Loyalty programs have long been a feature of the hotel sector, but little evidence has traditionally supported whether they represent an operationally and financially beneficial form of investment.
Yet a recent study by Dr. Dan Wang of the School of Hotel and Tourism Management (SHTM) at The Hong Kong Polytechnic University and her co-researchers provides evidence that hotels are justified in making such investments, and provides suggestions for how hotels can further capitalize on the benefits.
Loyalty programs were introduced almost forty years ago with American Airlines’ “frequent guest” program, and soon caught on in the hospitality sector. By 2015 the loyalty programs of major hotel groups had more than 300 million members, although the researchers caution that the number of “real active members” was probably far lower.
A loyalty program can increase repeat business and profits, while also reducing the need to attract new customers. Loyal customers are more likely to perceive the company’s products and services with good value and are less sensitive to the company’s price premium.
Loyalty programs also bring challenges. They are expensive to set up and maintain, and the profits they generate are hard to separate from those of other marketing efforts. The researchers note that it is challenging for marketers to create and manage profitable loyalty programs because there are high costs associated with adding value to customers’ experiences, especially given their widely differing needs and interests. Overinvestment is an ongoing concern.
The researchers warn that loyalty programs also open up the possibility of “service encounter failures”, which can sour the relationship between a hotel company and its customers and thus damage its reputation. Another potentially negative effect is that bystander customers sometimes perceive unfairness in comparison to the loyalty customers.
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