Loyalty programs have become a cornerstone in the hospitality industry, aiming to enhance customer retention and drive business growth. Are loyalty programs truly effective in enhancing customer retention? What objectives do these programs aim to achieve? What are the current trends shaping their evolution? This article delves into these questions to assess the role and impact of loyalty programs in today’s market.
As mentioned in a previous article, loyalty programs offer a rational approach to fostering customer loyalty. Initially developed in the retail sector during the 19th and 20th centuries, these programs expanded into the travel industry in the 1980s, first with airlines and subsequently with hotels. Today, they are prevalent in the hotel industry, with 95% of major hotel brands and chains implementing some form of loyalty program.
The Dynamics of Loyalty Programs: from Principles to increased Sophistication
The core principle of loyalty programs is rooted in the psychological concept of reciprocation: the more customers engage and spend with a brand, the more the brand offers in terms of services, benefits, and experiences. With time, these programs have grown to include several features.
The point model is a common feature, where customers accumulate a tokenized currency through various purchases within the hotel’s ecosystem—a system often referred to as “earn and burn.” Points can be redeemed for rewards or services within the hotel group’s portfolio, such as stays, dining, or wellness activities.
The coalition model enriches the point system with affiliated partnerships. Points can then be earned, transferred, and spent across affiliated partners’ programs. Hotels typically partner with airlines, car rental companies, and travel services. Marriott Bonvoy, the world’s leading loyalty program, has even collaborated with lifestyle brands like Uber and Starbucks, reflecting the coalition model’s growing prominence. Furthermore, partnerships with credit-card reward programs have become key sources of revenue for hotel loyalty programs. Affiliated programs drive points accumulation, more than frequent stays, according to CBRE’s 2024 investment report.
Value-based services are also integral to loyalty programs, offering benefits such as priority check-in, late check-out, access to exclusive lounges, complimentary drinks upon arrival, or tickets to events. Accor’s ALL (Accor Live Limitless) program exemplifies this approach.
Tiered structures are commonly employed, providing escalating perks and rewards as members accumulate more points. This system incentivizes customers to spend more to unlock higher rewards, thereby favoring the highest spenders.
Hotel loyalty programs are usually free. However, a subscription model can be added to offer further booking discounts for frequent travelers, as seen with Accor ALL Plus.
However, as loyalty programs become increasingly sophisticated, companies may need to reassess the value of reward points and the associated costs.
As noted by loyalty program consultant Chayya Sakhuja, founder and CEO of QBF Consulting, these programs are not one-size-fits-all. They should foster simplicity and be designed according to specific objectives, such as reducing acquisition costs, increasing customer spending, or boosting advocacy through referrals. Ms. Sakhuja has been led several loyalty programs in the Middle East, including one of its largest in scale, U by Emaar, associated with Emaar real estate communities, which created Burj Khalifa, Dubai Mall, and Dubai Fountain.
Benefits of Loyalty Programs: Why They Matter to Hoteliers
Hotels typically expect several advantages from implementing loyalty programs:
Increasing customer retention and lifetime value is a primary goal. Studies have shown that loyal customers spend, on average, 31% more than new customers.
Optimizing capacity utilization by encouraging repeat business helps ensure a steady stream of bookings, even during off-peak seasons.
Boosting direct bookings is another benefit. By reducing reliance on third-party booking platforms, hotels can save on commission fees, which have risen to an average of 20% in recent years.
Evolving Hotel Loyalty Trends in 2024
As customer preferences evolve, hotel loyalty programs follow, according to iSeatz 2024 Hospitality Rewards Report. An increasing number of programs now offer rewards for eco-friendly choices, such as declining housekeeping, or allow point donations to environmental causes, aligning with the values of eco-conscious travelers. Recognizing shifting preferences, some hotel brands enable members to earn and redeem points at vacation rental properties, catering to diverse accommodation needs. Finally, leveraging customer data, to identify customers with the highest Lifetime Value, remain one of the main perks of loyalty programs.
The Reality of Loyalty Programs: less retention and changing membership dynamics
The effectiveness of hotel loyalty programs is complex. According to a BCG 2024 report, hotel loyalty programs are among the least effective programs in prompting customers to buy exclusively from one brand compared to other industries. Similarly, a 2023 McKinsey study indicates that hotel loyalty programs capture only about 50% of a traveler’s overall spending, compared to airlines and cruises, which capture closer to 60%. This suggests that travelers are less prone to spend on a single hotel chain. Hence, hotels may need to refine the customer experience to address this issue.
Even though hotel loyalty programs contribute to occupancy rates, they do not drive them. According to CBRE 2024 investment report concerning the U.S. top 5 public hotel companies, while global room count grew by 5% and loyalty rogram members increased by 11%, total hotel occupancy attributable to loyalty member bookings increased only by a 2.5-percentage-poin .
Assessing the financial viability of loyalty programs is essential, as determining whether the program’s value outweighs its costs can be challenging.
Refining Loyalty Programs: capturing the right customers
According to Ms. Sakhuja, loyalty programs are enhancements to brand loyalty. They are built upon, and cannot substitute the emotional engagement constituted by brands. Furthermore, instead of adopting a “spray and pray approach” targeting all customers, brands should focus their efforts and investments on their most valuable customers and customers with the highest potential. It is up to companies to decide who they are, whether it be based on frequency of purchase, or their advocacy. Loyalty programs should then enable brands to deepen the relationship with these targeted customers, learn about their behaviors and evolve alongside them.
The Hotel Watch 
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