The hospitality and gaming industries can develop stronger frequent guest programs by paying attention to customer psychology and desires.

A new report from the Cornell Center for Hospitality Research (CHR) highlights ten principles that will make it more likely that loyalty programs actually develop loyal customers.

"Virtually all hospitality and gaming firms have some form of customer loyalty program," said McCall, a professor of marketing at Ithaca College and a CHR research fellow, "but so far there's not much evidence that these programs actually create customer loyalty. So, we looked at the basic concepts of customer psychology to focus on ways that these programs can actually build loyalty. One key point is to be careful with price-oriented rewards, which can turn the potentially loyal frequent guest into a discount-focused customer."

Voorhees, an assistant professor at Michigan State University (MSU), pointed out that most loyalty programs do encourage repeat purchases, but only up to a point. "Repeated purchases don't necessarily equate to loyalty," he said. "What we observed is that once customers hit a reward tier, they consider whether they can make it to the next tier or whether it's easier to get rewards from a competitor. Loyalty program designers need to find ways to keep customers active."

Added Calantone, the Eli Broad Professor of Business at MSU: "Several of our suggestions are meant to limit customers' switching behavior. For example, hotels could adjust their tier rewards, possibly by offering continual reinforcement, such as small, undocumented rewards to guests who are moving ahead within their existing reward tier."

The hospitality research shows that the ten most successful methods of improving loyalty programs are as follows: foster customer engagement, establish a two-way value proposition, capitalize on customer data, properly segment across and within tiers, develop strategic partnerships, develop dynamic tiers, cater to customers' desires for choice and fairness, avoid commoditization by differentiating, avoid the price sensitivity trap, and embrace new technologies.

The new hospitality industry performance report, "Building Customer Loyalty: Ten Guiding Principles for Designing an Effective Customer Reward Program," by Michael McCall, Clay Voorhees, and Roger Calantone, is available from CHR at no charge at:

www.hotelschool.cornell.edu/research/chr/pubs/reports/2010.html