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Building a Platinum Loyalty Program Data can reveal who the best customers are and how they should be rewarded. Monday, December 07, 2009 Beth Kormanik

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In a scene in the new movie Up in the Air, George Clooney's character connects with a fellow road warrior by comparing their numerous memberships and elite status in hotel and airline loyalty programs.

While the characters are fiction, the millions of people enrolled in loyalty programs show that their actions are rooted in reality.

"There is a real clear expectation by consumers that the people they make purchases from will offer a reward program," said Michael McCall, a research fellow at the Center for Hospitality Research.

But are they such a great deal for the airline and lodging industries that sponsor them?

It's a question the industries are wrestling with, according to two experts who discussed the issue during a recent webinar sponsored by business analytics consultant SAS and the Cornell University Center for Hospitality Research.
McCall quoted a Millennium Group hotel manager who said earlier this year, "You know, I have this customer reward program. It's is kind of expense, but I feel like I have to have a program because everyone else has one. Honestly I don't know what, if anything, it actually does for me."

The answer, McCall said, is for hotels, airlines and others with reward programs to use data to evaluate their programs.

McCall said the modern-day loyalty program began in 1981 with American Airlines' AAdvantage program, which allowed air travelers to redeem frequent flier miles for free or discounted tickets on a future flight.

The question became, are companies giving their best customers the best rewards? He noted that airline programs rewarded the number of miles flown, not necessarily the number of dollars spent.

An effective loyalty program, according to McCall, will lead guests to increase purchase frequency, decrease their price sensitivity, turn them into advocates for the brand or property, increase their spending and develop a sense of community among program members.

A poll of webinar participants asked whether the reward programs they personally belong to create brand loyalty. A majority, 56 percent, said yes, that they belong to high-quality programs that offer excellent rewards. Another 21 percent disagreed, saying the programs offer discounts on things they would purchase anyway, while 17 percent claimed they would be loyal even without a program. Four percent reported that they have too much invested in a program to switch to a competitor.

In another poll question, participants were asked to cite the primary accomplishment of their company's own loyalty program. Most said they increase the frequency and/or monetary amount of customer purchases. A smaller number believed the data acquired from customers was the most important, while others said the programs make customers happy, increasing retention.

Not all loyalty program members are created equal, McCall noted.

In a study of members of lodging loyalty programs, he looked at eight years of data from 100,000 loyalty program members -- that's 1.2 million transactions -- and measured spending on the room, F&B and other services; room upgrades and downgrades, other actions to the account and demographics.

The results showed that three-quarters of guests did not increase their spending simply because they enrolled in a loyalty program, while some guests appeared to increase spending slightly.

But McCall identified a third group of guests who accounted for the majority of spending. These are the most valuable guests, he said, but often they were grouped in the top tier with other guests who spent less money.

"These results suggest a need for an ultra-premium category that is reserved for a very small minority who are likely to be your best customers," he said. "This is probably a group we want to pay close attention to."

For the other groups who are not spending as much, McCall said "this suggests a need to probe what benefits are missing from the program." Hotels interested in optimizing their program structure and rewards should consider making innovations to the rewards they offer. The most valuable customers should get the best rewards, McCall said, but don't get carried away. Think carefully about what the customer values, he advised.

"Instill rewards that drive engagement to foster true loyalty," he said. "Figure out what it is they might want." Instead of room discounts, for instance, offer a limousine ride to the hotel from the airport. Guests may be just as happy with an experience or service rather than a room discount. These kinds of rewards also have the benefit of taking the focus off of room rate. Offering a $100 discount will create price sensitivity and have guests thinking about the price and not the experience of the property.

"It's something that isolates them in a way that makes them feel special and unique," he said.

Before making any changes, though, McCall advised management to think carefully about tier program management. "Rewards are easy to give and hard to take away," he said. "Once you've earned your platinum status, to be moved to silver or tinfoil status is not something you want."

Customer loyalty programs give companies a lot of data about their guests, but David Ogden, principal analytic consultant at SAS, said hotels do not always take full advantage of that data.

"A lot of what I see is collecting data they couldn't get otherwise and analysis they wouldn't be able to do," he said. "[But] oftentimes they're not measuring the economic value of what they're generating."

For a deeper insight into customers, Ogden introduced the concept of Customer Lifetime Value (CLV). This calculation is a measure of cash flow from a customer, past and future. It's a basis for measuring true economic value, and challenges brands to identify their most valuable customers and increase the cash flow from them.

"The basic concept of CLV is fairly straightforward: sum that money up from when they first do business with you until they are no longer a customer," he said. "Once you measure CLV, figure out how to improve your loyalty program to increase future value."

The actual calculation of CLV involves complicated math with multiple variables, Ogden said. (For anyone curious as to what they look like, Ogden directs you to sas.com for a white paper on the topic.) A consultant like SAS can take care of the math and help hotels build a retention program to increase the margins for each customer.

"How do I get them from $400 to $500?" Ogden said. "What levers can I pull to manage the value?"

The results of CLV research can help hotels focus marketing and loyalty programs on attracting and keeping the most profitable guests. "CLV will add a layer of complexity to how you evaluate your loyalty program," Ogden said.