Hotel Customer Loyalty: Who to reward new customers or loyal ones?
Hotel customer loyalty programs can be very tricky. Many of our hotel clients ask us which customer we think they should reward: new ones or current ones. Today, many hotels and resorts reward new customers as way to generate trial to their product, with some rewarding only those loyal customers who stay often at their properties. When considering adding a loyalty program for your hotel or resort, the question is which one of these strategies to pursue, either rewarding new customers or current customers.
The answer, just like most things, is “it depends”. Why it depends? Because every hotel has a unique scenario. However, we can provide you with a little guidance with two simple scenarios you might have and help choosing the right customer to reward in your loyalty program.
Two Camps of Thought about Customer Loyalty.
At Valorem Group we have two camps of thought about loyalty, the Business Camp that suggests that those customers who repeat often are in love with the hotel’s services and amenities, and that s/he would be willing to pay more for it, making discounting a decision that will negatively impact the bottom line. They believe that only new customers should be rewarded to generate trial and that current customers should be awarded little in the form of rewards other than low cost upgrades.
The other camp is the Loyalist Camp that believes that the only way to maintain a client is by offering them perks that keep them spending more money, more often, for more products/services. They claim that discounting leads to a loyal customer with a lifetime value that positively impacts the bottom line in the long term, and that new customers should not be rewarded without proving loyal habits. They claim that rewarding new customers only decreases the value of patronage to your loyal customers.
Two scenarios to help you decide whom to reward.
We think that both camps have valid points, but that the validity of the points depends on the hotel and resort’s competitive landscape. Lets first cover the two simple scenarios that hotels and resorts are very familiar with to help us decide whom to reward: 1) Hyper competition. We hear about it all the time, more hotels, more inventories, more options for the consumer and more tools which keep consumer focus on price. 2) A small concentration of customers that repeat often and produce most of the hotel and resorts revenue. Yes, it is the famous 80/20 rule, where 20% of your customers produce 80% of your revenue.
Discount in Highly Competitive Markets.
The rule of thumb is that if you have a highly competitive environment, you discount to new customers. If you have low competitive environment then you don’t discount to new customers, yet focus on loyalty. That should make sense to industry players who might have been at a resort in a not-so-popular area, and as more inventory comes on line have seen ADR and RevPar come down in an effort to drive trial to their resorts. Imagine for example the first hotels in Cancun and compare it to today’s hyper competitive arena. Hotels and resorts are clamoring for new business [heads in beds] and for that are continuously offering discounts for new guests.
If along with a large competitive set you also have an equal-spend-customer, meaning that every guest spends the same amount of money at your resort or hotel, then we see the path of rewarding new customers as optimal. Remember, offering rewards to frequent-stay guests will not ensure a repeat visitor if there are many low priced options from competitors in your market space. In these two scenarios, discounting to NEW CUSTOMERS is the absolute way to go.
High Competition, Low Concentration of High Paying Customers.
If on the other hand you have a high amount of spend among a small percentage of guests [the 80/20 rule exists], then you only discount to your most loyal and profitable guests. Yes, this means you measure the amount the dollar spend of those guests to make sure they are your best customers. It also means you gauge the amount of services that they consume on and off site and debit it to from their total spend [to make sure your margins are not already at an all time low].
When Your Loyal Customer is a Drain on your Budget.
Have you ever had that loyal customer that absorbs most of your front desk personnel’s time and that of the hotel wait staff , who returns more food then s/he consumes, and cancels their reservations more often? All of this is cost and should be tallied as a debit to that customer’s loyalty algorithm to ensure that you are not spending all of your staff’s time on one very loyal customer (unfortunately). Many ask us if they should “fire” their best clients, and we always say “NO WAY”. You should reassess their real costs and charge them more. Yes, charge more and provide little if any loyalty rewards for a return visit. We suggest you don.t tell them, just do it.
Are loyal customers really loyal?
One thing to watch out for too is the loyalty rate of your most faithful customers. So before you whip out the Perma Perks program for Mr. Smith, make sure that Mr. Smith’s company offices aren’t next door to your hotel and that he will stay there every time he is in town versus commuting 45 minutes to get to work in the morning from an alternative hotel. Make sure you are not on the way to the airport and that Mr. Smith doesn’t come in for a meeting and next morning move on to the next country. Make sure Mr. Smith isn’t an investment banker and that your hotel doesn’t already offer him/her a great image in the community. His rewards may be different. Everything must be looked at and the right program designed.
We suggest you break down your guests not by the amount they spend and number of times they visit you, but by the different types of customer “personas” carefully reviewing their needs and what provides them with value. Go ahead and reward differently for each group. Forget Gold, Silver and Platinum, segment by clusters, kind of like teams, and fulfill their needs. Maybe the investment banker needs a special table in the lobby that is reserved for him during his stay. That wont cost more, but is a huge advantage to him during his business trip.
One more note. Now that you are segmenting and rewarding, please segment internally. What I mean is, please don’t have any reservations agent respond to your most profitable clients, have a special and empowered employee handle those calls, nothing can be worse than being a top customer of a rewards program and then having to hear a customer service representative provide you with no solutions to your simple needs. Internal segmentation is critical for success of any real loyalty program. We will discuss this option in further posts.
Want more tips about how to market your resort, simply log into the Tips and News Section of the Valorem Group Website. If you are searching for corporate incentive programs and want to work with one of our partner hotels to create a corporate incentive program that will increase your bottom line, contact us at email@example.com
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“Way back in 2008”, the Vice President of our analytics group spoke at a corporate meeting about marketing strategies for 2014. He said “We were all continuously saying”, he continues, “it’s all good”. “Today, we no longer use the 2008 phrase, but we continuously compliment every action taken by anyone inside our companies no matter how insignificant. We see emails back and forth about how amazing everyone is and how hard we all work, then we sit in long budget meetings to talk about how we are not making our numbers”. He concluded.
How does that happen and who is to blame if anyone?
Is it marketing’s fault? Did sales mess it up for us? Was it the economy, more inventory on the market, price cutting by our competitors, or can we simply blame it on Obama’s new Affordable Care Act? The answer is nobody inside our company really knows. The reason we don’t know is because we spend little time analyzing failure and all of our time commending each other for a job well done. While we do not suggest stopping the flow of emails regarding a job well done, we also suggest investigation into the continuous crisis discounting and the number of incidences of these types of activities.
We created an Incidence Index to help guide our marketing and sales efforts. The index is a chart that details the number of times in one year that we have crisis discounting and track increases in these activities. We have noted a considerable increase in the use of crisis discounting or pricing over the last three-year period to the point where crisis discounting has become part of daily life at hotels and resorts.
The Valorem team tries to understand why bad things happen and how often they happen. Is it normal to have crisis discounts across Online Travel Agents 24-48 hours prior? If so, should the meeting atmosphere about not making our numbers really be a nice meeting about what has become standard operating procedure? If sales are down, then automatically open the flood gates by reducing prices. Cant we put this into our Pallisades program and let it run without holding continuous meetings to scold sales for their inability to make good on their plans?
What we have noticed over the last five years is that while marketing creates those beautiful and amazing marketing plans, which we all praise, with amazing strategies to grow and increase revenue embedded, the effectiveness of the plan is low.
In our Valorem Group offices we have two camps of thought, one that believes that it is the process of writing a marketing plan and the other that believes that it is the use of a plan in a flexible age. The first camp simply states that little time has been put into thinking about the best plan while the latter is concerned with the inflexibility of the plan.
While we wont bore you with a discussion about these two, we do want to go back to measuring failure as a path to success. We have measured the incidences of price decreases within 24-48 hours across a three-year period and have noted considerable increases in most of the companies analyzed [see, we used the word increases which is a positive word, to refer to the rate of failure, which we think you should send us a kudos for].
So to get down to the grain of it all, we take existing marketing plans with elaborate calendars and match it to the incidences of price decreases in a crisis mode. We analyze the cost of the marketing action, whether advertising, email campaigns, etc., and then identify those marketing practices which have had no impact on reducing the number of crisis events. We identify the weakness in the marketing plan and come up with solutions that will work. That doesn’t mean throwing solutions that have always been thrown at a problem in the past, it means giving some long and serious thought to activities and results based on your company’s Incidence Index. If you set as a goal to reduce the incidence of crisis discounting, you would be better off than setting the goal to increase revenue.
We then help marketing gurus get their groove back on by opening the doors to a broader look at the market and competitive set. The competitive strategy of price cutting is standard and we should plan on it, not use it as the excuse after plans fail. We need to prevent and establish countermeasures without competing on a lower price point. We stop and consider increased room inventory counts in our areas, competitive new market entry strategies, new airline lift in or away from your area and other market components that will always affect your plan, but are considered with less frequency.
We suggest you start your own incidence index at your property and gauge the effectiveness of your planning. If you want some ideas, reach out to us at any time. If you would like to see more tips about marketing, please click here https://valoremgroup.com/tips-news/