Program devaluations can kill the golden goose. And, it appears, we may already be seeing that with Hilton.
Ric Garrido points to a really interesting article in Hotel News Now on the value and evolution of loyalty programs which quoted hotel program execs on how the programs generate value and on the risks in disrupting that relationship.
In general frequent flyer programs are highly profitable. That’s why I’ve been so skeptical of totally remaking their business models (“revenue-based” airline frequent flyer programs).
Sure, members can be frustrated with redemptions on the airline side especially, not finding enough seats. That’s mostly an HR and technology problem. Agents aren’t incentivized to work hard for frequent flyers — they don’t get paid a bonus for successfully booking an award, or for spending lots of time on the phone with a customer looking for an award. And the computer systems looking for award seats don’t piece together every possible combination or even most combinations to find seats that are bookable.
But the programs inspire. They aren’t just a rebate for use on travel, they are a rebate that gets leveraged by the vast buying power (frequent flyer programs are ‘insiders’ booking millions of trips) and further leveraged by usually buying inventory at a deep deep discount that would go otherwise unsold. That’s why you don’t just get a penny per point in value towards travel, you get airline tickets (and sometimes even hotel rooms) that would cost thousands of dollars.
Customers become much more loyal when they successfully redeem their points. Early frequent flyer programs would deposit miles into your account if you got your balance down to zero. They were afraid that if you didn’t have built up miles, you might bolt to a competitor. What they actually learned was when you redeem your miles, you start accumulating faster because you’ve had it reinforced just how valuable the program is.
But really high redemption rates, at least as much as frustrations with the booking process, drive customers away. If a business class ticket to Europe is 500,000 points rather than 100,000 that’s going to alienate customers.
And frequent flyer programs shouldn’t want to alienate customers. Many are profitable billion dollar enterprises. I’ve often gone back to the role they’ve played over the past decade with the major US carriers — when United was in bankruptcy, the mileage program was the only consistent part of the airline. They used the program to attract debtor in possession financing and exit financing from their co-brand credit card partner, who also pre-purchased half a billion dollars worth of miles to provide additional liquidity. Major half billion and billion dollar mileage purchases were similar done with Delta’s and American’s co-brand partners. Even small Alaska Airlines sells over a hundred million dollars worth of miles a year to Bank of America, a huge deal when the airline might make or lose $15 million in a year.
So I don’t get why programs seek to upend themselves when they have a model that works better than they seem to have convinced themselves that they do.
Programs create value in several ways if you are a travel provider:
- Your program attracts business — it increases “wallet share” (customers spend more of their travel dollars with you instead of your competitors) and your members also tend to spend more per transaction than non-members.
- Your program saves you money. Sure, it costs money to run the program and give rewards, but there’s cost savings too. Your program members are much more likely to book directly through one of your channels rather than through other websites or agents that you have to pay commissions to.
- You sell points and make money. You sell -them directly to consumers, you sell them to credit card companies who then reward your customers (which in turn makes them more loyal to you!), you sell them to other retailers who want to use your currency as a rebate to incentivize transactions.
- You get really really rich marketing data, which you can use to get more business from your customers and also rent out to other businesses.
Devaluing your program risks all of these benefits, and risks the profit stream you already have.
Some programs believe their members simply won’t know the difference. Most are ignorant, they don’t pay attention, they don’t know what rewards should cost. They just want to know could they get the room or flight?
And some programs believe that points that have already been accumulated are effectively hostage, you can do with them as you will. And raising redemption costs might even mean members have to go out and earn more through your program to get the rewards they want.
That’s naïve. Not all members pay attention, but enough do. Your elites pay a lot more attention than general members, and elites represent an outsized portion of your participation and your travel revenue as well. They can and do move their business. Their points balances may be hostage, but they are not.
In fact, we may already be seeing the consequence to one program of its devaluation, or at least an early hint of it.
The CFO of the company which owns the Hilton Times Square and the DoubleTree Suites Times Square says the March 28 Hilton HHonors devaluation (bloodletting, really) is hurting their business.
“Some of the things that will affect our (revenue per available room) growth rate for the two products we have in Times Square is the change in the Hilton HHonors system,” said Bryan Giglia, senior VP and CFO for Sunstone. “They changed the points system, materially devalued the points program across the board, but it specifically impacted our two hotels. And while HHonors has been a fairly significant driver of room nights at our hotels in the New York market, that change has impacted RevPAR growth in those hotels in the second quarter.”
It’s not just Hilton HHonors members that don’t like paying 95,000 points for rooms that cost 40,000 – 50,000 just a few months ago. It’s hotel owners who are seeing customers book elsewhere because they’re giving up on the program.
While far from the best, HHonors remains frequently decent relative to its competitors. It used to represent a good value, now it’s just not terrible compared to Priority Club. But the dramatic shift is meaningful to members. And two high profile New York hotels are speaking out. This isn’t just about members wanting their perks…