerce, advertising, marketing strategies, and the size of the hotel and scale of the hotel chain were taken into account, spending on loyalty programs still had the most positive effect on hotels’ operational and financial performance. In other words, the researchers found that loyalty programs brought the greatest returns in comparison to investments in other forms of marketing, regardless of the type of hotel.
The research findings provide hotel managers with scientific justification regarding the investment budget for loyalty programs. The results suggest that “among the major marketing initiatives in the hotel industry”, managers are justified in placing more emphasis on loyalty programs because they bring the greatest returns.
Other applications of the findings are improving performance by exploring synergies between marketing initiatives, in order to enhance the efficiency of resource allocations. For instance, integrating a variety of distribution channels into loyalty programs might result in “positive impacts of both e-commerce and loyalty programs”. As the proportion of active loyalty program members is rather low, the benefits of the programs can perhaps be furthered enhanced if hoteliers find ways to further engage the members.
Overall, the research provides strong evidence justifying financial investment in loyalty programs. Yet the researchers note that the overabundance of such programs in the very competitive hotel sector has the potential to “make it harder for hotels to gain exclusive loyalty from program members” in the future. More study, they say, is needed to determine just how significant that overabundance may be.
For more information, please refer to
Hua, Nan, Wei, Wei, DeFranco, Agnes L. and Wang, Dan. (2018). Do Loyalty Programs Really Matter for Hotel Operational and Financial Performance? International Journal of Contemporary Hospitality Management, 30(5), 2195-2213.