Loyalty Traveler- Hotel Value Proposition

Loyalty Traveler- Hotel Value Proposition

Hotel loyalty points are a type of travel savings account for frequent guests. The allure of free hotel stays for points is member incentive for repeat business with a hotel company, owning a hotel-branded credit card and making partner purchases to earn additional hotel points.

Hotel points are a safety net against fluctuating hotel rates. The loyalty member with hotel points has a hedge fund to leverage against high hotel rates that may align precisely with his or her vacation dates. Free stays are the primary value proposition for the loyalty member, particularly leisure travelers who may never have sufficient annual hotel stays to earn many of the value-added benefits of elite membership. The option to use points for a free hotel night is the member’s benefit for years of hotel brand loyalty and point accumulation.

The largest global hotel companies almost all use an exchange system where every hotel has a fixed award price set by its award category for a free night. In 2010, we’ve seen extensive award category changes. Carlson made significant reductions in points needed for its highest category hotel awards making goldpoints plus more valuable. Hilton HHonors made major upward shifts making its hotel points less valuable. Marriott Rewards shifted 650 hotels–46 percent up and 54 percent down. Starwood Preferred Guest announced no award category changes for 2010.

Hilton and Marriott released only some names of hotels at the highest award levels that would be changing redemption amounts before the changes took effect. Marriott revealed 12 days in advance less than seven percent of impending changes for categories 5 to 8, naming 14 hotels moving up and 29 hotels shifting down. Hilton and Marriott both chose to withhold a complete list of hotel category changes until the new award levels took effect. Members wonder why.

Hotels.com released its Hotel Price Index in March 2010. Survey data showed an average rate decline of 14 percent across the globe for 2009 compared to 2008. Furthermore, hotel prices are on average lower in 2010 than 2004. So why does the average hotel award cost more in 2010 than 2004? There should seem to be a direct correlation between a hotel’s average room rate and a hotel’s award category.

The lower award categories, where the vast majority of hotel properties reside, show a steady trend of point devaluation over time.

A look at Starwood Hotels (SPG) offers insight to award category changes and trends over the past five years. Only U.S. hotels in the SPG system since 2005 are compared to see actual shifts and avoid the currency exchange variable in hotel rates.

Hotel average rates increased from 2005 to 2008 and the SPG annual hotel award category realignment saw steady upward movement. For many hotels the award cost increased at a faster pace than accelerating room rates during these four years. Hotels in the lowest categories steadily migrated up in the seven-category SPG structure.

The SPG award structure has not changed since 2005, except for the addition of category 7 hotel awards. Only 16 luxury class hotels reside in category 7. The points required for an award remain the same for categories 1 to 6. Primarily what has changed for the member seeking a less than jet set experience is the distribution of hotels within award categories.

The lowest award levels are now more sparsely populated. Starwood’s lowest category 1 award level contained 31 hotels in 2005. There are eight hotels remaining in category 1 in 2010 and only one of these is a hotel that dropped from category 2 since 2005. Starwood category 2 had 97 U.S. hotels in 2005. Currently, only 49 hotels from 2005 are still in category 2 and the rest increased 75 percent in point cost. Half of the nearly 100 SPG U.S. hotels in category 3 from 2005 cost 42 percent more points in 2010. No hotels from 2005 in category 4 are lower cost awards, while 23 of 51 hotels require 20 percent more award points in category 5.

SPG members anticipated downward movement in award categories for 2010 to reflect the steep decline in hotel rates over the past 18 months. Marriott and Hyatt have a better overall bell-curve hotel distribution across their award structures for the time being. Hilton and Starwood are both top heavy award programs.

Loyalty members see hotel programs as a value proposition. Hotel companies know statistically their loyalty program members provide sustained and valuable revenue exceeding the cost of the programs. Loyalty members are more profitable for hotel companies in spite of the small subset who strategically maximize loyalty program benefits and promotions.

More transparency and equity in the awards-for-points system will serve both members and the hotel program well in sustaining the win-win loyalty proposition as travelers and the hotel industry weather the persistent economic rough seas of 2010.

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