Hotel Loyalty Programs: Strategies, Benefits, and Brand Trust

Introduction: The Decline of Brand Loyalty in Hospitality

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 and rewards programs. 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 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 holding 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 their 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: brands wine and dine their customers and expect "total faithfulness" when in fact brands should simply treat their customers as good friends and offer them the gratitude befitting good friends. This is where benefit programs enter the picture.

Literature Review: Commitment, Trust, and Relationship Marketing

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 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 retaining its customers?

Among the most 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 Robert M. Morgan and Shelby D. Hunt's 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 productive business relationship (Shugan 2005). The organization that confirmed Morgan and Hunt's impact — based on the sheer number of publications and journalists that had drawn on their research — was the Institute for Scientific Information (ISI), which should remove any doubt that a marketing or advocacy group aligned with hotels produced this finding.

Writing in Marketing Science, 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 embrace its customer base, buildings, cash, and other "tangible assets" — along with employee resources. As to marketing activities, for the successful business (in this case, hotels), those activities should extend well beyond simply creating "short-term sales." Instead, marketing activities should work toward the creation of "enduring, if not permanent assets." Those assets — customers — become the Holy Grail that Shugan alludes to earlier, and they return far more value to the hotel than awareness advertising, which offers only temporary customer brand awareness.

A true loyalty program trusts the customer rather than demanding the customer's trust, Shugan continues. Many existing loyalty programs are "shams" in his opinion because they tend to produce liabilities instead of assets. The loyalty programs Shugan critiques do in fact generate short-term cash flow, but they also produce "substantial future obligations" to those same customers. Instead of making a commitment to the customer — which demonstrates the hotel's trust of the customer — too many loyalty and benefit programs ask the customer to trust that, in return for upfront expenditures, the hotel will follow through with future rewards. Shugan sees this particular strategy not as investing in the customer as an asset, but rather treating the customer as a liability; i.e., the hotel owes the customer something in the future. In the process, the hotel risks a "catastrophic backlash" when those promised rewards fall short of customer expectations.

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

Although this article in the Journal of Marketing was published in 1994, it set the stage for much of the benefit and loyalty trends in hotel services today, according to Shugan's narrative. Relationship marketing as conceived by Morgan and Hunt is built on two distinguishing concepts: the "discrete transaction" and the "relational exchange." The discrete transaction normally features a high-profile launch — what Shugan calls "awareness advertising" — a short duration, and a "sharp ending by performance." The relational exchange, by contrast, 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 and Hunt theory holds 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 their 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 realm of confidence. If a customer has confidence in the integrity of the brand, he or she is then willing to step into the vulnerable place known as commitment, which leads, Morgan and Hunt explain on page 24, "to higher levels of loyalty."

Customer Emotions, Pricing Transparency, and Reward Design

Why do travelers choose one destination over another — and by inference, why do they choose one hotel over another? Certainly the brand loyalty factor enters into the mix, but White and 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 stay. Their research focuses on the relationship between the "affective" and "cognitive" components (p. 169) of decision-making. An "affective" reaction is the immediate, emotionally driven impulse of the customer to make a decision about where to stay; a "cognitive" reaction is more thoughtful and "deliberate," the research indicates.

White and Scandale's findings tend to corroborate Kapferer's assertion that loyalty is in decline; they believe that the affective component may well be a "better predictor" of customer behavior than the cognitive component. Since the affective component is based more on emotion, 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.

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 article published in 2005. Choi and Mattila conducted a study of 120 travelers 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 scenario with the most detailed pricing information was preferred by far more customers than the other two. While merely providing information on varying rates improved customer perceptions of the hotel, this alone did not "improve customers' perceptions of fairness." What did improve perceptions of fairness 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 and Mattila study received no information on rate schedules, they considered the hotel's process unfair. In effect, a hotel's candor through the release of RM policies is a kind of "benefit" in itself, suggesting that a hotel agent speaking with a potential customer should offer "fairly complete information." Choi and Mattila conclude that offering detailed RM information relieves customers from suspicion that "the hotel was gouging customers" or that the customer could have received a more attractive rate "by haggling."

Ran Kivetz opens his piece by noting that his material is based on five studies involving "both real and hypothetical choices" for customers. The central question of his article is: what influences people's trade-offs between receiving a certain reward (a deterministic reward) from a hotel, versus taking a riskier gamble — for example, having their name entered into a drawing for a significant prize (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 a customer might earn for investing effort — that is, time and money. When a customer puts out effort, an expectation for reward is created; the higher the requirements, the greater the expectation.

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" increases when the effort being asked of the customer is "intrinsically motivating"; and (c) as the level of effort increases, there is a greater likelihood of an "inverted-U effect" on the preference for "sure-small" over "large-uncertain" rewards.

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

Kivetz reports on a survey of 186 respondents waiting in a major train station; participants were randomly given the choice between an FP requiring a 10-night stay (which involved effort) and an effortless free raffle. Of those who chose a reward, 59 of the 69 respondents (74%) chose the "sure small" reward. Additional findings from the Kivetz article include: (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" compared with individuals who did not find the activity pleasurable.

This last finding was supported through a survey of 232 east coast high school students who were offered the choice to participate in either a math survey or a poetry survey; in each case, students would be asked to evaluate new learning materials once a week for four weeks. Following the survey, participants could choose between a $20 bill (a "sure-small" reward) or a one-in-twenty-five chance at winning $600 in cash. Students who enjoyed math and were placed in that group tended to take the risk and aim for the $600; those who did not enjoy math went for the sure-small reward of twenty dollars, a pattern that held true for the poetry group as well.

For hotel marketing professionals designing loyalty rewards programs, one key concept that emerges from Kivetz's work is that asking potential customers to put forth effort for rewards will more likely result in them pursuing greater, riskier rewards if they are motivated by or simply enjoy the effort involved. It is therefore incumbent on the hotel to learn — through surveys — what their customers enjoy doing and what activities they would prefer to avoid.

In her research piece, Mattila puts forward the notion that simply offering rewards does not produce customer loyalty. The hotel must also foster "some form of emotional bonding" with the hotel's brand. While the topic of commitment has been addressed elsewhere 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 in guest loyalty. Mattila points out that the typical American traveler carries several hotel chains' rewards program membership cards. Indeed, the most recent study by J.D. Power and Associates at the time of publication reported that only one-third of the 13,335 travelers 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 their effectiveness. She cites a survey by Colloquy (conducted through focus groups) showing that guests could not distinguish among several frequent-guest programs once the logos were removed from the promotional materials. One factor contributing to this sameness problem is that frequency benefit programs do not build loyalty if the customer places most emphasis on accumulating "points" rather than on the superior offerings and services of the hotel.

Mattila concludes by restating that when a hotel guest becomes focused on accumulating points to earn coveted rewards and no longer relates to the quality of his or her stay — food, amenities, comfort — no real loyalty is demonstrated. To remedy this, hotels need to increase emotional bonding by "carefully analyzing the data provided by frequent-guest programs," enabling the hotel to more fully understand individual customers' preferences and portray a message to the customer that they truly care.