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Ten principles for designing an effective customer reward program


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Building Customer Loyalty

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Ten principles for designing an effective customer reward program

  1. 1. Building Customer Loyalty: Ten Principles for Designing an Effective Customer Reward ProgramCornell Hospitality ReportVol. 10, No. 9, June 2010by Michael McCall, Ph.D., Clay Voorhees, Ph.D., and Roger Calantone, Ph.D.
  2. 2. Advisory Board Ra’anan Ben-Zur, Chief Executive Officer, French Quarter Holdings, Inc. Scott Berman, U.S. Advisory Leader, Hospitality and Leisure Consulting Group of PricewaterhouseCoopers Raymond Bickson, Managing Director and Chief Executive Officer, Taj Group of Hotels, Resorts, and Palaces Stephen C. Brandman, Co-Owner, Thompson Hotels, Inc. Raj Chandnani, Vice President, Director of Strategy, WATG Benjamin J. “Patrick” Denihan, Chief Executive Officer, Denihan Hospitality Group Joel M. Eisemann, Executive Vice President, Owner and Franchise Services, Marriott International, Inc. Kurt Ekert, Chief Commercial Officer, Travelport GDS Brian Ferguson, Vice President, Supply Strategy and Analysis, Expedia North America Chuck Floyd, Chief Operating Officer–North America, Hyatt The Robert A. and Jan M. Beck Center at Cornell University Anthony Gentile, Vice President–Systems & Control, Back cover photo by permission of The Cornellian and Jeff Wang. Schneider Electric/Square D Company Gregg Gilman, Partner, Co-Chair, Employment Practices, Davis & Gilbert LLP Susan Helstab, EVP Corporate Marketing, Four Seasons Hotels and Resorts Jeffrey A. Horwitz, Partner, Corporate Department, Co-Head, Lodging and Gaming, Proskauer Kevin J. Jacobs, Senior Vice President, Corporate Strategy & Treasurer, Hilton Worldwide Cornell Hospitality Reports, Kenneth Kahn, President/Owner, LRP Publications Vol. 10, No. 9 (June 2010) Paul Kanavos, Founding Partner, Chairman, and CEO, FX Real Estate and Entertainment © 2010 Cornell University Kirk Kinsell, President of Europe, Middle East, and Africa, InterContinental Hotels Group Cornell Hospitality Report is produced for Radhika Kulkarni, Ph.D., VP of Advanced Analytics R&D, the benefit of the hospitality industry by SAS Institute The Center for Hospitality Research at Gerald Lawless, Executive Chairman, Jumeirah Group Mark V. Lomanno, President, Smith Travel Research Cornell University Suzanne R. Mellen, Managing Director, HVS David Meltzer, Vice President of Global Business Development, Rohit Verma, Executive Director Sabre Hospitality Solutions Jennifer Macera, Associate Director Eric Niccolls, Vice President/GSM, Wine Division, Glenn Withiam, Director of Publications Southern Wine and Spirits of New York Shane O’Flaherty, President and CEO, Forbes Travel Guide Center for Hospitality Research Tom Parham, President and General Manager, Cornell University Philips Hospitality Americas School of Hotel Administration Chris Proulx, CEO, eCornell & Executive Education 489 Statler Hall Carolyn D. Richmond, Partner and Co-Chair, Hospitality Practice, Fox Rothschild LLP Ithaca, NY 14853 Steve Russell, Chief People Officer, Senior VP, Human Resources, McDonald’s USA Phone: 607-255-9780 Michele Sarkisian, Senior Vice President, Maritz Fax: 607-254-2922 Janice L. Schnabel, Managing Director and Gaming Practice Leader, Marsh’s Hospitality and Gaming Practice Trip Schneck, President and Co-Founder, TIG Global LLC Adam Weissenberg, Vice Chairman, and U.S. Tourism, Hospitality & Leisure Leader, Deloitte & Touche USA LLP
  3. 3. Senior PartnersThank you to our Hilton Worldwidegenerous McDonald’s USA Philips HospitalityCorporate Members STR Taj Hotels Resorts and Palaces TIG Global Partners Davis & Gilbert LLP Deloitte & Touche USA LLP Denihan Hospitality Group eCornell & Executive Education Expedia, Inc. Forbes Travel Guide Four Seasons Hotels and Resorts Fox Rothschild LLP French Quarter Holdings, Inc. FX Real Estate and Entertainment, Inc. HVS Hyatt InterContinental Hotels Group Jumeirah Group LRP Publications Marriott International, Inc. Marsh’s Hospitality Practice Maritz PricewaterhouseCoopers Proskauer Sabre Hospitality Solutions SAS Schneider Electric Southern Wine and Spirits of America Thayer Lodging Group Thompson Hotels Travelport WATG Friends American Tescor, LLC • Argyle Executive Forum • Berkshire Healthcare • Cody Kramer Imports • Cruise Industry News • DK Shifflet & Associates • • EyeforTravel • • Gerencia de Hoteles & Restaurantes • Global Hospitality Resources • Hospitality Financial and Technological Professionals • • • Hospitality Technology Magazine • Hotel Asia Pacific • Hotel China • • Hotel Interactive • Hotel Resource • HotelWorld Network • International CHRIE • International Hotel Conference • International Society of Hospitality Consultants • iPerceptions • JDA Software Group, Inc. • The Lodging Conference • Lodging Hospitality • Lodging Magazine • LRA Worldwide, Inc. • Milestone Internet Marketing • MindFolio • Mindshare Technologies • Parasol • PhoCusWright Inc. • PKF Hospitality Research • RealShare Hotel Investment & Finance Summit • Resort and Recreation Magazine • The Resort Trades • • Shibata Publishing Co. • Synovate • TravelCLICK • UniFocus • USA Today • WageWatch, Inc. • The Wall Street Journal • WIWIH.COM
  4. 4. Building CustomerLoyalty: Ten Guiding Principles for Designing an Effective Customer Reward Program by Michael McCall, Clay Voorhees, and Roger Calantone Executive SummaryR eward programs are incentives designed to create loyalty among customers and to provide the best rewards to the “best” customers. These programs have proliferated in the hospitality industry for nearly three decades, with little direct evidence that they actually build either attitudinal or behavioral loyalty. While program implementation seems to have expandedexponentially, the actual components and structure of any given program appears to be driven more bywhat the competition is offering rather than demonstrated effectiveness. This report (1) identifiesprogram components that have been shown to be effective, and (2) offers a series of guiding principlesthat hospitality and marketing managers should find useful in designing and modifying their rewardprograms. Although there is no universal recipe for reward program success, the ten guiding principlesadduced in this report could assist managers in leading the conversation on how to make their programsmore effective. Key points include finding genuine ways to rewards guests, differentiating the loyaltyprogram from those of competitors, and continually reevaluating tier requirements to ensure continuedguest participation.4 The Center for Hospitality Research • Cornell University
  5. 5. About the Authors Michael McCall, Ph.D., is professor and chair of the department of marketing and law in the School of Business at Ithaca College and a visiting scholar at the Cornell University School of Hotel Administration ( He has published over 40 articles in such journals as the Journal of Food Service Business Research, International Journal of Hospitality Management, Journal of Applied Psychology, and Decision Sciences Journal of Innovative Education, and Cornell Hospitality Quarterly. Clay Voorhees, Ph.D., is an assistant professor of marketing at the Eli Broad College of Business at Michigan State University ( His chief research interest involves social exchange and influence, including customer experience management, customer relationship development, return on marketing investments, and segmentation models. Among other journals, he has published in the Journalof the Academy of Marketing Science, Journal of Retailing, Journal of Service Research, Strategic Management Journal, Journal of Services Marketing, and Cornell Hospitality Quarterly, and he has made numerous conference presentations. Roger Calantone, Ph.D., the Eli Broad Professor of Business, is chair of the marketing department and is co- director of the Institute for Entrepreneurship at the Eli Broad College of Business at Michigan State University ( His chief research interests include product design and development processes; decision support; pricing and price perception; and economic impact. Among his many publications are articles in the Journal of Product Innovation Management, Journal of the Academy of Marketing Science, Journal of World Business, Journal of Business Logistics, and European Journal of Marketing. He has received numerous awards for publishing excellence and for his conference presentations.Cornell Hospitality Report • June 2010 • 5
  6. 6. COrnell Hospitality ReportBuilding Customer Loyalty: Ten Guiding Principles for Designing an Effective Customer Reward ProgramT by Michael McCall, Clay Voorhees, and Roger Calantone he concept of a customer loyalty program can be traced at least as far back as 1896 when Sperry and Hutchinson launched its Green Stamp program. Under this program, Sperry and Hutchinson sold “green stamps” to retailers that were then provided to customers as a reward for their patronage. Customers could paste their stamps into books, and redeemthose filled books for a variety of products in the S&H Green Stamp catalog.1 The green stampphenomenon provided a clear demonstration of the potential of reward programs, as it created anadvantage for retailers that offered the stamps and created a risk for retailers that did not offer such aprogram. Building on this basic concept of customer rewards, American Airlines launched the firstcontemporary hospitality industry customer reward program in 1981.2 Soon after, numerous hospitalityand retail firms followed suit and developed rewards programs focused on rewarding their “best”customers, with the goals of securing their loyalty.1 “History of Loyalty Programs,” FrequentFlier,‌ p-005.htm (as viewed February 3, 2008). ff2 “American Airlines AAdvantage Program Details, AAdvantage, (viewed May 23, 2010).6 The Center for Hospitality Research • Cornell University
  7. 7. Thirty years later, most hospitality and retail firms main- effectiveness can be categorized into the following threetain some kind of frequent guest rewards program. Despite main “buckets”:the programs’ proliferation, many questions remain unan- • The structure of the loyalty program,swered as to how these programs can be designed and man-aged for best effect. We have frequently heard the following • The structure of the rewards, andtwo questions from managers: • Customers’ fit with the loyalty program.• What are the key success drivers among the best The recommendations that we put forth in this report programs?, and are built on these three drivers. We examine how each of• How can a program differentiate itself in a sea of the program components interact to produce both positive commoditized reward programs? and negative effects for both the firm and the customer.4 Exhibit 1, on the next page, presents an overview of these Noticeably missing from the hospitality and marketing principles.literature is a comprehensive set of guidelines to address thesequestions and give direction to hospitality managers on how Principle 1: Foster Customer Engagementthey might manage their programs. In this report we seek to A key feature of any successful loyalty program rests inprovide a starting point for managers looking to launch or its ability go beyond simple repeat purchase behavior toreinvent their rewards program. We do this by identifying ten the point that it engages the customer through numerousguiding principles based on concepts of human behavior and positive interactions. Repeat business does not necessarilyconsumer psychology that we believe provide insight into the mean loyalty,5 and true loyalty is more than repeat purchas-best and worst of customer reward program practices. es. Loyalty programs should be aimed at fostering a deepBasic Components of a Loyalty Program emotional connection between the customer, its employees, brands, and the broader organization. This type of connec-References to improving the customer experience and foster- tion only comes from repeated positive interactions anding loyalty have appeared in the hospitality literature dating experiences with a brand.back many decades, including the initial bibliography of hos- Programs that are designed to reward a broad setpitality publications issued in 1960 in the Cornell Hotel and of “loyal behaviors” like engagement activities should seeRestaurant Administration Quarterly.3 Over the years, scores stronger involvement in the program and an increase inof academics have tackled theoretical and practical issues both attitudinal and behavioral loyalty among its mem-surrounding customer loyalty and its antecedents. A recent bers. For example, at the basic level, customers could bewave of research has attempted to deconstruct the factors provided rewards for simply updating and confirming theirthat underlie loyalty program effectiveness. In a review of thisresearch, we suggest that the main drivers of loyalty program 4 M. McCall and C.M. Vorhees, “The Drivers of Loyalty Program Success: An Organizing Framework and Research Agenda,” Cornell Hospitality Quarterly, Vol. 51, No. 1 (February 2010), pp. 35-52.3 Kay Spinney and Blanche Fickle, “A Bibliography Especially Prepared For 5 R.N. Bolton, R. K. Kannan, and M. D. Bramlett, “Implications ofHotel And Restaurant Administration and Related Subjects,” Cornell Hotel Loyalty Program Membership and Service Experiences for Customerand Restaurant Administration Quarterly, Vol. 1, No. 2 (August 1960), pp. Retention and Value,” Journal of the Academy of Marketing Science, Vol.43-103. 28 (2000), pp. 95-108.Cornell Hospitality Report • June 2010 • 7
  8. 8. Exhibit 1 Ten guiding principles for customer reward program design and management Foster Consumer Engagement • Loyalty is more than repeat purchases, and programs must evolve to foster a deeper emotional connection between the customer and firms. Establish a Two-Way Value Proposition • Programs should ffer rewards that simultaneously provide high value to the consumer and carry low internal costs. Capitalize on Consumer Data • Marketers can take use the potential of the loyalty program to capture data on your consumers that can be used to better meet their needs. Properly Segment Across and Within Tiers • Rather than simply adopting tier structures based loosely on precious metals, managers should revisit their programs and segment based on actual spending, engagement, and consumer profiles. Develop Strategic Partnerships • Because consumers crave variety, programs can develop two-way partnerships, and thereby increase their value to consumers. • Another type of partnership involves more collaboration with academic researchers armed with an array of statistical tools, psychological and economic theories, intellectual curiousity, and the time to take a deep dive into emerging research questions on loyalty program management. Develop Dynamic Tiers • Managers need to develop switching barriers to keep program members loyal to the organization as they clear spending hurdles for tier membership. One mechanism for this is to offer smaller and potentially spontaneous rewards between the major tier milestones to encourage continued customer loyalty and deter switching. Cater to Consumers Desires for Choice and Fairness • Consumers love choice and control, and so programs can offer a relatively broad set of rewards, based on consumers desires. Programs can also give members flexibility in their redemption intervals and choices. Avoid Commodization through Differentiation • Just as marketing managers would never blindly copy the marketing mix of their competition, loyalty managers must strive to develop points of differentiation associated with their program and then properly position their programs against the competition. Avoid the Price Sensitivity Trap • By focusing only on future discounts, programs may inadvertently convert loyal customers to price-sensitive ones. Thus programs should disguise or downplay price-related benefits. Embrace New Technologies • Programs should take full advantage of mobile devices to offer rewards. Products like FourSquare and other PDA-enabled programs offer the potential to reward consumers in real time for their rewards and the implications for creative program managers are limitless.8 The Center for Hospitality Research • Cornell University
  9. 9. contact information as part of annual program maintenance. Principle 3: Capitalize on Customer DataA simple effort like this one ensures accurate data and cre- As we said, programs should be based specifically onates a reason for customers to visit program websites and see customer preferences. When we asked one gaming executivetheir membership benefits. Building on this baseline, com- how he felt about his loyalty programs, he replied that theypanies should consider providing rewards for other forms of were the best marketing research expense on his balanceengagement, such as membership in brand communities or sheet. He believed that even if the program provided nospecialized brand events. Generating this level of customer direct improvement in customer spending, the amountinvolvement increases opportunities to foster emotional of personal information and purchase data that he canconnections with customers and offers the indirect benefits collect via his program makes it his single best source ofof increasing awareness of the program among a broader marketing research data. Thus, hospitality operators shouldcustomer base. ensure that their programs are optimized to capture dataPrinciple 2: Establish a Two-way Value on customers, as well as drive loyalty. Loyalty and researchProposition initiatives should be integrated to use customer insights not just for their loyalty programs, but for the broader businessDesign your program so that it offers rewards that provide operations.high value to the customer yet carry low internal costs. As hospitality firms seek to control costs in all areas,A core tenet of customer relationship marketing is that managers often find themselves striving to justify loyaltysatisfaction is a product of a mutually successful exchange programs’ existence. By documenting the steps that connectthat comes about when both parties believe that they have program data to customer spending, program managers canreceived something of value.6 While customers will almost demonstrate the value of their programs. Better yet, throughcertainly accept product discounts as a reward for patronage, collaboration with the marketing research department, con-they may not necessarily place a high value on those dis- trolled studies can be developed that compare expenditurescounts. As we explain in a moment, discounts may actually between program members and non-members, which coulddiminish the value proposition. Consequently, a retailer may provide preliminary estimates of the incremental businessbe offering a reward that discounts the price of a product offered by the loyalty program.even though the customer would be willing to make thepurchase at the original price. Principle 4: Properly Segment across and within Instead, reward programs should offer rewards that Tierscustomers truly value. So, in place of a monetary discount The tier structure of loyalty programs must work for youron an existing or future hotel stay (low customer value, high customers. Most reward program tiers seem similar to thosecost), the hotel might instead offer that customer free use of existing programs. We see these as antiquated hierarchiesof a service for which the hotel usually charges (e.g., fitness usually based on precious metals (e.g., platinum, gold, silver,facilities, wifi). This provides high customer value at low cost. or tin). Managers need to take a second look at their tierBy considering both value and cost, the firm would maxi- structure to identify opportunities to collapse tiers or pos-mize its flexibility in offering a reward while at the same sibly develop new tiers, based on customer spending and in-time optimizing the value-cost relationship. terests. For instance, one well-known hotel chain offers their The challenge with this principle lies in implementation, first reward tier after customers stay a minimum of 10 nights.because it requires knowledge of customers’ preferences. Not While this reward is relatively easy to earn, the next upgradeall customers will place equal value on all activities.7 Man- occurs when the traveler reaches 50 nights in 12 months.agers will need to use their ability to learn about program The concern that emerges here is whether these tiers dif-members to identify reward categories that have high value ferentiate the chain’s customers according to their loyaltyto individual customers, while still having relatively low behavior. Chances are that the customer who stays 10 nightsinternal cost to the firm. Based on this research the program or less is fairly similar to the customer who stays 11 nightscan offer flexible reward tiers that deliver on both sides of (or a few more than that). However, those customers in thethe value proposition. low end of the second tier (staying 11 nights or a bit more than that) are almost certainly different from someone at the6 R. Buchanan and C. Gilles, “Value-managed Relationship: The Key to top end of that same tier, who stays 49 nights or so. DespiteCustomer Retention and Profitability,” European Management Journal, Vol. these likely differences, the reward program is structured8, No. 4 (1990), pp. 523-526. so that both the 11-night and the 49-night customer are7 P. Danaher, D. Conroy, and J.R. McColl-Kennedy, “Who Wants a Rela- earning the same rewards, even though these two customertionship Anyway? Conditions When Consumers Expect a Relationship groups are likely to have distinctively different needs and de-with Their Service Provider,” Journal of Service Research, Vol. 1, No. 11(2008), pp. 43-62. sires. Further, the gulf from one reward status to the next isCornell Hospitality Report • June 2010 • 9
  10. 10. so great that when a customer achieves the first status level between offering a broad set of rewards and overwhelmingshe will likely conclude that the next level (40 additional customers with numerous options. Once again, research ef-nights) is not attainable. That customer is likely to shift her forts focused on capturing program members’ desires couldspending to the competition for the balance of the reward help guide these decisions.period in an effort to manage her “portfolio of rewards” for Independent insight. We also see an opportunity forher lodging patronage. Thus, this tier structure provides an more collaboration with independent parties, but we alsounintentional incentive for customers to shift to another acknowledge that most managers barely have time to runhotel brand so that the customer can then earn rewards their operations, let alone think about alternative arrange-from multiple brands. ments or reexamine their assumptions about their programs. Instead of an arbitrary or imitative tier structure, it One possibility for operating and strategically advancing amakes sense for program managers to look carefully for rewards program is to engage a firm that specializes in loy-non-linearities in spending that may represent opportuni- alty program design and development. These firms may offerties to further segment groups. Managers must also attend the benefit of an outside perspective coupled with experiencecarefully to within-tier anomalies where both the prefer- in analogous industries. By introducing a fresh perspectiveences and needs of customers within a given tier level might on the program’s strategy, it may be possible to identify op-differ. Given appropriate market research, the reward struc- portunities for improvement that were masked by internal,ture should match the diverse needs of customers within operational challenges.specific spending tiers. We also believe that firms could partner with academic Managers should also consider the opportunities for researchers to investigate issues relating to loyalty programs.segmenting programs based on factors other than spend- We see the needs of managers and marketing academicsing. For example, CVS recently launched a spin-off from aligning perfectly in the context of loyalty program man-its standard ExtraCare program exclusively for diabetes agement and optimization.8 Many managers are in need ofpatients. By making subtle changes to the rewards that are additional support and insight on their programs, and mar-offered and to its supplemental services, the pharmacy may keting faculty are constantly searching for opportunities tohave discovered a simple way to differentiate its program re-analyze existing databases or develop new studies to betteramong diabetes patients by simply recognizing their needs understand customer loyalty.and offering rewards that better align with those needs. Principle 6: Develop Dynamic TiersPrinciple 5: Develop Strategic Partnerships Loyalty programs must develop switching barriers thatProgram managers are beginning to recognize the possibili- discourage customers from jumping from one program toties for making strategic partnerships. These partnerships another, as in the case of the hotel company program that weallow the programs to improve their offerings, while devel- mentioned above. Since we know that customers will developoping a better understand the programs’ true impact. The a portfolio of loyalty programs within product categories,first type of partnership, which we refer to as “corporate alli- organizations risk losing those customers’ repeat businessances,” offers a program the ability to extend the breadth of as customers clear tier hurdles. As we noted before, oncerewards. The second, which we term “independent insight,” customers achieve a tier reward, if they conclude that theydeals with the need for programs to seek outside evalution will not be reasonably able to reach the next hurdle, theyperspectives. can shift their business to the competition to solidify their Corporate alliances. Loyalty program partnerships rewards from that competitor’s loyalty program. Switchinginvolve one firm providing their customers with the op- barriers can discourage your customers from straying to thetion of exchanging their rewards for offerings from firms competition merely for loyalty points. One such barrier isin other industries. Administration of such arrangements to offer relatively small rewards (possibly undocumented)are typically outsourced to a third party or are structured between the major tier milestones to encourage continuedas one-way agreements, where one provider simply com- customer loyalty and deter switching.9 These strategies arepensates other providers for their inclusion in the rewards based on the basic tenets of reinforcement schedules, whereofferings. We believe that these strategic partnerships, both providing a mix of continuous rewards in conjunction withwithin and outside the industry, could involve two-way each transaction in combination with seemingly spontane-reciprocal agreements, where both organizations bring ous, higher value rewards may have the biggest impact onvalue to the other’s program. Moreover, hospitality opera-tors should evaluate their existing relationships to develop 8 McCall and Vorhees, op.cit.a simple portfolio of partners that provide maximum value 9 J.C. Nunes and X. Dreze, “The Endowed Progress Effect: How Artificialto their customers. The partnerships should strike a balance Advancement Increases Effort,” Journal of Consumer Research, Vol. 32, No. 4 (2006), pp. 504-512.10 The Center for Hospitality Research • Cornell University
  11. 11. behavior. As an example, provided the hotel is not sold Building on the notion of control in the program,out, guests in a particular tier could sometimes be offered a customers also crave a feeling of fairness in their exchanges.choice of room type at no extra charge, a reward that costs Put simply, customers want to feel that they have earnedthe hotel essentially nothing. Managers who are able to offer their rewards, in part because achieving a reward tier issmall rewards that reinforce loyal behavior are likely to see a matter of some distinction. When rewards appear “tooimproved patronage from their customers. The operation- easy” to earn, the prestige associated with program and tieralization of these strategies will differ based on context, but membership diminish, along with the allure of the programthe identification of low-cost rewards that can keep program itself. As a result, managers must carefully develop a rewardsmembers both interested and motivated in the program mix that aligns with the effort required to earn them. Thiscould greatly reduce brand switching. The following are need for balanced rewards that reinforce feelings of exclu-some other examples of this strategy: sivity further reinforce the need to advance beyond simple• Hotel chains might offer continuous upgrades in terms price-based reward certificates to experience-based rewards of room style, location, and amenities while customers that carry a more visible separation of benefits between tiers. work their way through each tier level; Qantas, for instance, has developed a program feature that applies these principles by adjusting its tier membership re-• Restaurants may be able to provide upgraded beverage quirements. Once a customer has earned status in a tier, the service or desserts, or perhaps offer prime-time reserva- point requirements to retain that status are reduced by 15 tions to program members in certain tiers; and percent. This means that the member can retain a particular• Casinos can track customer beverage preferences and status level with fewer miles, thus increasing engagement offer real-time rewards as the patron moves through the and likelihood of continued involvement in the program. At property. the same time, mileage requirements are clearly explained to program members at the outset, retaining the feeling thatPrinciple 7: Cater to Customers’ Desires for the status has been earned.Choice and Fairness Principle 8: Avoid Commoditization throughCustomers love choice and control,10 so your loyalty Differentiationprogram could provide customers with flexibility in their Many of the examples we have given in this report are aimedredemption intervals and choices. Just as most retailers at this principle: Find ways to differentiate your loyalty pro-won’t carry just one brand in a product category, hospitality gram. As with any hospitality industry initiative, competi-operators should not offer a single set of narrow rewards. A tors quickly copy loyalty programs’ structure and rewards.key component in the S&H Green Stamp program was that Consequently, loyalty programs are essentially reduced tocustomers could choose their rewards along with the “level” commodities, become just another cost of doing business,or “timing” of their redemption according to the number and take on the nature of an indirect price war linked toof stamp books they filled. Although we’re not necessarily their rewards discounts.11 In an effort to break this cycle,suggesting that you maintain a catalog offering kitchenware, managers must strive to develop points of differentiation as-folding chairs, and bicycles, flexibility in reward redemp- sociated with their program and then properly position theirtion may build engagement from customers when they feel programs against the competition.that they have control over the benefits they receive in the We do not pretend that this is a simple matter. Programprogram. A simple example of this strategy is Best Buy’s differentiation may be the single biggest challenge cur-Premier Silver program. Among other features, program rently facing loyalty program managers. There are only somembers can choose when they receive rewards as well as many ways to differentiate a program when all the details ofthe medium by which the rewards are delivered (i.e., via the program structure and tiers are completely transparent. Weprogram website, via email, or via snail mail), rather than have seen some success with programs that are differentiatedsimply mailing rewards at pre-established set intervals. Best by experiences or service benefits that complement the stan-Buy also offers customers the opportunity to “bank” their re- dard “monetary” rewards. These supplements could be aswards, which provides customers control over their program simple as prioritized service, exclusive events, direct accessbenefits and may even assist customers in setting upgraded to and consultation with employees, and flexible programpurchase goals. management. Supplementing a program with value-added offerings not only helps with differenting the program, but10 A. Smith and L. Sparks, “It’s Nice to Get a Wee Treat If You’ve Had 11 S.M.J. Van Osselaer, J.W. Alba, and P. Manchanada, “Irrelevanta Bad Week; Consumer Motivations in Retail Loyalty Scheme Points Information and Mediated Intertemporal Choice,” Journal of ConsumerRedemption,” Journal of Business Research (2008). Psychology, No. 14 (2004), pp. 257-270.Cornell Hospitality Report • June 2010 • 11
  12. 12. it also encourages more interaction between the customer easily update their profiles, review reward options, andand firm, creating an opportunity to foster deeper feelings of streamline their exchanges. These improvements shouldloyalty. increase customer involvement and satisfaction with a In addition to service differentiation, some firms have program, while also reducing operating costs.been able to refresh their programs by adjusting the rules by Customer cards in grocery stores, for instance, canwhich they reward customers. For example, JetBlue recently identify purchasing cycles, product replacement intervals,shifted from the common “segments flown” loyalty model and shopping patterns. Casino loyalty cards can go eventhat has been a cornerstone of frequent flier programs to further, as they can track guests’ gaming choices and theira “dollars spent” currency for program status. This subtle non-gaming activities including, dining, salon usage, andchange provides a profound shift in the value of the program, fitness center activity. In addition to having the ability tobecause it increases the rewards for high volume business track purchasing patterns, recent advances in surveillancecustomers who pay premiums for convenience. Instead of equipment offers casino managers the opportunity to visu-giving premium customers the same mileage rewards as low- ally track patrons as they move through the casino.13 Thispaying coach passengers, JetBlue is now rewarding its most allows casino managers the opportunity to provide custom-valuable customers in a manner that is appropriate to their ers with rewards on the spot (such as a favorite beverage).program status and is (momentarily) unmatched by their Having the ability to know what your customers are doingcompetitors. at any time can allow managers to anticipate customer needs and preferences thereby increasing customer satisfac-Principle 9: Avoid the Price Sensitivity Trap tion and differentiating their product from that of theirAnother reason to differentiate your program with nonmon- competitors.etary rewards is that it’s important not to focus your programtoo heavily on price concessions. Many reward programs are Making the Loyalty Program Work for Youstill based on a simple design that provides customers with Although reward programs have been going strong in thefuture discounts as a reward for current spending. While hospitality industry for nearly three decades,14 there is still athese programs have demonstrated some value to firms, lack of empirical evidence that demonstrates a direct causalthey carry a substantial risk of converting traditionally loyal relationship between program membership and attitudi-customers to price sensitive ones.12 By routinely offering nal and behavioral loyalty. The recommendations that wecustomers price discounts throughout a program, two major have outlined here are practical in orientation, but they areareas of risk emerge. First, customers may begin to update derived from various theories of human decision and con-their expectations for doing business with a firm and may sumption behavior. In closing, we must reiterate that theseavoid doing business with that company unless a discount recommendations are meant to serve as broad, guidingis provided. Second, firms may reinforce the importance of principles for programs in the hospitality and gaming sec-price reductions over quality of service in customers’ minds tors. Because each company and each program is distinct,and, as a result, customers update their evaluation criteria to there is no universal recipe for designing a loyalty programplace a premium on price discounts. If this occurs, branded that is both effective and beyond imitation.firms that typically capture a premium due to service and Above all else, the most important strategic investmentreputation may begin losing share to competitors that can in any program is customer research. By understandingbetter meet customers’ price demands. your customer base and loyalty program members, man- agers can make informed decisions on how to advancePrinciple 10: Embrace New Technologies their programs. We think a review of rewards and loyaltyLoyalty programs should take advantage of technology program operations is timely, because many seem to haveadvances. The days of the punch card or even plastic loyalty hit maturity, and the companies that can effectively advancecards are quickly vanishing. Products like FourSquare™ and their programs through effective differentiation that meetsother PDA-enabled programs offer the potential to reward members’ needs will capture a lead in the battle for custom-customers in real time. The implications for creative program er loyalty. We hope that the principles introduced in thisdesigns are limitless. We are not advocating technology for report can provide managers with an initial set of factors tothe sake of technology, but if the medium offers new benefits, consider as they evaluate and advance their programs. nprograms should embrace them and let the customer decide.At the basic level, companies can strive to develop effectiveweb support for their programs that allow for customers to 13 Casinos can use other technology. See: David C. Wyld, “Radio Fre- quency Identification: Advanced Intelligence for Table Games in Casinos,”12 M. McCall and D. Ogden, “Loyalty, Rewards, and Value: What Do Cornell Hospitality Quarterly, Vol. 49, No. 2 (May 2008), pp. 134 - 144.We Want from Our Customers?,” Casino Journal; www.casinojournal. 14 J.L. Hoffman and R.M. Lowitt, “A Better Way to Design Loyalty Pro-com/‌ j/‌ om/‌ les/‌ DFs (viewed April 1, 2009). c h fi P grams,” Strategy and Leadership, Vol. 36 (2008), pp. 44-49.12 The Center for Hospitality Research • Cornell University
  13. 13. The Office of Executive Education facilitates interactive learning opportunities where professionals from the global hospitality industry and world-class Cornell faculty explore, develop and apply ideas to advance business and personal success. The Professional Development Program The Professional Development Program (PDP) is a series of three-day courses offered in finance, foodservice, human-resources, operations, marketing, real estate, revenue, and strategic management. Participants agree that Cornell delivers the most reqarding experience available to hospitality professionals. Expert facutly and industry professionals lead a program that balances theory and real-world examples. The General Managers Program The General Managers Program (GMP) is a 10-day experience for hotel genearl managers and their immediate successors. In the past 25 years, the GMP has hosted more than 1,200 participants representing 78 countries. Participants gain an invaluable connection to an international network of elite hoteliers. GMP seeks to move an individual from being a day-to-day manager to a strategic thinker. The Online Path Online courses are offered for professionals who would like to enhance their knowledge or learn more about a new area of hospitality management, but are unable to get away from the demands of their job. Courses are authored and designed by Cornell University faculty, using the most current and relevant case studies, research and content. The Custom Path Many companies see an advantage to having a private program so that company-specific information, objectives, terminology nad methods can be addressed precisely. Custom programs are developed from existing curriculum or custom developed in a collaborative process. They are delivered on Cornell’s campus or anywhere in the world.Cornell Hospitality Report • June 2010 • 13
  14. 14. Cornell Hospitality ReportsIndexwww.chr.cornell.edu2010 Reports 2010 Roundtable Retrospectives Vol 9, No. 12 Hotel Revenue Management in an Economic Downturn:Vol. 10, No. 8 Developing Measures for Vol. 2, No. 1 Sustainability Roundtable Results of an International Study, byEnvironmental Sustainability in Hotels: 2009: The Hotel Industry Seeks the Elusive Sheryl E. Kimes, Ph.DAn Exploratory Study, by Jie J. Zhang, “Green Bullet.”Nitin Joglekar, Ph.D., and Rohit Verma, Vol 9, No. 11 Wine-list CharacteristicsPh.D. 2010 Industry Perspectives Associated with Greater Wine Sales, by No. 4 Hospitality Business Models Sybil S. Yang and Michael Lynn, Ph.D.Vol. 10, No. 7 Successful Tactics for Confront the Future of Meetings, bySurviving an Economic Downturn: Howard Lock and James Macaulay Vol 9, No. 10 Competitive Hotel Pricing inResults of an International Study, by Uncertain Times, by Cathy A. Enz, Ph.D.,Sheryl E. Kimes, Ph.D. 2009 Reports Linda Canina, Ph.D., and Mark LomannoVol. 10, No. 6 Integrating Self-service Vol. 9, No. 18 Hospitality Managers and Vol 9, No. 9 Managing a Wine CellarKiosks in a Customer-service System, Communication Technologies: Challenges Using a Spreadsheet, by Gary M.byTsz-Wai (Iris) Lui, Ph.D., and Gabriele and Solutions, by Judi Brownell, Ph.D., Thompson Ph.D.Piccoli, Ph.D. and Amy Newman Vol 9, No. 8 Effects of Menu-price FormatsVol. 10, No. 5 Strategic Pricing in Vol. 9, No. 17 Cases in Innovative on Restaurant Checks, by Sybil S. Yang,European Hotels, 2006–2009, by Cathy Practices in Hospitality and Related Sheryl E. Kimes, Ph.D., and Mauro M.A. Enz, Ph.D., Linda Canina, Ph.D., and Services, Set 1: Aqua by Grandstand, SessaregoMark Lomanno Brand Karma, Capella Hotels & Resorts, EnTrip, Visualiser, Luggage Vol 9, No. 7 Customer Preferences forVol. 10, No. 4 Cases in Innovative Club, Royal Plaza on Scotts, Tastings, Restaurant Technology Innovations, byPractices in Hospitality and Related Tune Hotels, and, by Judy Michael J. Dixon, Sheryl E. Kimes, Ph.D.,Services, Set 2: Brewerkz, ComfortDelgro A. Siguaw, D.B.A., Cathy A. Enz, Ph.D., and Rohit Verma, Ph.D.Taxi,, Iggy’s, Jumbo Sheryl E. Kimes, Ph.D., Rohit Verma,Seafood,, PriceYourMeal. Ph.D., and Kate Walsh, Ph.D Vol 9, No. 6 Fostering Service Excellencecom, Sakae Sushi, Shangri-La Singapore, through Listening: What Hospitalityand Stevens Pass, by Sheryl E. Kimes, Vol 9 No 16 The Billboard Effect: Managers Need to Know, by Judi Brownell,Ph.D., Cathy A. Enz, Ph.D., Judy A. Online Travel Agent Impact on Non- Ph.D.Siguaw, D.B.A., Rohit Verma, Ph.D., and OTA Reservation Volume, by Chris K.Kate Walsh, Ph.D. Anderson, Ph.D. Vol 9, No. 5 How Restaurant Customers View Online Reservations, by Sheryl E.Vol. 10, No. 3 Customer Preferences Vol 9 No 15 Operational Hedging and Kimes, Ph.D.for Restaurant Brands, Cuisine, and Exchange Rate Risk: A Cross-sectionalFood Court Configurations in Shopping Examination of Canada’s Hotel Industry, Vol 9, No. 4 Key Issues of Concern inCenters, by Wayne J. Taylor and Rohit by Charles Chang, Ph.D., and Liya Ma the Hospitality Industry: What WorriesVerma, Ph.D. Managers, by Cathy A. Enz, Ph.D. Vol 9 No 14 Product Tiers and ADRVol. 10, No. 2 How Hotel Guests Perceive Clusters: Integrating Two Methods for Vol 9, No. 3 Compendium 2009the Fairness of Differential Room Pricing, Determining Hotel Competitive Sets, by Wayne J. Taylor and Sheryl E. Kimes, Jin-Young Kim and Linda Canina, Ph.D. chr/pubs/reports/abstract-14965.htmlPh.D. Vol 9, No. 13 Safety and Security in U.S.Vol. 10, No. 1 Compendium 2010 Hotels, by Cathy A. Enz, Ph.D
  15. 15. Vol 9, No. 2 Don’t Sit So Close to Me: Vol 8, No. 18 Forty Hours Doesn’t Work Vol. 8, No. 9 Accurately EstimatingRestaurant Table Characteristics and Guest for Everyone: Determining Employee Time-based Restaurant Revenues UsingSatisfaction, by Stephanie K.A. Robson Preferences for Work Hours, by Lindsey A. Revenue per Available Seat-Hour, by Garyand Sheryl E. Kimes, Ph.D. Zahn and Michael C. Sturman, Ph.D. M. Thompson, Ph.D., and Heeju (Louise) SohnVol 9, No. 1 The Job Compatibility Vol 8, No. 17 The Importance ofIndex: A New Approach to Defining the Behavioral Integrity in a Multicultural Vol. 8, No. 8 Exploring ConsumerHospitality Labor Market, by William J. Workplace, by Tony Simons, Ph.D., Ray Reactions to Tipping Guidelines:Carroll, Ph.D., and Michael C. Sturman, Friedman, Ph.D., Leigh Anne Liu, Ph.D., Implications for Service Quality, byPh.D. and Judi McLean Parks, Ph.D. Ekaterina Karniouchina, Himanshu Mishra, and Rohit Verma, Ph.D.2009 Roundtable Retrospectives Vol 8, No. 16 Forecasting Covers in HotelNo. 3 Restaurants at the Crossroads: A Food and Beverage Outlets, by Gary M. Vol. 8, No. 7 Complaint Communication:State By State Summary of Key Wage-and- Thompson, Ph.D., and Erica D. Killam How Complaint Severity and ServiceHour Provisions Affecting the Restaurant Recovery Influence Guests’ PreferencesIndustry, by Carolyn D. Richmond, J.D., Vol 8, No. 15 A Study of the Computer and Attitudes, by Alex M. Susskind, Ph.D.and David Sherwyn, J.D., and Martha Networks in U.S. Hotels, by Josh Ogle,Lomanno, with Darren P.B. Rumack, and Erica L. Wagner, Ph.D., and Mark P. Vol. 8, No. 6 Questioning ConventionalJason E. Shapiro Talbert Wisdom: Is a Happy Employee a Good Employee, or Do Other Attitudes MatterNo. 2 Retaliation: Why an Increase in Vol 8, No. 14 Hotel Revenue Management: More?, by Michael Sturman, Ph.D., andClaims Does Not Mean the Sky Is Falling, Today and Tomorrow, by Sheryl E. Kimes, Sean A. Way, David Sherwyn, J.D., and Gregg Ph.D.Gilman, J.D. Vol. 8, No. 5 Optimizing a Personal Wine Vol 8, No. 13 New Beats Old Nearly Cellar, by Gary M. Thompson, Ph.D., and2009 Tools Every Day: The Countervailing Effects of Steven A. Mutkoski, Ph.D. Renovations and Obsolescence on HotelTool No. 12 Measuring the Dining Prices, by John B. Corgel, Ph.D. Vol. 8, No. 4 Setting Room Rates onExperience: The Case of Vita Nova, by Priceline: How to Optimize ExpectedKesh Prasad and Fred J. DeMicco, Ph.D. Vol. 8, No. 12 Frequency Strategies and Hotel Revenue, by Chris Anderson, Ph.D. Double Jeopardy in Marketing: The2008 Roundtable Proceedings Pitfall of Relying on Loyalty Programs, by Vol. 8, No. 3 Pricing for RevenueVol 8, No. 20 Key Elements in Service Michael Lynn, Ph.D. Enhancement in Asian and PacificInnovation: Insights for the Hospitality Region Hotels:A Study of Relative PricingIndustry, by, Rohit Verma, Ph.D., with Vol. 8, No. 11 An Analysis of Bordeaux Strategies, by Linda Canina, Ph.D., andChris Anderson, Ph.D., Michael Dixon, Wine Ratings, 1970–2005: Implications for Cathy A. Enz, Ph.D.Cathy Enz, Ph.D., Gary Thompson, Ph.D., the Existing Classification of the Médocand Liana Victorino, Ph.D. and Graves, by Gary M. Thompson, Ph.D., Vol. 8, No. 2 Restoring Workplace Stephen A. Mutkoski, Ph.D., Youngran Communication Networks after2008 Reports Bae, Liliana Lelacqua, and Se Bum Oh Downsizing: The Effects of Time on Information Flow and TurnoverVol 8, No. 19 Nontraded REITs: Vol. 8, No. 10 Private Equity Investment Intentions, by Alex Susskind, Ph.D.Considerations for Hotel Investors, by in Public Hotel Companies: Recent Past,John B. Corgel, Ph.D., and Scott Gibson, Long-term Future, by John B. Corgel, Vol. 8, No. 1 A Consumer’s View ofPh.D. Ph.D. Restaurant Reservation Policies, by Sheryl E. Kimes, Ph.D.
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