Getting it right: mixing social and economic rewards in hotel loyalty programmes

Managers should deploy economic benefits as a defensive relational strategy and social rewards as an offensive relational strategy to ensure customers become long-term patrons of their facilities

PUBLISHED : Friday, 24 March, 2017, 3:00pm
UPDATED : Friday, 24 March, 2017, 9:43pm

Hong Kong’s tourism industry has contributed to about 5 per cent of its gross domestic product in recent years. Despite continuous drop in visitor arrivals over the past two years, a 87 per cent hotel room occupancy rate last year marked a slight 1 percentage point rise over 2015.

Now more than ever, individual hotels must work out effective and innovative marketing strategies, not only to ride out the current storm, but become more competitive in local and regional markets.

The concept of relationship marketing is prevalent in the local hotel industry, giving rise to numerous loyalty or reward programmes that offer preferential rewards for members in proportion to how often they patronise an establishment. The rewards offered – usually in the form of economic or social benefits – make members feel special, important, and appreciated. Common examples of economic benefits include free room, room upgrade and discounts. Social benefits, on the other hand, are more diverse and include any preferential treatment or personalised recognition and attention given to individual customers.

Yet, when so many hotels are offering loyalty programmes, how to make yours stand out in the market? What kinds of rewards are more effective in building up relationships with valued customers? How to balance effectiveness versus cost and operational impact on the operators?

The effectiveness of a loyalty programme is contingent upon the customer recognising its benefits. Customers tend to keep subscribing to loyalty programmes because of economic benefits they gain. Economic rewards are also particularly effective in establishing initial relationship with new customers. However, monetary incentives alone are not sufficient for retaining customer commitment.

Moreover, economic rewards have their downsides: being easily duplicated by competitors, and with high implementation cost. Tricky redemption policies, such as blackout dates and expiry dates, further make customers doubtful about the financial benefits.

In comparison, social rewards usually work better in building stronger relationships since social benefits enhance a customer’s intrinsic reasons for sustaining and reinforcing emotional commitment, and thus his attachment to a specific hotel.

To explore the impact of economic and social rewards on the relational behaviour of loyalty programme members, we have conducted an online survey of 334 participants privy to various hotel reward programmes in the United States to study their responses towards economic reward based initiatives versus those based on social benefits.

The findings indicate that a social reward dominant programme is more effective than an economic reward oriented programme in encouraging favourable relational behaviours toward programme providers.

The relational effects are especially vivid in the following areas: openness (e.g. “I would feel comfortable telling the hotel when I think something needs improvement.”), advocacy (e.g. “I would defend the hotel to others if I hear someone speaking poorly about it.”), and immunity (e.g. “Even if I hear some negative information about the hotel, I would not switch to a competing hotel”).

When programme members are exposed to customised, intrinsic offerings from a loyalty programme, they tend to be intrinsically motivated to stay with a hotel by developing emotional attachment, internal enjoyment, and affective commitment.

The distinct nature of social and economic rewards provide programme operators with an insight into how to strike a balance between offering social and economic rewards.

Numerous reward programmes in the hotel industry offer similar economic benefits that are effective in attracting rational customers and prompting them to remain loyal. However, economic benefits can be easily duplicated by competing hotels. Customers are likely to switch to hotels that provide better economic offers.

In short, financial incentives alone cannot prevent customers from switching to competing programmes. To foster relational behaviours and gain long-term benefits from a loyalty programme, hotels should consider offering both social and economic rewards.

Moreover, delivering economic offers to customers is costly.

To foster relational behaviours and gain long-term benefits from a loyalty programme, hotels should consider offering both social and economic rewards

Therefore, loyalty programme managers should consider economic benefits as a defensive relational strategy and social rewards as an offensive relational strategy in stimulating the relational behaviours of customers. Given the limitations of financial benefits in maintaining long-lasting customer relationships, and the practical need for striving cost-effectiveness in business operation, loyalty programme operators should adopt the strategy of providing economic rewards just to the extent of merely meeting, rather than greatly exceeding, members’ expectations. At the same time, they should develop and offer more customised offers, which can intrinsically motivate customers to foster a sense of belonging and emotional attachment to their hotel.

Executives in local hotels can take reference of some good examples from overseas for stretching their innovation in designing customised social rewards that appeal to their target customers. For example, in Thailand, the Phuket Marine Biology Centre and the Royal Thai Navy annually release baby turtles at a leading hotel in cooperation with the governor of Phuket and that hotel’s guests.

In such event, only members of the hotel’s superclass loyalty programme are allowed to release baby turtles into the sea, which is a rewarding and memorable experience, especially for children. Such a preferential treatment is so meaningful to customers that they become reluctant to switch to any competing hotel that offers equal or even better financial incentives.

No success formula can be simply copied direct for guaranteed effects, especially releasing turtles is not encouraged in Hong Kong. Yet, executives in the hotel industry can certainly gain an insight from our study on how to balance social and economic rewards in designing loyalty programmes. The findings can help them further explore ways to amplify relational value to establish sustainable relationships with their hotel customers.

Lee Jin-soo is an associate professor of the School of Hotel and Tourism Management at the Hong Kong Polytechnic University