There’s an idea one is taught in business school that one should invest a lot of money into loyalty systems because loyal customers are the cheapest.
The numbers are “obvious” – since one pays a certain amount to acquire new customers we obviously should spend a little less to keep loyal ones coming back. But should we really? And are loyalty programs really that cheap?
Let’s look at a few scenarios.
The chain hotels
Points and loyalty systems in hotel chains have a benefit and make sense when there are hundreds or thousands of hotels. Sales representatives who spend their lives on the road accumulate points during the year on the company’s expense and then redeem them with the family for the holidays. This story is so good it is almost a cliché in the hotel loyalty program world.
But it is clichéd because it actually exists. It works because there are hundreds of hotels that benefit from corporate contracts and the guests are happy with it. There is sometimes a not-so-hidden agreement between the employers and the employees that they can get some perks and extra miles rather than a raise in order to retain their silver or gold member cards. The upside is that a certain segment, mainly large companies and large chains, keep their employees happier and retain guests.
The downside is that these programs cost money. Those points become liabilities on the balance sheet and when they are redeemed they cost real cash to the hotel. Hotel franchise owners in popular tourist destinations aren’t so excited because they receive the inbound guests at very reduced rates (redeeming points) where roadside motels receive the guests at more lucrative rates (paying customers).
And as the competition increases the benefits to lure those loyal customers, these programs increasingly cost more money to hotel owners. But the larger the chain the more guest retention is possible, and there’s value in that.
