Ten Key Principles for Building Customer Loyalty Programs
Customer loyalty programs are a ubiquitous part of the business landscape for airlines, hotels, and other hospitality firms. Despite the proliferation of these programs, it’s hard to prove that they consistently encourage repeat purchases, let alone create actual customer loyalty. Intended as a switching barrier, loyalty programs have proved easy for competitors to imitate. At their worst, they have become just another cost of doing business that is largely driven by whatever competitors are willing to offer.
“A strategically managed loyalty program could fulfill its original goal of encouraging customers’ repeat purchases and behavioral loyalty.”
Instead of being a “hole where money goes,” a strategically managed loyalty program could fulfill its original goal of encouraging customers’ repeat purchases and behavioral loyalty. A recent report from the Cornell Center for Hospitality Research puts forth ten specific principles as building blocks for hoteliers to manage loyalty programs to fulfill their original intended purpose. I’ll outline those ten principles in this article, point out loyalty program components that have been demonstrated to be effective, and explain the drivers of loyalty program success. All ten principles are based on the findings of customer psychology research. You can read the full report at no charge from the CHR website1: “Building Customer Loyalty: Ten Principles for Designing an Effective Customer Reward Program,” by Michael McCall, Clay Voorhees, and Roger Calantone.
As an important caveat, these researchers’ ten principles are not a cookbook solution. In fact, there is no universal recipe for a successful reward program. Instead, the purpose for offering these ten principles is to provide the basis for each hospitality firm to determine the most effective way to identify their best customers and structure their loyalty program rewards to enhance guests’ loyalty. Perhaps the most critical principles offered by these researchers is to find genuine ways to rewards guests, differentiate your loyalty program from those of competitors, and realize that managing a loyalty program is a dynamic process in which managers must continually reevaluate program rules and rewards in a way that responds to guests’ needs.
The following are the ten principles: (1) foster consumer engagement, (2) establish a two-way value proposition, (3) capitalize on consumer data, (4) properly segment across and within tiers, (5) develop strategic partnerships, (6) develop dynamic tiers, (7) cater to consumers’ desires for choice and fairness, (8) avoid commoditization through differentiation, (9) avoid the price sensitivity trap, and (10) embrace new technologies.
Principle 1: Foster consumer engagement
The most successful loyalty programs offer their members as many ways as possible to interact with the program and the hospitality business through repeated, positive experiences. The idea here is to create an emotional connection between your customer and all aspects of your business, including your brand and your employees. The greater this connection, the higher the likelihood that your customers will have actual attitudinal loyalty, and not just participate for the rewards.
The touchpoints could be as simple as a friendly reminder to guests to update their personal information in your database, or it could be some kind of reward program for participation in your brand’s virtual community. Certainly the time-honored practice of remembering frequent guests’ birthdays is an example of a touchpoint, but the key here is to engage the guests for increased awareness of your program and your brand.
Principle 2: Establish a two-way value proposition
As you design your program, determine which rewards have the highest value for your customers but also have the lowest internal cost for your company. By doing this, you’ve created a two-way value proposition, in which both parties (you and your customers) believe they have received something of value beyond what they have put into the arrangement.
“Despite their frequent use, discounts are a poor choice for loyalty program rewards because they interfere with the brand’s overall value proposition.”
This principle requires that you identify rewards that your customers truly value that do not involve monetary discounts. Modeled on the airlines’ concept of earning a free flight, discounts are a common aspect of loyalty programs (a free night’s stay, a discounted room rate). Despite their frequent use, discounts are a poor choice for loyalty program rewards because they interfere with the brand’s overall value proposition. Since guests cannot inspect a service in advance of purchasing it, price is an important indicator of quality for services. By offering discounts, a hotel is making an inadvertent, potentially negative statement about the value of its services. Moreover, guest use benchmarks to determine what is an appropriate amount to pay for a particular service. Even when discounts are connected with rewards programs, they create a new (lower) benchmark for guests’ pricing expectations. Graphs of hotel industry pricing statistics demonstrate the speed with which average room rates fall when hotels offer discounts and the remarkably slow recovery of those average daily room rates. Worst of all, a hotel may find itself offering a discount to guests who are more than willing to pay the full purchase price. Several studies2 at Cornell have found that when a hotel offers rates below those of its competitors, that simply costs the hotel money, compared with its competitive set.
The researchers acknowledge that implementing this principle is a challenge, because creating rewards that give your guests value with little internal cost requires that a company know what its customers truly value. Not all customers will place similar value on a particular reward, so you need to learn about your guests, and you need to keep your reward tiers somewhat flexible. The next principle discusses the need for customer data in more detail. You might offer your frequent guests free use of a service that normally costs money, say, use of the fitness center or the wifi. Or you might extend additional appropriate services—and certainly a room upgrade costs little but often confers genuine value.
Principle 3: Capitalize on customer data
Although knowing what your guests really value is a challenge, new technology helps with this process, and your loyalty program itself is a source of guest marketing information. Your guests voluntarily share their spending habits and other personal information as part of loyalty program membership. So hospitality operators should make certain that their programs are set up to capture as much of this information as possible, and can make use of it. Beyond that, your guests now voluntarily share their hopes and dreams on social media, often in the context of reviewing a stay at your hotel. By applying appropriate analytical tools, you can determine what your guests most desire.
Another benefit of having information about customer spending is that it allows you to match your loyalty program expenses against customer spending, thereby establishing the value of the program as it relates to gross operating profit.
Principle 4: Properly segment your loyalty program tiers
Matching the number and structure of loyalty program tiers to guests’ preferences is critical. That is, your loyalty program reward tiers must make sense to your guests and create appropriate distinctions for the top tier members. McCall, Voorhees, and Calantone give the following example of a hotel loyalty program that probably is not achieving its objectives. This program sets its first reward tier for a guest who has stayed 10 nights. So far, so good; it’s easy to earn this reward. But the next tier doesn’t open up until the guest stays 50 nights in a 12-month period. Because this would seem out of reach for many otherwise steady customers, they might be lured away to a competitor’s program after earning the 10-night reward. The program might also have a structural problem, in that it treats a guest who has stayed, say, 15 nights the same as one who has stayed 40 nights—and these are probably two quite different guests. I say it “might” have a problem, because this program could also be exactly correct for this hotel. It depends on whether the program fits customers’ needs.
The point here is that the structure of any loyalty program should not imitate that of other loyalty programs. Instead, managers can examine spending patterns to identify noticeable groups of guests. Tiers can gain flexibility if tier membership is defined not only by spending (or room-nights) but also as it relates to other activities. Thus, guests who have similar spending amounts might be in parallel program tiers depending on other factors. Perhaps you could create a “breakfast club” or a “fitness group.” Again, it depends on guests’ preferences, needs, and spending patterns.
Principle 5: Develop strategic partnerships
“If your analysis shows that program members are seeking rewards that are external to your firm, this might be an opportunity to create a strategic alliance that extends the breadth of loyalty rewards.”
The universe of loyalty program rewards is large and diverse. McCall and his associates have found that most loyalty program members prefer rewards that are directly tied to your operation. However, they also have found that this preference varies by reward tier, with top tier members using the program points to acquire luxury gifts. If your analysis of customer desires shows that program members are seeking rewards that are external to your firm, this might be an opportunity to create a strategic alliance that extends the breadth of loyalty rewards.
McCall and his associates envision a corporate alliance of this kind as an arrangement in which one company’s loyalty program members can exchange their rewards points for those provided by another supplier. This is more than the usual setup where one provider just pays another for points. Instead, this could be a true partnership arrangement of mutual benefit to both companies.
It’s also possible that a loyalty program would benefit by being operated by a third-party firm that specializes in program design and development. Again, any structural change in the loyalty program should be driven by customer needs and desires.
Principle 6: Develop dynamic tiers
I alluded to this point in the discussion of Principle 4. The fact is that your guests will hold a portfolio of memberships in loyalty programs—and they will move from one brand’s program to another, depending on their status within the reward tiers. One goal for any company’s loyalty program is to create barriers that discourage this movement. By establishing dynamic tiers (with “fuzzy” barriers) you can encourage guests to stay with your program. Again depending on guests’ needs, a hotel might offer small rewards after a guest has crossed a major tier division. Those small rewards could even be undocumented and would thus would come as a pleasant surprise and create another touchpoint for the guest.
This idea is based on the concept of developing continuous reward schedules, with seemingly (or truly) spontaneous interim rewards. Here’s where a hotel could sometimes offer guests in certain tiers the chance to upgrade a room (or choose any available room type). The cost to the hotel is effectively zero, but utility to the guest could be considerable, if only for the recognition of being offered such a choice. Restaurants could operationalize this principle by offering upgraded beverage service (not free drinks, but perhaps a nicer bottle of wine) or provide the chance for prime-time reservations when appropriate. Casinos are in a particularly good position to offer continuous rewards as befitting their players’ activities.
Principle 7: Cater to customers’ desires for choice and fairness
Flexibility must be a key aspect of contemporary loyalty programs. Airlines recognize this principle by offering seats throughout their system for top-tier members, as well as other potential applications for mileage points. Similarly, hotels and other hospitality operators should avoid offering a narrow set of rewards, but instead should offer guests choices of how and when customers redeem their points. While the rewards should always make sense within the context of your brand, your guests will appreciate knowing that they are not “locked in” to a particular set of rewards. In particular, you could encourage continued participation in your program by expanding the choices for higher-tier members.
By the same token, a loyalty program’s structure must seem fair to customers. This means not only that the structure should make sense, but also that customers will feel that they have earned their rewards. This is another argument for maintaining several tiers, even if you offer mini-upgrades or spontaneous rewards within a tier. The rewards must align with the amount of effort required to earn them. For top-tier members, the challenge of earning those rewards reinforces their feelings of exclusivity, and gives other tier members something to aspire to. Rewards can be established in a way that sets each tier apart.
Principle 8: Avoid commoditization through differentiation
“Differentiation is the hospitality industry’s holy grail, since a differentiated property can command a price premium and since it is so easy for competitors to match or to trump every innovation.”
Differentiation is the hospitality industry’s holy grail, since a differentiated property can command a price premium and since it is so easy for competitors to match or to trump every innovation. Loyalty programs are one way to establish differentiation that competitors will be hard pressed to copy. If all hospitality firms in a particular competitive space are offering similar loyalty programs, then those programs have become commodities, which is the situation that I highlighted at the beginning of this article. As a commodity, the loyalty program is merely a cost of doing business—table stakes, as the saying goes.
Creating and maintaining differentiation is easier said than done, to be sure. The details of any particular loyalty program are entirely transparent to all competitors, who then can pick and choose which aspects to imitate (or try to surpass). The idea presented above of unstated mini-rewards and other flexible aspects of program management may differentiate a program, and McCall and his associates suggest that adding experience- and service-based rewards could also set apart a particular loyalty program. Top-tier members might appreciate the chance to exchange views with the general manager or executive chef—a process that would help the hotel or restaurant build its brand. Such interaction would create more touchpoints for guests, in keeping with Principle 1.
Principle 9: Avoid the price sensitivity trap
I discussed the dangers of discounting in conjunction with Principle 2, but McCall and his associates consider this matter sufficiently dangerous that it merits being stated as a separate principle. To reiterate, when a loyalty program’s chief benefit involves some form of price concession, the guest most likely will begin to focus on the price of the room, meal, or flight, to the exclusion of other benefits. Guests are already sufficiently price sensitive without reinforcing that tendency. Another danger of discounting that I did not mention above is that guests may dial in an expectation of a discount on every transaction. You can probably think of a retailer where customers would never pay full price, simply because they know that eventually there will be a “20-percent off” sale. Unless that is specifically your business plan, you don’t want to be that retailer. By focusing guests’ attention on price over service or other considerations, you open up the possibility of a price war. When customers place disproportionate emphasis on price over quality, the firm with the lowest cost structure can control pricing. At worst, all competitors engage in a race to the bottom.
Principle 10: Embrace new technologies
As I mentioned in connection with Principle 3, we now have technology that provides the opportunity to learn about guests as never before. This is a two-way street, since many of your guests carry a smart phone or other electronic equipment that allows you to share loyalty program benefits and other information about your operation. Not only can your guests easily update their loyalty program profiles, but they can arrange reward exchanges or redemptions. Just as grocery stores use “buying club” cards to identify customers’ most frequent purchases and buying cycles, casinos can track guests’ gaming choices, and hotels and restaurant can likewise note patterns in guest bookings. Once again, the goals are to improve the customer experience, differentiate your property and its loyalty program, and encourage customer loyalty.
In closing, I want to emphasize that this article is based entirely on the work of researchers Michael McCall, Clay Voorhees, and Roger Calantone. McCall, who is a visiting scholar at the Cornell University School of Hotel Administration, is professor and chair of thedepartment of marketing and law at Ithaca College. Voorhees is an assistant professor of marketing at the Eli Broad College of Business at Michigan State University, where Calantone is the Eli Broad Professor of Business, chair of the marketing department, and director of the Institute for Entrepreneurship. The principles in this article should be considered to be broad building blocks for a loyalty program. By using these points as guiding principles, we hope that you will be able to build a program that accomplishes its original goal—developing true guest loyalty.
Glenn Withiam is director of publications at the Cornell University Center for Hospitality Research.
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