Loyalty programs as a marketing tactic in the hospitality industry

By Priya Chetty on April 22, 2020

For establishing a consistently performing business and securing a long-term upsurge of profits, attracting new customers is not enough. Managers need to put in the effort to ensure the retention of existing customers through instigating efficacious policies pertaining to customer satisfaction and loyalty. Customer satisfaction in the hospitality industry is challenging as it is predominantly reliant on the quality of service provided. A meticulous management approach emphasizing on customer satisfaction can enhance customer loyalty and thereby have a positive impact on the corporate and brand image.

Investigating service characteristics that form the basis of consumer decision making is important for the hospitality industry. When this is absent, customers generate a negative impression affecting customer patronage (Guzzo, 2010). In the present scenario, customer relationships are cardinal and customer satisfaction is the focal point of business goals. It is only through amicable and long-term customer relationships that a loyal consumer base can be built for a proliferated rate of return. Therefore, the hospitality industry is investing to enhance service quality and perceived value to accomplish superior levels of customer satisfaction and loyalty. Moreover, it enhances word of mouth publicity and drives positive consumer behavior (O’Neill and Mattila, 2010).

Loyalty programs used in the hospitality industry

Today, loyalty programs are being widely used as a marketing strategy by businesses across the globe to acquire consumers’ loyalty. Customers are using loyalty cards extensively, not only for shopping but also for indispensable transactions. Loyalty programs have established a commendable position in a company’s relationship management strategies. Some segments and related sectors of the hospitality industry such as lodging, travel, aviation, etc. extensively adopt loyalty programs to cultivate more loyal customers.

Loyalty programs in the hospitality industry are complex and evolved, offering many tangible and intangible benefits such as cash reward, discounts, and verbal or non-verbal recognition. (Berman, 2006) classified loyalty programs into four main types:

  • Type 1: Swiping membership card for discounts without a minimum expenditure requirement.
  • Type 2: One free item on the purchase of a specific number of items.
  • Type 3: Points awarded for every purchase.
  • Type 4: Personalised service based on customers’ purchase history.
Types of loyalty programs in hospitality industry
Figure 1: Types of loyalty programs in hospitality industry

Out of these, three types are popularly used in the hospitality industry; types 2, 3 and 4. The food and beverage industry uses type 2. This type of loyalty program is easy to administer and monitor. It functions on the basis of number of items purchased and not the frequency of purchases. For example, a person who purchases ten cups of tea on a single day earns the same number of points as a person who visits the café every day to purchase the same amount.

Type 3 is widely used by airlines and hotel chains, where customers earn reward points for every purchase, irrespective of the amount spent per transaction. These points are then redeemed for free flights and other freebies. This type of loyalty program is easy to administer and the data helps the companies to evaluate customers’ purchase patterns over a period of time.

Type 4 is used by all types of establishments in the hospitality industry such as spas, restaurants, nightclubs, airlines, travel companies, etc. The company monitors loyal customers’ purchase record to customize reward offerings to them rather than design a universal reward.

Importance of loyalty programs

Loyalty programs are heavily employed as marketing tactics especially by large businesses as this tactic works well with volumes. Furthermore, if the demand for a particular product category is unyielding then the impact of loyalty program diminishes as the market is heading towards saturation. Likewise, if the product category is extremely inflatable, the loyalty programs shall assist in attaining a competitive advantage (Liu and Yang, 2009). However, companies do not instinctively adopt loyalty programs but have multiple objectives to accomplish through customer loyalty initiatives. The prominent objectives are:

  • To enhance knowledge regarding customers: Customer loyalty programs facilitate the company to obtain crucial information about customers with their prior approval. The customers willingly furnish the requisite information in anticipation of availing the complete benefits of membership of the program. This information is extremely beneficial in designing promotional strategies for target markets. It also helps in tailoring their services according to the demands of the customers (Ting, 2018).
  • Utilizing the knowledge gained to improve sales of least and most popular services: Hotel trade is all about service quality and an assortment of services that need to be regularly evaluated and improvised to suit the dynamic demands of the customers (Gumaste, 2017). In medium and large scale hotel chains, customization is strongly linked to information intensiveness, i.e. the amount of information collected about the consumer. Based on the consumer’s purchase history such as preferred payment method, the period of stay, type of room, etc. hotels customize their offerings to suit their needs.
  • Escalating customer retention and purchase rate: A well-prepared loyalty program ensures customer retention through elevated switching costs of the members which restrict the customer to shift to another brand. For example, consumers have to spend time and money researching alternatives (Xie, Xiong, Chen, & Hu, 2015). The higher the switching costs, the more is the probability of customers remaining loyal. Presently not many loyalty programs have high switching costs. However, hotels tend to leverage knowledge gathered to develop innovative offerings that cannot be imitated by counterparts and also attaining consistency in services across all the branches (Oracle, 2005; Arunmuhil and Arumugam, 2013; Narteh, Agbemabiese, Kodua and Braimah, 2013).

Case example of Taj hotels

The efficacy of loyalty programs as a marketing tool has gained high popularity across the globe. The Taj hotels were compelled to instigate their loyalty programs, Taj InnerCircle, to corroborate international hotel chains. Furthermore, these chains were at an advantage of global marketing and customer loyalty programs and just providing equitable quality services. This was not sufficient to outdo the competition (Delong and Vijayaraghavan, 2002). Taj hotels have its point wise reward system. Since points are perceived as a commodity, Taj had to strive to live up to the brand image and customer expectations. However, maintaining these loyalty programs require a lot of investment and maintenance. Loyalty programs in the hospitality sector have grown extremely common and thus, looking at it as a differentiator is irrelevant. Taj’s loyalty programs allow guests to redeem their earned points for rooms and other facilities at their hotels.

The Taj Group of Hotels is also into co-branded loyalty programs. It has tied up with many leading international aviation companies like British Airways, Virgin-Atlantic, Emirates, Sri Lankan Airways, Singapore Airlines, and Delta Airlines to facilitate their frequent flyers with multiple paybacks. This has provided tremendous impetus to the Taj as an international brand of hospitality (Sahoo and Vyas, 2007).

References

  • Arunmuhil, K. and Arumugam, A. (2013). An Impact of Loyalty Cards on Consumer Purchasing Behavior in Apparel Industry, International Journal of Business and Management Invention, 2(5), Pp.73-92
  • Berman, B. (2006). Developing an Effective Customer Loyalty Program. California Management Review, 49(1), 123–148.
  • Delong, T. and Vijayaraghavan, V.(2002). Taj Hotel Group, Harvard Business Review, October 15, 2002.
  • Gumaste, R. (2017). A Study on the Perception of Loyalty Membership Programme from the View Point of Hoteliers and Customers (A Study on the Four and Five Star Hotels in Pune). Atithya: A Journal of Hospitality, 3(1), 34–38.
  • Guzzo, R. (2010). Customer Satisfaction in the Hotel Industry: A Case Study from Sicily, International Journal of Marketing Studies, 2(2), Pp. 3-12
  • Liu, Y. and Yang, R. (2009). Competing Loyalty Programs: Impact of Market Saturation, Market Share and Category Expandabiltiy, Journal of Marketing,73, Pp.93-108
  • Narteh, B., Agbemabiese, G., Kodua, P. and Braimah, M. (2013). Relationship Marketing and Customer Loyalty:  Evidence from the Ghanaian Luxury Hotel Industry, Journal of Hospitality Marketing & Management, 22(4), Pp. 407-436
  • O’Neill, J. and Mattila, A. (2010). Hotel Brand Strategy, Cornell Hospitality Quarterly, 51(1), Pp. 27-34
  • Oracle, 2005. Ensuring Customer Loyalty: Designing Next- Generation Loyalty Programs, Oracle White Paper, February, 2005 .
  • Sahoo, D. and Vyas, P. (2007). Loyalty Programme  Applications in Indian Service Industry, Working Paper No.2007-07-11, Research and Publications, Indian Institute of Management Ahmedabad, Pp. 1-26
  • Ting, Y. P. (2018). The effectiveness of retail loyalty program benefits on tourists (Case in Macao). ISCONTOUR 2018 Tourism Research Perspectives: Proceedings of the International Student Conference in Tourism Research. Macao: BoD – Books on Demand.
  • Xie, K., Xiong, L., Chen, C.-C., & Hu, C. (2015). Understanding Active Loyalty Behavior in Hotel Reward Programs Through Customers’ Switching Costs and Perceived Program Value. Journal of Travel & Tourism Marketing, 32(3), 308–324.
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