The Cost Of Guest Loyalty.
By Robert Mandelbaum
Monday, 25th June 2012
Brand loyalty programs appear to be driving an increasing number of guests to hotels, however this increased volume of room nights comes with an increased cost.

To gain an understanding of the costs associated with guest loyalty programs, PKF Hospitality Research, LLC (PKF-HR) analyzed "Loyalty Programs and Affiliation Fees" (guest loyalty fees) data from our annual Trends® in the Hotel Industry survey. 

The sample consisted of 1,583 hotels that reported guest loyalty fee payments each year during the period 2007 through 20111

Hotels that are operated directly by a national chain, and hotels operated by a non-branded management company, were included in the sample since both types pay guest loyalty fees.

Costs Outpace Revenue

From 2007 to 20111, guest loyalty fees increased at a compound annual rate (CAGR) of 3.4 percent for all hotels in the research sample.  Concurrently, the number of rooms occupied at these same hotels declined at a 0.2 percent CAGR, as did rooms revenue which decreased at an average annual rate of 2.4 percent.

Underscoring the imbalance between annual changes in costs, occupied rooms, and revenue, guest loyalty fees measured on a dollar-per-occupied room basis have increased from $2.48 in 2007 to $2.87 in 20111, while the average daily room rate declined from $108.95 to $99.07.  As a percent of rooms revenue, guest loyalty fees have risen from 1.6 percent in 2007 to 2.1 percent in 20111.

Using classic business measures, costs rising at a greater pace than their associated benefits would imply that guest loyalty programs do not provide a return on investment. 

However, since the amount lodging chains charge property owners is based on the volume and spend of loyalty program members at the hotel, it can be assumed that the rise in guest loyalty fees is the result of accommodating an increased number of guests that are members of the brand's loyalty program. 

Unfortunately most hotel managers do not track discreet guest loyalty related revenues on their financial statements, so we are unable to quantify the associated revenue benefit.

A Shift In Costs

Hotel franchise companies charge properties a variety of fees.  In our annual Trends® survey, PKF-HR captures these fees in four expense categories:

  • Royalty Fees
  • Advertising and Marketing Assessments
  • Loyalty Program and Affiliation Fees
  • Reservation Assessments
From 2007 through 20111, the combined payments made by the hotel owners in our research sample for all four franchise related fees declined at a 0.2 percent CAGR. 

This compares to the previously cited 2.4 percent decline in rooms revenue and a 2.8 percent decrease in total revenue during the same period.  While not totally in sync, total franchise related fee payments did move in the same downward direction as the change in revenue.

While total franchise related fees have remained relatively stable, the composition of the payments has changed from 2007 to 20111.  During this time period the portion of total franchise related fees assigned to guest loyalty programs and royalty payments has increased, while payments made for marketing and reservations assessments have declined.

The change in the composition of total franchise related fees is consistent with the anecdotal knowledge we gain from our clients.  In general, hotel owners are receiving greater direct benefit from the brand loyalty programs, as opposed to the 800 number call centers. 

In addition, since the brand national marketing programs are supposed to be a zero-sum charge back to the properties, the decline in marketing and advertising assessments can be attributed to the efficiencies of corporate internet marketing initiatives.

As hotel guest travel patterns and reservation methods shift, so too do the tactics needed to attract them and book their business.  Over time, the changing costs associated with these evolving marketing strategies and programs show up on the hotel operating statement.

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1 - Estimated year-end 2011

Robert Mandelbaum, Director of Research Information Services in the Atlanta office of PKF-HR ( www.pkfc.com ).  PKF-HR offers reports that allow owners and operators to benchmark the guest loyalty fees of a hotel to comparable properties ( www.pkfc.com/benchmarker ).  This article was published in the May 2012 issue of Lodging.

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