Hotel Benefits Programs Benefits Programs

Hotel Benefits Programs

Benefits Programs & the Hotel Industry

Hilton Hotels (HHonors), Marriott (Honored Guest), Holiday Inn (Priority Club), Hyatt (Gold Passport), Sheraton (Club International), and numerous other hotel brands have over the past few years developed benefits (rewards) program. They launched these programs because these and other hotel chains felt the sting of waning customer loyalty; they are battling back with rewards, benefits, and other special marketing programs to regain some of that lost loyalty. Indeed, saying that brand loyalty (also identified as customer loyalty to brands) is in decline is at the very least "an understatement" according to Jean-Noel Kapferer. Writing in Ivey Business Journal Online Kapferer (Professor of Marketing at HEC Paris, Graduate School of Management) asserts that while brand loyalty is the "holy grail" of marketing (Kapferer 2005), locating and hanging on to that holy grail has become more difficult in recent years because consumers are more versatile and "less loyal" than they have ever been.

Many studies have shown, Kapferer continues, that satisfied customers, when considering the next purchase, do not automatically buy the same brand, or stay in the same hotel; instead, the customer tends to select from several brands within the same product category. Kapferer uses the analogy of the institution of marriage, which is supposed to be a long lasting relationship based on fidelity. And yet, in many cultures and countries, men and women divorce and remarry "many times" in their lives. Given this lack of fidelity and loyalty between men and women across widely diverse cultures, it is then "unreasonable" for brands to "demand exclusive long-term relationships" with customers, Kapferer explains. Moreover, it is "logically impossible" for a brand such as Hilton or Marriott to expect loyalty when it is "not reciprocal." This is the key point Kapferer offers in his research article; brands wine and dine their customers and expect "...total faithfulness" when in fact brands should just treat their customers as good friends and offer them the gratitude befitting good friends. This is where benefit trends come into the picture.

LITERATURE REVIEW:

Steven M. Shugan (Marketing Science). Before entering into a review and analysis of recent benefit trends - also called "rewards" and "loyalty marketing" programs and promotions, among other titles - it is worthwhile initially to look deeper into the philosophies and strategies behind brand loyalty and customer value. For example, how important are the concepts of "commitment" and "trust" when it comes to the hospitality industry pleasing and keeping their customers?

To wit, among frequently-cited papers in the field of economics and business over the past twelve or so years, the top cited piece, according to the journal Marketing Science, is the Robert M. Morgan / Shelby D. Hunt research titled "The Commitment-Trust Theory of Relationship Marketing." Published in the Journal of Marketing, the article presents the case that "commitment and trust are necessary requisites" for a business relationship that is productive (Shugan 2005), the editorial in Marketing Science explains. (More on Morgan / Hunt a bit later in this section.)

The organization that made the assertion that Morgan & Hunt had hit the nail on the head in terms of the sheer number of publications and journalists that had tapped into their research was the Institute for Scientific Information (ISI), which should remove any doubt that a marketing or advertising or advocacy group aligned with hotels put out a PR-type report on the topic.

Writing in Marketing Science, editorial scribe Steven M. Shugan suggests that customer loyalty is achieved through the understanding that customers are "assets" and that believing in that concept is "essential" to marketing success in the hospitality industry. Shugan quotes from (and agrees with) available marketing research: "...the life-time value of a well treated customer and his/her good opinion, far exceeds any single transactional benefit."

Shugan writes that the typical balance sheet of any firm might well embrace its customer base, buildings, cash, and other "tangible assets" - along with employee resources. And as to marketing activities, for the successful business (in this case, hotels) those activities should be well more expansive than just creating "short-term sales." Instead, marketing activities should work towards the creation of "enduring, if not permanent assets." Those assets (customers) become the Holy Grail that Shugan alluded to earlier, and they return far more value to the hotel than awareness advertising, that only offers temporary customer brand awareness, Shugan continues in his editorial in Marketing Science.

A true loyalty program trusts the customer rather than demanding the customer's trust, Shugan continues. Many existing loyalty programs are "shams" in Shugan's opinion, because they tend to produce liabilities instead of producing assets. The loyalty programs Shugan alludes to do in fact garner short-term cash flow, but they also produce "substantial future obligations" to the same customers. Instead of making a commitment to the customer (which demonstrates the hotel's trust of the customer), too many loyalty / benefit programs ask the customer to trust that, in turn for his or her expenditures out front, the hotel will follow through with future customer rewards. So, Shugan sees that particular strategy as not investing in the customer as an asset, but rather as a liability; i.e., the hotel owes the customer something in the future. And in the process, the hotel risks a "catastrophic backlash" when in the future the rewards promised tend to fall short of what the customer had expected.

The bottom line for Shugan: True loyalty / benefit programs trust the customer rather than insisting on the customers' trust of the hotel. A true loyalty program creates an asset by "making the customer more attached to the brand over time."

Robert M. Morgan & Shelby D. Hunt (Journal of Marketing): Although this article in the Journal of Marketing was published in 1994, it set the stage for and cleared the path for much of the benefit / loyalty trends in hotel services today, according to Shugan's narrative in the previous paragraphs. Morgan et al. writes that his approach is to examine the nature of the "relationship marketing" based on relationship "commitment and trust."

In their groundbreaking 1994 journal article, Morgan & Hunt break relationship marketing down to two distinguishing concepts; one is the "discrete transaction," and two is the "relational exchange." The discrete transaction normally features a big-splash-type launching (what Shugan alludes to as "awareness advertising"), a short duration, and a "sharp ending by performance." On the other hand, the relational exchange is an ongoing process, linked to the future, one that "...traces to previous agreements."

The Commitment-Trust theory asserts that commitment and trust are pivotal because those concepts encourage marketers to, a) cooperate with their "exchange partners" (customers) in order to preserve relationship investments; b) avoid "short-term alternatives" that may be attractive and instead stay with existing customers over the long haul; and c) be willing to launch "high-risk actions" based on the belief that their customers will not behave "opportunistically" and abandon the brand for a better deal from a competitor (p. 22). The Morgan & Hunt theory holds that that relationship commitment is a key component of relationship marketing; and relationship commitment, like a successful marriage between two loving partners, involves "mutual social trust" and leads to the achieving of "valuable outcomes" for both parties (p. 23). The trust component of Morgan & Hunt's theory suggests that while commitment to a brand involves some vulnerability on the part of the customer, when trust is achieved, the relationship between the customer and the brand moves into the genre of confidence. And if a customer has confidence in the integrity of the brand, he or she is then willing to step out into the vulnerable place known as commitment and trust the brand, which leads, Morgan & Hunt explain on page 24, "to higher levels of loyalty."

Christopher J. White & Steve Scandale (Journal of Hospitality and Tourism Management): Why do travelers choose one destination over another - and by inference, why do they choose one hotel over another? Certainly the brand loyalty / customer loyalty factor enters into the mix; but White & Scandale's research into the "cross-cultural" dynamics of decision-making suggests that consumer emotions "were the strongest predictor" of where a visitor would choose to visit and stay. The research White & Scandale engaged in focuses on the relationship between the "affective" and "cognitive" components (p. 169) related to decision-making. An "affective" reaction is the immediate impulse of the customer to make a decision about where to stay; a "cognitive" reaction is more thoughtful and "deliberate," the research indicates.

Meanwhile, White & Scandale's findings tend to collaborate the assertion of Kapferer in the Introduction to this paper (that loyalty is in decline); White & Scandale believe that the affective component may well be a "better predictor" of customer behavior than the cognitive component. And since the affective component is based more on emotions than the cognitive component, it behooves the hotel industry to make an appeal to the "affective" component within the traveler. When followed up with service, satisfaction, and benefits that produce trust and commitment over the long run, customer loyalty becomes a very real possibility.

Sunmee Choi & Anna S. Mattila (Cornell Hotel & Restaurant Administration Quarterly): The impact that a hotel can have on customers by sharing a frank and specific list of pricing practices ("revenue management" [RM]) is significant, according to a peer-reviewed journal article published in 2005. Choi & Mattila conducted a study of 120 travelers (all waiting for flights from Reagan National Airport in Washington, D.C.), providing them with three distinctly different scenarios regarding a hotel's rate-management policies. The result of the research determined that the scenario with the most detailed information on hotel pricing was preferred by far more customers than the other two. Looking deeper into these results, the authors report that while merely providing information on the varying rates offered by the hotel improved customer perceptions of the hotel, which alone did not "...improve customers' perceptions of fairness." What did improve perceptions of fairness in the minds of customers was when the hotel explained that rates varied according to day of the week, length of stay, and how far in advance the reservation was made.

When customers surveyed in the Choi & Mattila research project received no information on rate schedules, they believed the hotel process unfair. So, in effect, a hotel's candor through the release of RM policies is a kind of "benefit" in itself; this suggests that the hotel agent on the phone with the potential customer should offer, "fairly complete information." In conclusion, Choi and Mattila assert that offering detailed RM information relieves customers from being suspicious that "the hotel was gouging customers" or that the customer could have received a more attractive rate "by haggling."

Ran Kivetz (Marketing Science): Ran Kivetz opens his piece by announcing that his material is based on five studies involving "both real and hypothetical choices" for customers. The salient point of his article is a question: what influences people's trade-offs between receiving a certain reward (a deterministic reward) from a hotel, or tossing the dice for a more risky gamble when the reward involves placing the customer's name in a hopper from which a significant prize is offered as a lure (uncertain rewards). When it comes to customers and their decisions regarding frequency programs (FP), Kivetz writes that there is a "trade off" between the probability and the magnitude of rewards that the customer might earn for investing effort (i.e., time and money). When a customer puts out effort, an expectation for reward is created; the higher the requirements, the greater the expectation, Kivetz explains.

The dynamics involved in this trade off include the following three hypotheses: a) once a customer puts out effort, that effort "enhances" his or her preference for "sure-small rewards over large-uncertain rewards"; b) the preference for reward "certainty" is satisfied when the effort being asked of the customer is "intrinsically motivating"; and c) the more the level of effort is increased, the greater the chances for an "inverted-U effect" on the preference of "sure-small" over "large-uncertain" rewards.

Moreover, when the customer is asked to invest "a stream of future efforts," toward the ultimate reward, Kivetz goes on, expectations are raised relative to the "fair or appropriate size of the reward." And rewards that fail to meet those raised expectations will be seen as "unfair losses"; rewards, on the other hand, that meet "or exceed" expectations will be coded as "gains."

Kivetz reports on a survey of 186 respondents who were waiting in a major train station; the participants were randomly given the choice between being part of an FP that required a 10-night stay (which of course involved effort) and participating in an effortless free raffle. Of those train passenger participants who chose a reward, fifty-nine of the 69 respondents (74%) chose the "sure small" reward. Additional information obtained from the Kivetz article includes: a) when an effort activity is "inherently enjoyable" or motivating, there is a strong likelihood of lowered reward expectations; and b) participants who enjoyed a particular effort activity were "less likely to prefer the sure-small reward" as contrasted with individuals who didn't find the activity (effort) pleasurable.

This last finding was backed up through a survey of 232 east coast high school students who were offered a choice to participate in a survey that would place them randomly in either a math survey or a poetry survey; in each case, the students would be asked to put out effort, that is, to evaluate new learning materials once a week for four weeks in the category they were placed in. Following the conclusion of the survey, those who chose to be participants would then receive a reward of their choice: either a $20 bill (a "sure-small" reward) or a one-in-twenty-five chance at winning $600 in cash. For the students who enjoyed math and wound up in that group, they tended to take the risk of winning $600; and for those who did not like math (and this held true for the rules regarding the poetry group), they went for the sure-small reward of twenty dollars.

What can these data provide for hotel marketing professionals creating loyalty rewards programs? One possible helpful concept that emerges from Kivetz' work is that asking potential customers to put forth effort for rewards will more likely result in them reaching for the greater riskier rewards if they are motivated by the effort, or simply enjoy the effort. Hence, it is incumbent on the hotel to find out (through surveys) what their customers enjoy doing, and what they would rather not participate with.

Anna S. Mattila (Cornell Hotel & Restaurant Administration Quarterly): In this research piece by Mattila, the writer puts forward the notion that just offering rewards does not result in customer loyalty. Additionally, the hotel must foster in guests "some form of emotional bonding" with the hotel's brand. And while the topic of commitment has been alluded to previously in this paper, Mattila provides fresh examples of why "commitment" is the most important concept "in any relationship that involves loyalty" - and that emotional responses are also major factors as regards guest loyalty. Initially, on the topic of loyalty, Mattila points out that the typical American traveler has in his or her possession several Hotel chains' rewards program membership cards. Indeed, the most recent study by J.D. Power and Associates reports that only one-third of the 13,335 travelers that were surveyed showed "strong loyalty" to a particular hotel brand.

Adding to this problem is the fact that most frequent-guest programs "look alike," Mattila asserts, and that sameness greatly reduces the effectiveness of the programs. Mattila alludes to a recent survey by Colloquy (through focus groups) that showed guests could not tell the difference among several frequent-guest programs once the logos were taken off the promotional materials. One of the issues that goes into this sameness problem for hotels is that frequency benefit programs do not build loyalty if the customer places most of his or her emphasis on the gathering of "points" instead of on the superior offerings and services of the hotel.

Mattila concludes by restating that when a hotel guest becomes dependent on accumulating points (to get those coveted benefit rewards) and no longer relates to the quality of his or her stay (food, amenities, comfort), no loyalty is shown. To remedy this problem, hotels need to increase emotional bonding by "carefully analyzing the data provided by frequent-guest programs." That way, the hotel begins to more fully understand individual customers' preferences, and the hotel can then portray a message to the customer that they truly care.

Byung-Do Kim, Mengze Shi & Kannan Srinivasan (Management Science): In this research article, the authors study the use and "optimal design" of rewards programs in the context of "capacity management." Kim, et al., conclude that by providing incentives for firms to set higher current prices, reward programs can actually help hotels increase revenue. First of all, hotels have very strict capacity constraints, in that the price tag that goes along with making adjustments in those capacity constraints - like building new hotels for example - is very expensive. Hence, it behooves the hotel chain to make the best of its existing capacity constraints. For example, when a hotel has "excess capacity" and a low marginal cost, it makes sense to fill those rooms with reward-related guests, and with fewer available rooms, the price competition with other hotel chains is reduced.

Moreover, reward programs may well enhance market prices by compensating a hotel's loss in current sales "with a gain in future sales" - providing of course that the reward program truly advances the loyalty and commitment of present and future guests. This paper goes into serious mathematical (empirical) formulae to project its findings; a person familiar with algebra and trigonometry would feel right at home working through many pages of their 37-page paper (no page numbers are available since the piece was not in PDF format); for the layperson, however, the narrative portions of the research serve more appropriately in terms of understanding.

To wit, a hotel with excess capacity has a "strong incentive" to lower prices, in order to fill those rooms. Meanwhile, the hotel's competitors do not wish to be undersold, and hence, the competitor will follow suit and lower its room prices. The problem with this scenario is that price competitions "pervade" the hotel industry during times of lower demand for rooms. However, with reward programs, hotels are able to "commit to lower available capacities by giving out some of the capacities in the form of rewards." Therefore, reward programs, as has been presented earlier in this paper, attract and (if handled properly) retain customers; and beyond that, according to Kim et al., rewards programs give hotels more flexibility in terms of avoiding stiff competition. Moreover, if a hotel happens to be undersold by a competitor during the current period, that hotel will benefit from its competitor's capacity reduction down the road.

Brian Wansink (Journal of Advertising Research): The commonly held belief among marketing professionals is that it is about six times more costly to bring in a new customer, as it is to retain existing customers. In fact, Wansink writes in his research piece, when a company is able to beef up its customer retention by as little as 2%, the costs of advertising for new customers can drop by up to 10%. That having been said, Wansink appears to be critical of some companies that rush into loyalty programs. In some instances, Wansink writes, establishing a loyalty program "is a competitive reaction" and yet, once the program is fully established, "its intended purpose is sometimes forgotten."