A STRUCTURAL ANALYSIS OF
HOTEL SECTOR LOYALTY PROGRAMMES
Adrian Palmer
Una McMahon-Beattie
Rosalind Beggs
17 May 1999
International Journal of Contemporary Hospitality Management, forthcoming
Abstract
This paper analyses the variety of loyalty programmes that exist within the UK corporate hotel sector. A literature review leads to the proposition that in order to be cost-effective in stimulating repeat business, loyalty programmes should reflect the business environment in which they operate. Loyalty programmes vary in the extent to which they collect, analyse and use customer information. A conceptual framework is developed in which information management and customisation are related to each other. This proposition supports the argument that there is no single formula for the development of a successful loyalty programme within the hotel sector. Although questions are raised about how the effectiveness of a loyalty programme can be measured, the proposition that market characteristics, information intensity and level of customisation can influence the effectiveness of a loyalty programme, is accepted.
Key words
loyalty programmes, market segmentation, information management
INTRODUCTION
Customer loyalty has emerged as a major item on the marketing management agenda. Modern loyalty based programmes first achieved prominence in the airline sector and have since spread rapidly through the retail, car rental, hotel and financial services sectors, among many others. This apparent preoccupation with developing customer loyalty programmes is understandable in the context of studies which have suggested that it is more profitable to retain existing customers, than constantly seeking new customers to replace lapsed ones (Reichheld and Sasser, 1990; Hamilton and Howcroft, 1995).
The emergence of a plethora of loyalty programmes has intensified debate about the meaning of loyalty, with repetitious behaviour frequently being confused with an underlying sense of loyalty by customers to a particular supplier (Dick and Basu, 1994; Palmer, 1996; O'Malley 1998). The development of loyalty programmes in the 1990s has been associated with rewards given by firms in proportion to customers' expenditure with them. The falling cost of information processing has hastened the development of incentives which can be tailored to the needs and motivations of individual customers, with the result that many loyalty programmes appear to perform similar functions to traditional sales promotions tools. A paradox has appeared in that such programmes have often been introduced as part of a "relationship marketing" strategy, yet have been associated with a decline in customers' perceptions of the quality of their relationships with a firm (Barnes, 1994).
Once established within an industry sector, loyalty programmes have a habit of spreading rapidly. An early adopter of such a programme may gain a period of competitive advantage before competitors imitate their programme and it loses its competitive edge. It has been observed that in the later stages of development when loyalty programmes have become a sector norm, their overall benefit is low (Mowlana and Smith, 1993; Gilbert and Karabeyekian, 1995). True loyalty based on underlying emotional attitudes is more difficult to copy.
The idea of classifying service sectors in order to gain a strategic marketing insight is not new. Lovelock (1983) recognised that services comprised a disparate set of activities and that classification according to the form of the product could lead to a myopic and production led approach to marketing planning. Instead, it was argued that by classifying services in terms of key effects on customers, ostensibly different services could learn from marketing strategies developed by services which could be similarly classified in terms of their marketing needs. A valuable insight into the operation of loyalty programmes can be gained by classifying sub-sectors of service industries in order to understand the requirements of a loyalty programme and the likelihood that a strategy will succeed. A strategy which might be considered novel within one part of the hotel sector may be quite inappropriate to another.
The proposition of this paper is that hotels can be classified according to two important criteria which will influence the effectiveness of a loyalty programme: (i) the extent to which they offer a customised rather than a standardised service; and (ii) the extent to which they can be described as "information-intensive" or "information-poor" businesses.
This paper explores the literature on information intensity and service customisation and relates this to the development of loyalty programmes within the hotel sector. A conceptual framework is proposed and tested with a sample of UK hotels.
THE NATURE OF LOYALTY PROGRAMMES
For the purpose of this research, customer loyalty programmes in the hotel industry are considered to be based on reward cards. These cards have a dual function (Hartley, 1997). Firstly, reward cards encourage customers to make return visits by offering incentives to repurchase. This ties the customer more closely to the hotel and, in theory, creates customer loyalty. Secondly, they provide the company with information. By keeping track of an individual's stay and usage patterns through information technology the hotelier gains information such as frequency of stay, room rates charged, additional services purchased and preferred method of payment.
CLASSIFYING HOTEL SUB-SECTORS
The UK hotel industry is heavily fragmented in nature, being dominated by owner operated small to medium sized enterprises. This dominance has lead to a traditional classification of hotels into independently owned and chain affiliated hotels (O’Brien and Jones, 1995). Furthermore chain hotels can be designated as national or international, with the UK and France now in control of some of the best known chain and brand hotels in the world (Knowles, 1996). In the context of loyalty programmes, an alternative approach to classification would begin by considering hotels' positioning in terms of two key dimensions of loyalty programmes: their information intensiveness and the extent which they are able or willing to customise their service offer to the needs of individual customers. The bases and justification for this classification are discussed below.
Information intensity
Information has been cited as an important contributor to a firm's competitive advantage (Buckley, 1996). Conventional definitions of marketing emphasise the importance of understanding customers' needs, implying a requirement for appropriate methods of collecting, analysing and acting on information about customers' changing needs. Loyalty programmes represent a relatively inexpensive means by which an organisation can collect information about its customers (Hamilton and Howcroft, 1995).
Information has a valuable role to play in the planning, implementation and control of marketing programmes. Organisations have been seen as information processing systems in the way that the acquisition, analysis and dissemination of information are crucial to developing and sustaining a competitive advantage (Piercy, 1985; Hamiliton and Howcroft, 1995; Buckley, 1996). Organisations use information to monitor multiple aspects of their internal and external environments. Variation has been observed in the extent to which firms collect information about their environments. At one extreme, entrepreneurial, risk-seeking organisations may be happy to make risky decisions rather than a paralysis by analysis. Risk adverse organisations may see the careful collection and structuring of information as a means of reducing the risk inherent in their internal and external environments.
As the scale of business organisations has become larger, customers have become more remote from organisations’ principal decision-makers. For example, a small hotel owner might have considerable information about the needs of each of its customers, based on regular personal contact. By contrast, the managers of large multi-outlet chains must develop more formal structures and processes for handling information if they are to be able to understand and satisfy their customers' needs better than their competitors.
Information management has been crucial to the development of many loyalty programmes (Hamiliton and Howcroft, 1995; Christy, Oliver and Penn, 1996). Loyalty programmes based on storage of individual customers' demographic status and spending patterns can contribute significantly to an organisation's knowledge base. However, it has been noted that many loyalty programmes, including those in the hotel industry, do not seek to obtain information about customers' transactions, but merely give rewards in proportion to their expenditure (Ranby, 1995). Although less expensive to create, such programmes offer less opportunity to develop one-to-one marketing relationships which cater for the unique needs of each customer. They can therefore be seen as much more tactical than strategic and are less likely to develop affective dimensions of loyalty. Furthermore, even where information about customers is collected, this tends to be of a behavioural rather than an attitudinal nature.
Organisations in the hotel sector vary in the way they structure their information handling activities. At one extreme, many small hotels manage with only very loose information structures, relying heavily on informal methods of listening and communication. At the other extreme, hotels collect information in a structured manner, and regularly analyse and make use of the information that they have collected. In between, hotels may have in place some of the elements of a data collection system, but fail to use this information in a structured way. It has been observed that many organisations' ability to analyse and use information has fallen behind their ability to collect data (Wang, 1997).
Complexity and customisation of the service offer
A true marketing orientation has been defined as occurring where an organisation tailors its products to the precise needs of each individual customer (Webster, 1992). From the customer's perspective, loyalty at an emotional level reflects a feeling that no other organisation could match the complexity of their needs more precisely.
Within the hotel sector, there is great variation in the extent to which a hotel is able or willing to adapt its service proposition to the unique needs of individual customers. Customisation and product differentiation is related to customer segmentation. In the extreme case of a segment of one, a hotel would differentiate its service offer to the unique needs of each customer.
Hotels frequently seek to segment their markets by developing brands and sub-brands which are specific to the needs of each segment (for example Holiday Inn has segmented its markets by developing formats including Holiday Inn Express, Garden Court, Resort and Crowne Plaza). Within these brands, hotels can achieve further segmentation by differentiating their service offer to meet the unique and precise needs of each customer, e.g. noting preferences for a non-smoking bedroom or dietary requirements. Alternatively, some hotels have adopted the approach of standardisation in an attempt to achieve low unit costs. This is often associated with tight scripting and simplification of staff roles in order to minimise the opportunities for service failure.
A PROPOSED FRAMEWORK
It was argued above that two elements are essential for the development of an effective customer loyalty programme - a supply of information about customers' needs and an ability and willingness to customise the service offer to meet the needs of individual customers.
Figure 1 shows a position map in which the two dimensions are defined in terms of hotels' level of information intensity and the extent to which service provision is customised to the needs of individual guests.
(For illustrative purposes, ideal-type hotel categories are positioned on the map).
High National/International International
Budget Hotel Luxury Hotel
Information
Intensity
Small Privately Guest House
Low Owned Hotel
Standardised Customised
Adaptability of service to individual customers' needs
Figure 1: A proposed conceptual framework for classifying hotels, with hypothesised descriptive positions.
Hotels in the bottom right of the position map are characterised by a small scale of operation in which a lot of information about operational and strategic issues can be held in the mind of a single owner. Formalised methods of collecting information are therefore minimal, but this does not prevent the owner being able to adapt the service offer to individual guests' needs, through a combination of listening, personal experience and the absence of formalised procedural rules. This type of business is capable of achieving high levels of customer loyalty based on the personal efforts of the owner, but manages without the infrastructure of a formalised loyalty programme.
The bottom left hand corner of the position map typically comprises hotel businesses, which have grown beyond the capacity of their owners to control on an informal basis. The ability to informally customise services may be hindered by the need to refer back to the owner for decisions where requests for customisation are out of the ordinary. At this stage of development, this type of business is unlikely to have developed a sophisticated system for collecting information.
With further growth, hotels in this category may be able to reach the level of information intensity achieved by those in the top left of the position map. Formalised information structuring can be crucial to a firm's transition from a small local operator to a national one.
However, developing a structured information system is not in itself a business objective. The challenge is to use this information to deliver superior value to customers. In the context of customer loyalty, a crucial element of this use of information is the ability to customise the service offer so that it meets the individual needs of customers. The top right hand section of the map characterises larger hotels that have used multiple methods of information management to deliver customised services.
A natural pattern of evolution can be identified along both dimensions, in that firms have a tendency to become more intensive in their use of information and more customised in their approach to market segmentation (Webster, 1992). There is however an apparent paradox that hotels in the most evolved quadrant (highly customised and information intensive) are seeking to achieve the standards of service achieved by many small owner-managed hotels which succeed on the basis of informal information sources and flexible operating systems which can be easily adapted to customers' needs.
METHODOLOGY
The validity of the conceptual framework presented in Figure 1 was tested with reference to a sample of UK hotels.
A sample of 12 hotels was selected randomly from those which satisfied the following criteria: they were individual brands (i.e. the brand was the unit of analysis rather than the corporate entity); they had all made some attempts to develop customer loyalty through customer relationship development programmes, however formal or informal their structure; they all operated in the UK. The sample of hotels is listed in Appendix 1. In the analysis, these have been recorded randomly as hotels 1 to 12 in order to preserve the confidentiality of some of the information provided in respect of the hotels' information management processes.
Survey research was undertaken during spring 1998 by a combination of postal questionnaire, telephone interview and "mystery shopper" observation.
To position the sample of hotels on the map, the two scales were operationalised. In respect of information intensity, the literature was used as a basis for defining ten dimensions, which were subsequently validated by discussions with a sample of hotel operators. The ten dimensions of information intensity are shown in Appendix 2. A point was given for each dimension of information intensity that a hotel met. An overall score out of ten was derived by a summation of the ten dimensions. Information for each of the ten items was obtained through a combination of postal questionnaires and telephone interviews.
A similar approach was used for positioning each hotel in respect of the extent to which it is able and willing to customise its service offer to the needs of individual guests. In using multiple indicators, the aim of these items was to assess the flexibility of a hotel, rather than the extensiveness of its range of facilities offered. Ten criteria were based on published literature and validated and refined by reference to a group of hotel operators. The ten dimensions of customisation are shown in Appendix 3. To increase objectivity of the measure, the ten items were measured using mystery customer techniques. The researcher posed as a potential guest with special requests and the score recorded whether the hotel had the flexibility to meet these requests (e.g. for a non-smoking room or an orthopaedic bed). Hotels were scored from 1 (low level of customisation) to 10 (high level of customisation).
ANALYSIS
Scores for the two dimensions of information intensity and customisation are plotted in Figure 2. It can be immediately seen that most hotels lie close to a trend line, indicating that information intensity and customisation are in some way linked.
High 10
9
8 *9 *2 *3 *8
Levels of 7 *6 *5 *1 *7
Information 6 *4
Intensity 5
4 *10 *12 *11
3
Low 2
2 3 4 5 6 7 8 9 10
Low High
Levels of
Information
Intensity
Figure 2 Position Map of hotels by level of information intensity and customisation
Based on the above results, it is suggested that there is no single formula for the success of a customer loyalty programme. It would appear that hotels positioned in the top right corner utilise the information gathered through their loyalty scheme in the most effective manner. Loyalty programmes in this area are most likely to be successful with the hotel responding effectively to its business environment. Additionally, loyalty is likely to be of both an attitudinal and behavioural nature thus resulting in ‘true’ customer loyalty.
The bottom left corner reflects little systematic gathering of information by the groups and minimal customisation. Hotels in this area tend to be highly standardised and are therefore best positioned to offer loyalty programmes based on reward for repetitious purchase.
The research suggested those positions in the top left and lower right areas of the position map are not common. The former represents hotels which are information intensive, but achieve only low levels of customisation. This represents a lost opportunity for a hotel, as the information, which it expensively collects, analyses and disseminates, is not being put to use in creating unique value for individual customers. Hotels may spend a transitional phase in this area while information systems are developed, but before marketing and operational programmes are developed which are based on the information generated. Case number 4 represents a hotel which is probably in transition as it develops its service offer.
The bottom right area of the position map was under-represented, that is, the sample found no hotels which were highly customised but low in information intensity. This may have been a consequence of excluding from the sample small private hotels and guesthouses, which manage with highly informal and personal information systems. With a large corporate organisation, it seemed difficult to achieve high levels of customisation without a centralised system to record and analyse information.
CONCLUSIONS AND MANAGEMENT IMPLICATIONS
This study has suggested a link between the information intensiveness of a hotel and the extent to which it is able to customise its service offer. Within a sample of medium and larger sized hotels, customisation and information intensiveness were seen to be closely correlated with each other. The closer the correlation the greater the ability of the hotel to customise their loyalty programmes.
There is no single type of loyalty programme that is suitable for all hotels. Different categories of hotels require different approaches to the development of their programmes dependent upon their business environment. Most strikingly, the study appears to indicate that managers of budget range hotels are least likely to benefit from complex loyalty programmes based on a mixed service offering including enhanced levels of service and room upgrades. Hotels in this category cannot offer increased levels of service because of their highly standardised product. As such, they should consider loyalty programmes based simply on rewards such as reduced room rates or free nights. In order to operate this type of programme, customer profiling data should be kept to a minimum with a focus on usage patterns.
Some medium to large sized hotel groups appear to be investing in the collection of high levels of customer information without making effective use of this data by tailoring the service to the customer needs This represents not only a waste of financial resources but also, a missed opportunity. Managers of these hotels should review the extent of data collection and its value for both the organisation and the customer.
Alternatively, a significant number of hotels in the sample collect a good deal of information about their customers and capitalise on this by offering a customised service. This provides an ideal basis for the development of a sophisticated loyalty programme offering tailored rewards.
Surprisingly, one major hotel group was able to achieve high levels of customisation without gathering large amounts of customer data. However, this group operates within the luxury hotel market where customisation is a customer expectation. Managers within this market require creativity to differentiate their loyalty programmes.
Managers should note that it is not certain whether customisation alone can improve profitability, which is also affected by considerations of operational costs. Customisation may result in additional costs that puts a hotel at a competitive disadvantage in respect of price sensitive but less demanding market segments. To penetrate such markets, costly information systems may yield less benefit than ruthless cost cutting to achieve a price advantage in the market place. In such circumstances, loyalty programmes may seek to buy loyalty through reward programmes, rather than developing attitudinal loyalty through the creation of a unique service offer.
Despite the limitations of the study, there are a number of important implications for management. Firstly, the development of a management information system must begin by asking how it can best add value to a hotel's service offer, as perceived by guests. It is important to understand the needs of different market segments, for while some segments are prepared to pay a premium price for a highly customised service, others are happy to accept a more generic type of service at a lower price. It follows that the management information system for hotels serving the former segment will involve more parameters than the latter. This leads to the second point that hotels should avoid unnecessary collection of information. Information has a cost, both to the hotel in terms of the financial cost of collecting and processing the information, and to the hotel guest in terms of the psychological cost of divulging personal information. If a hotel is not going to use information which it has expensively collected (e.g. by offering only a very standardised service), it could probably reduce its costs and hence improve its competitive position within some market segments by reducing its information collection activities.
Finally, it was noted earlier that large hotels' information systems aim to recreate in the corporate entity the personal knowledge of customers that could be held in the mind of a small hotel or guest house owner. Collecting information alone will not bring about this corporate personalisation. To ensure that guests' unique needs are met in a seamless manner, information must be disseminated and acted upon within a corporate culture that stresses the need to treat guests as unique individuals. Without this culture, a hotel could be failing not only by unnecessarily adding to its information costs, but also failing to deliver its promises to guests in respect of individual customisation.
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