This is a controversial issue that few in the hotel industry publicly discuss, while many others remain completely unaware.
The "earn-and-burn" challenge is one that we’ve experienced firsthand, and it’s worth unpacking because it has substantial implications for how hotel commercialization will be addressed for the rest of the decade.
Earn and burn is an issue that has persisted since we attended this year’s IHIF NYU in early June. At the conference, CEOs of the big seven major hotel chains took the stage to boast about their total loyalty program enrollment numbers. (To read our past takeaways on the landmark hotel investment conference, go here.)
While you can scrutinize this macro figure in terms of the number of unique guests across the sum of these families of brands, what was also impressive during this grand roundtable was that each company’s strategy is to foster the next generation of loyalty by moving guests up their chain scale.
Their strategy: A younger guest, or new loyalty member, is introduced to their brand network at the 3-star or low-4-star level. Throughout their travel journey, they will next aspire to try a lifestyle or luxury product while within that brand’s umbrella.
These mega multinational hotel companies have brands across the chain scale, offering significant distribution, marketing and rate support for individual properties. Moreover, motivating travelers to move up the chain scale over time enables these companies to foster long-term loyalty.
But individual properties that are aspirational — or in the luxury category — have to stay cognizant of a pitfall that comes from this approach. By focusing on this ‘trade-up-the-chain’ customer, they may be curtailing ancillary revenue contributions. The results show that their revenue per available guest (RevPAG) may be negatively affected.
And therein lies the earn and burn challenge. Guests who are active in these loyalty programs are probably earning the bulk of their points at midscale and upscale flagged hotels. Then, after years of saving, they spend or burn their points on trips to the rarer, aspirational, design-driven hotels and resorts in the portfolio.
For reference, while this key performance indicator — RevPAG or total revenue per available room (TRevPAR) — will ultimately affect RevPAR in the aggregate, looking at revenue allocation for each guest helps to get granular in diagnosing gaps or finding opportunities for incremental growth.
This issue primarily arises because these ‘earn-and-burn’ guests are more likely to also be ‘heads-in-beds’ lodging guests, as opposed to those who fully utilize the property’s range of amenities. They are more likely to walk down the street to the nearest Starbucks than get a drink at the posh cafe in the hotel lobby. They may also redeem their points for stays during peak periods, potentially displacing other guests with higher RevPAG. And some very high earners, depending on the loyalty program, are entitled to complimentary suite upgrades when available, which compresses the most profitable inventory.
Many hotels are seemingly caught between a rock and a hard place in terms of needing brand support while also wanting some autonomy in terms of how they wield the power of these global loyalty programs.
Solutions to the earn-and-burn challenge are very nuanced for each property.
Resorts suffer less because there are fewer places to wander about off-property; on-site ancillary capture remains high. The key for resorts is to create frictionless rails for building these ancillaries at the packaging and prearrival stages rather than assuming it will happen in the same volume once guests are on-premises.
Some luxury properties, especially resorts, may consider transitioning to a length-of-stay minimum policy that simultaneously excludes OTA guests or other types of low RevPAR guests. However, this is harder to execute for urban hotels where corporate guests may only need one night.
It follows that channel management can work wonders for advising on the types of guests your hotel is acquiring. A rate strategy — and, therefore, the number of points for redemption — can really help. What’s also emerging is the ability to open and close room categories by channel according to what pace is intended, as well as other predictive models within a revenue management system (RMS).
A well-integrated commercialization team can help coordinate between the revenue and marketing teams to manage this specific task. Where sales come in is in activating other segments — namely, corporate; meetings, incentives, conferences and exhibitions; and other high-RevPAG groups, such as weddings. And as the fourth pillar within the commercial department, communications or public relations should be a foremost part of all topline awareness strategies, particularly for leisure transients, insofar as earned media impressions and affiliate marketing.
Above all, what these solutions indicate is that earn and burn is a challenge that can be overcome. For all types of luxury, lifestyle or design-forward hotels, a flag can be your best friend for long-term asset growth if its loyalty program is utilized correctly.
What are your thoughts and solutions to this challenge?
Adam and Larry Mogelonsky are partners of Hotel Mogel Consulting Ltd., a Toronto-based consulting practice. Larry focuses on asset management, sales and operations while Adam specializes in hotel technology and marketing.
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