Hospitality Management 18 (1999) 345}370        Customer loyalty: the future of hospitality                       marketin...
346            S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370marketing. In the future, conquest marke...
S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370    347projection of the customers expenditures over th...
348Table 1Lifetime value calculation work sheetRevenue                                       Year 1               Year 2  ...
S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370     349frequently at hotels toward which they feel loy...
350                S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370Table 2Frequency versus loyaltyHow i...
S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370    351Express study referenced earlier would like the ...
352            S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370required hotel points and cashed them in...
S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370     353partnership activities. Satisfaction is a neces...
354           S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370this service process. For the service com...
S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370    355customers are telling each other and employees. ...
356            S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370usually occur because top management has...
S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370      357   Similarly, if an employee knows that an org...
358               S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370Table 3Features of value-added and va...
S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370                   359Table 3 (Continued)Benets        ...
360              S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370Table 3 (Continued)Benets             ...
S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370                361Table 3 (Continued)Benets           ...
362            S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370AirMiles program was that initially cust...
S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370    363varies. For example, 2000 points earned on a cre...
364           S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370where R is recency, F is frequency, and M...
S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370   365  evidence that any program produces a denitive a...
366              S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370benet `the hotel has a frequent-guest ...
S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370   367   A fth method used to understand the nancial im...
368              S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370Table 5Basic form of pre-test post-tes...
S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370                 369necessary to be partners with all t...
370               S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370Hu, M.Y., Toh, R.X., Strand, S., 1998...
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Customer loyalty the future of hospitality marketing

  1. 1. Hospitality Management 18 (1999) 345}370 Customer loyalty: the future of hospitality marketing Stowe Shoemaker *, Robert C. Lewis William F. Harrah College of Hotel Administration, University of Las Vegas, Mail Drop 6021, 4505 Maryland Parkway, Las Vegas, NV 89154-6021, USA Institute de Management Hotelier International, Cornell/ESSEC, FranceAbstract For many years hospitality rms have believed that the goal of marketing is to create asmany new customers as possible. While hoteliers believed it was important to satisfy the guestswhile they were on the property, the real goal was to continue to nd new customers. Thisconstant search for new customers is called conquest marketing. In the future, conquestmarketing will not be su$cient. Instead rms need to practice loyalty marketing or retentionmarketing. The authors believe that this will be the successful wave of the future in hospitality.The goal of this paper is to present a framework for understanding customer loyalty. We do thisrst by examining the economics of loyalty. We then dene loyalty and explain the di!erencebetween frequency programs and loyalty programs. We also show why satisfaction does notequal loyalty. We then introduce the Loyalty Triangle , which provides a framework forbuilding customer loyalty. Each leg of the Loyalty Triangle is then examined in-depth,including examples of how hotel companies use the Loyalty Triangle to develop strategy. Nextwe present ways to measure the success of loyalty programs. Finally, we present future researchissues. 1999 Elsevier Science Ltd. All rights reserved.1. Introduction For many years hospitality rms have believed that the goal of marketing is tocreate as many new customers as possible. While hoteliers believed it was importantto satisfy the guests while they were on the property, the real goal was to continueto nd new customers. This constant search for new customers is called conquest * Corresponding author. Tel.: 702-895-1794; fax: 702-895-4872. E-mail address: (S. Shoemaker)0278-4319/99/$ - see front matter 1999 Elsevier Science Ltd. All rights reserved.PII: S 0 2 7 8 - 4 3 1 9 ( 9 9 ) 0 0 0 4 2 - 0
  2. 2. 346 S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370marketing. In the future, conquest marketing will not be su$cient, as most hotel-industry segments are mature and competition is strong. There is also too much parityamong hospitality products in the same segment. For example, general managersfrom Sheraton in Asia were shown pictures of hotel rooms from their own chain andthree competitors. Most managers could not identify the brand of one room * noteven their own * although they were given a list of eight brands from which to choose(Bowen and Shoemaker, 1998). Loyalty marketing has become a particularly poignant topic for research andpractice in services over the last few years. In the face of overpopulated and hypercom-petitive markets, service providers have shifted the emphasis in marketing strategiesfrom customer acquisition to customer retention (loyalty) in many industries. In fact,in the airline industry, the cost of frequent #yer programs is often higher thanadvertising spending (about 3% of revenue for advertising and between 3 and 6% forfrequent-#yers program, Asian Business, 1993). Frequent traveler programs are, ofcourse, just one tactic to try to increase loyalty. Other tactics include service guaran-tees and complaint management programs (see Dwyer et al., 1987; Gronroos, 1994;Gummesson, 1987; Hu et al., 1998). Reasons for starting a loyalty program are, of course, related to getting and keepingcustomers. According to Dick Dunn of Carlson Marketing (Dunn, 1997), a rmspecializing in loyalty programs, reasons include the desire to:E protect market share from competitors,E steal high value customers from competitors,E retain and grow high value customers,E upgrade high value customer `look a-likesa (that is, reward non-high value cus- tomers who have similar characteristics as your best customers so they will become better customers),E retain a `core groupa of moderate value customers; andE create `opportunity costa for using a competitor. Given the interest in customer loyalty, it is useful to understand more about thistopic. The goal of this paper is to present such an understanding. We do this rst byexamining the economics of loyalty. We then dene loyalty and explain the di!erencebetween frequency programs and loyalty programs. We also show why satisfactiondoes not equal loyalty. We then introduce the Loyalty Triangle , which providesa framework for building customer loyalty. Each leg of the Loyalty Triangle is thenexamined in-depth, including examples of how hotel companies use the LoyaltyTriangle to develop strategy. Next we present ways to measure the success of loyaltyprograms. Finally, we present future research issues.2. The economics of loyalty The gure used most frequently to quantify the value of customer loyalty is `lifetimevaluea. As dened by Gordon (1988), the lifetime value of a customer is simply a
  3. 3. S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370 347projection of the customers expenditures over their life of purchases with a companyminus the cost of producing the product and serving and supporting each customer.The net prot of a customer over his or her lifetime is normally calculatedin current dollars using net present value. To calculate the lifetime value one needs toestimate the retention rate, spending rate, costs, and the discount rate. Lowder (1997) demonstrates the calculation of the lifetime net present value ofa customer over a ve-year purchase cycle. This appears in Table 1. The followingassumptions are used in this calculation:E the customer spends $150 each year;E a constant total of cost of 50% of sales;E the discount rate is 20%;E the original group consists of 1000 customers; andE the retention rate for year two is 40% (400 of the initial 1000), for year three it is 45% (180/400), for year four it is 50%. The reader will note that the lifetime value (row K) is calculated by dividing thecumulative net present value prot by the number in the original group. This is donebecause one cannot tell in advance which customers will stay through the wholepurchasing period. If a customer only buys from the company just once, she/he isworth just $75. However, should the customer buy from the rm over a 5-year period,the current worth of the customer is $115.09. This suggests that if there is a servicefailure and it costs $80 to make the customer happy, the company should spend themoney and make sure the customer is happy. The rm should not view the x as a lossof $5, but should instead look at it as a prot of $35.09 ($115.09}$80). To easily illustrate lifetime value, the numbers used in the calculations shown inTable 1 are very conservative. Actual revenue and costs from a hotel would showa much more impressive lifetime value. Research has shown that the costs associatedwith taking care of a loyal customer decline over time, while at the same time salesfrom loyal customers increases (Reichheld and Sasser, 1990; Bowen and Shoemaker,1998). In this example, costs and revenue were kept the same for illustrative purposes.Although it is not shown, the reader should verify that if the retention increases(defection rate decreases) an additional 50 customers each year (450 customers in yeartwo, 230 customers in year three, 140 in year four, and 90 in year ve), the net presentlifetime value of the customer is $124.44. This is an increase of approximately 8%. In a much-cited study, Reichheld and Sasser (1990) found that a 5% increase incustomer retention resulted in a 25}125% increase in prots in nine service industrygroups. This increase was due in part to lower sales and marketing costs, lowertransaction costs, price premiums, referrals, and revenue growth. Bowen and Shoemaker (1998) showed that the economics of customer loyalty applyto the luxury hotel segment. In a study of American Express platinum card memberswho took at least six overnight business trips per year where they stayed in luxuryhotels (e.g., Ritz Carlton and Four Seasons), these authors found that loyal customersare less likely to ask about price when making a reservation. Loyal customers alsoclaim they purchase other hotel services (e.g., laundry and restaurant meals) more
  4. 4. 348Table 1Lifetime value calculation work sheetRevenue Year 1 Year 2 Year 3 Year 4 Year 5A Customers (same customers tracked 1000 400 180 90 50 (end of ve years, only 50 of the one year to the next) initial 1000 are still customers)B Retention rate (% of those who 40%(400/1000) 45% (180/400) 50% (90/180) 55% 60% return from one year to the next)C Average yearly sale (total sales/total $150 $150 $150 $150 customers)$150D Total revenue of customers from $150,000 $60,000 $27,000 $13,500 $7500 original group) A*CCostsE Cost percent or calculate any way 50% 50% 50% 50% 50% that makes sense for your companyF Total costs (D*E) $75,000 $30,000 $13,500 $6750 C3750ProxtsG Gross prot (D}F) $75,000 $30,000 $13,500 $6750 $3750H Discount rate D(1#i)L 1D 1.2D 1.44D 1.73D 2.07D (1#0.20) (1#0.20) (1#0.20) (1#0.20) (1#0.20)I NVP Prot prots/discount rate $75,000 $25,000 $9375 $3902 ($3750/2.07)$1, ($30,000/1.2) ($13,500/1.44) ($6750/1.73) 812J Cumulative NPV (1#22#5) $75,000 $100,000 $109,375 $113,277 $115,088 ($75,000 S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370 #$25,000)K Lifetime value (NPV) $75 $100 $109.38 $113.28 $115.09Lowder (1997).
  5. 5. S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370 349frequently at hotels toward which they feel loyalty compared to purchases at hotelswhere there is little loyalty. Loyal customers are a great source of word-of-mouthadvertising. Specically, Bowen and Shoemaker (1998) found that loyal customers tella median of 12 people about the hotel toward which they feel loyalty and that almost20% claim that they would go out of their way to mention their favorite hotel whendiscussing hotels with friends or colleagues. They are also more likely to serve on anadvisory panel to that particular hotel and they are more likely to tell managementabout a potential problem. For instance, in the focus group phase of their research, Bowen and Shoemaker(1998) found one guest had spent $1000 to stay in a luxury suite only to nd a dirtyco!ee cup in the kitchenette. When asked if he would tell management about thisproblem, he replied `Why bother, there are many places in New York City whereI can spend $1000 for a hotel rooma. When asked if his response would be di!erent ifthis occurred in a hotel toward which he felt loyalty, he replied `Of course. I realizemistakes can happen. I would tell management because I know something would bedone to x the problema.3. De5nition of loyalty Rob Smith (1998), president of the loyalty marketing rm Focal Point Marketing,claims that loyalty occurs when `the customer feels so strongly that you can best meethis or her relevant needs that your competition is virtually excluded from theconsideration set and the customer buys almost exclusively from you * referring toyou as `their restauranta or `their hotela. Bowen and Shoemaker (1998) claim thatloyalty is the likelihood of a customers returning to a hotel and that personswillingness to behave as a partner to the organization (e.g., spend more while onproperty, not serve on advisory panels, and tell management when problems occur). Gri$n (1995) argues that two factors are critical for loyalty to #ourish. The rst isan emotional attachment to the product or service that is high compared with that topotential alternatives. The second factor is repeat purchase. She further argues thatthere are four types of loyalty based on degree of repurchase and the degree ofattachment. A high level of attachment and high repeat visits characterizes premium loyalty.This is the type of loyalty for which rms should strive, as this loyalty is most resistantto competitors o!erings. In contrast, inertia loyalty is most susceptible to competi-tors o!erings. Inertia loyalty occurs when customers have high repeat purchase butno emotional attachment to the service provider. As will be discussed later, frequencyprograms create inertia loyalty. A properly designed loyalty program, however, canmove customers from inertia loyalty to premium loyalty. Because customers in thissegment already purchase the product frequently, they are an ideal group to move tothe premium loyalty category. Latent loyalty occurs when customers purchase the service infrequently, eventhough they feel a strong emotional attachment to the service. Situational factorsrather than attitudinal in#uences determine repeat purchase. To increase the purchase
  6. 6. 350 S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370Table 2Frequency versus loyaltyHow it plays out Traditional frequency Real loyaltyObjectives Build tra$c, sales, and prots Build sales, prots, and the brandStrategy O!er incentives for repeat transactions Build personal brand relationshipsFocus A segments behavior and protability An individuals emotional and rational needs and their valueTactics Segmented rewards: Customer recognition Transaction status Individual value, tenure Free/discounted product Preferred access, service Collateral product discounts `insider informationa Rewards such as miles or points Value-added upgrades and add-ons Value-added upgrades and add-ons Emotional `trophya rewards Rewards `menua Tailored o!ers/messagesMeasurement Transactions Individual lifetime value Sales growth Attitudinal change Cost structure Emotional responsesbehavior of members of this group, it is necessary to rst determine why purchasefrequency is low and then develop strategies to overcome these situational factors.The nal category is no loyalty. Generally, loyalty programs do not impact thesecustomers.4. Frequency programs versus loyalty programs The di!erences between frequency and loyalty programs are shown in Table 2. Ascan be seen, the primary focus of frequency programs is to build repeat business, whilefor loyalty programs the focus is to build an emotional attachment to the brand.Smith (1998) states that `frequency occurs when customers give you a greater share oftheir transactions usually in exchange for accumulating miles, points, or other surro-gate discountsa. The problems with frequency programs are that the customer focuseson the rewards, not on product superiority or brand relevance. With many frequencyprograms, one reward is generally as good as another, thus creating a cost with nosustainable di!erentiable competitive advantage. The di!erences between frequency and loyalty lead to di!erent tactics. For fre-quency, the tactics involve free or discounted products, collateral product discounts(such as discounts on rental cars), and rewards such as points, miles, or both. (HiltonHonors provides guests with both points and miles.) For loyalty, the tactics involvecustomized recognition, emotional `trophya rewards, and tailored o!ers or messages.An example of customized recognition is the guest prole form used by the RanchoBernardo Inn (Rancho Bernardino, CA) to insure that when loyal guests arrive theirfavorite room will be stocked with their favorite beverages. As a point of perspective,Bowen and Shoemaker (1998) found that 57.7% of the respondents in the American
  7. 7. S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370 351Express study referenced earlier would like the hotel to use prior information on themto customize their stay, yet only 24.3% of the hotels they stayed in did so. An exampleof emotional `trophya awards is Hiltons policy of inviting its top guests to theAcademy Awards. Finally, an example of tailored o!erings or messages is the policy of the MiddleburyInn (Middlebury, Vermont) to proactively call its regular guests and remind them tomake a room reservation if they would like to visit during busy times. This is incontrast to the idea many hotels have where they only invite their regular guests tocome during slow times under the assumption that in natural busy times there is noneed to spend marketing dollars. Bowen and Shoemaker (1998) found that while37.7% claimed they would like it if the hotel called them in advance to remind themto book during a busy time, only 3% of the hotels they stayed in did so.5. Changes in strategies for creating loyalty over time Fig. 1 from Dube and Shoemaker (1999) shows how strategies to gain loyalty have Hchanged over time. As can be seen, creating brand relationships is the ultimate goalof loyalty programs. Brand relationship is dened as `an exchange of mutual valuebetween company and customer, which expands and deepens over time, adding valueto ones products and strengthening ones branda (Smith, 1998). The need for thisbrand relationship becomes important given the tenuous nature of loyalty based onfrequency programs. For frequency programs to work, the customer must nd themvaluable. This value comes from exchanging points or airline miles for free airlinetickets or hotel rooms. However, once these points or airline miles are cashed in, thecustomer is suddenly vulnerable to competitors o!erings, because now she/he nolonger has a vested interest in just one program. For instance, a traveler may stay in only one hotel chain in order to earn enoughhotel points for a free trip to an exotic resort. Once the traveler has earned the Fig. 1. Defensive strategies to manage brand switching and loyalty.
  8. 8. 352 S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370required hotel points and cashed them in, the account balance becomes zero. Witha zero balance, the o!erings of competitors may now be of interest, as there is noopportunity cost, in terms of lost points, in choosing one brand over another. In thesituation just described, the loyalty is to the frequency program and not to the brand.This is obviously not a desirable situation; hence, the move away from frequency andthe move toward brand relationship.6. Why have frequency programs at all? The recommended move toward brand relationships poses the question, `Whyhave frequency programs at all?a One reason is that frequency programs identify arms best customers. Specically, they provide an easy method for companies totrack both customers frequency and recency of visitation as well as customersspending patterns. For individual properties, of course, this information can becollected without a frequency program. For companies with multiple locations,di!erent ownership structures (i.e., corporate owned or franchised), and di!erentmethods of purchase (i.e., through central reservation system or by purchaseat property level) frequency, recency and customers spending patterns would bedi$cult to collect and collate in a timely and useful manner. Customer information is important. As the manager of the frequency program fora major hotel company mentioned to one of the authors of this paper, `We are in thedirect marketing business. The key to direct marketing is an accurate up-to-datedatabasea. As will be discussed later in this article, this information can also be used totrack customers preferences (i.e., they always stay in a room for non-smokers) andtravel patterns. This later information, if combined with other information, can thenbe used as input in site selection models and for targeted communications, amongother things. A third reason for a frequency program is that rms can use the `valuea of theircustomers as a negotiating point to gain nancing for a new project, sign a manage-ment contract, or recruit new franchisees. This idea relates to the beliefs of some thatthe hotel business is really a real-estate business. Just like a real-estate business thatrelies on the right mix of tenants, the hotel business relies on the right mix of `heads-inbedsa. The database associated with frequency programs can enable a company toprovide this right mix of customers and thus di!erentiate itself from competitors, whomay also being trying to get a new property to carry `their #aga. For the lender orbuilder of a hotel, the ability of a rm to provide the right mix of customers may be thefeature that makes them choose one operator over another.7. Loyalty versus satisfaction Customer loyalty is not the same as customer satisfaction. Customer satisfactionmeasures how well a customers expectations are met by a given transaction, whilecustomer loyalty measures how likely a customer is to repurchase and engage in
  9. 9. S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370 353partnership activities. Satisfaction is a necessary but not a su$cient condition forloyalty. In other words, we can have satisfaction without loyalty, but it is hard to haveloyalty without satisfaction. A study by Heskett et al., (1997) found that the link between customer satisfactionand customer loyalty was the weakest relationship in their service-prot-chain model.This model attempts to capture the in#uence on prot of operating strategy, service-delivery system, service concept, and target market. Proprietary research undertakenby Shoemaker in the casino industry also found a weak link between customersatisfaction and loyalty. Some of the reasons for the failure of satisfaction to translate into loyalty areunrelated to either satisfaction or loyalty. Travelers may not be loyal to an individualproperty because they never return to the area where they were very satised witha specic property. Other guests may be satised with a hotel but their desire fornovelty inhibits their loyalty to a specic property. Some guests remain price sensitiveand always shop for the best deal; even though they were satised with a particularhotel, they will try another one if it makes a better o!er. As a nal consideration, someguests may not develop loyalty because they are never encouraged to become loyalcustomers. That is, the hotel never asks them to come back and does not collect thedata necessary to develop a meaningful dialogue with the customer.8. Creating brand relationships Fig. 2 provides a framework for creating a brand relationship. The LoyaltyTriangle is an equal lateral triangle because of the belief that in order to createlong-term loyalty, the service rm must execute all the functions described on eachside of the triangle equally well. On one side is the process, which is `how the service worksa. It involves all activitiesfrom both the guests perspective and the service providers perspective. For the guest,the process includes everything that happens from the time they begin buying theservice (e.g., calling to make a reservation) to the time that they leave the property(e.g., picking up their car from a valet). All interactions with employees are part of Fig. 2. Loyalty triangle.
  10. 10. 354 S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370this service process. For the service company, the process includes the design of theservice operations, the hiring and training of service personnel, and the collection ofinformation to understand customers needs, wants, and expectations. A second side of the equilateral loyalty triangle is termed value creation. Valuecreation is subdivided into two components: value added and value recovery.Valued-added strategies increase the long-term value of the relationship with theservice rm, o!ering greater benets, on both current and future transactions, torepeat customers than to occasional customers (Dwyer et al., 1987; Gummesson, 1987;Gronroos, 1994). Providing the guest with an upgrade because she/he is a repeatcustomer or using knowledge of prior stays to customize the current stay are twoexamples of value added tactics. Value-recovery strategies, on the other hand, areprimarily designed to rectify a lapse in service delivery occurring in specic transac-tions by providing amendments and compensations to alleviate the costs associatedwith failure (Fornell and Wernerfelt, 1987; Hart et al., 1990). It is the process thatinsures that the guests needs are taken care of without further inconveniences.Providing loyal guests with a toll-free number to call if problems occur is an exampleof value recovery, as is a 100% guarantee. The nal leg of the loyalty triangle is communication. This leg of the triangleincorporates database marketing, newsletters, and general advertising. It involves allareas of how the service provider communicates with its customers. Each leg of the Loyalty Triangle is discussed in detail next.8.1. The process As mentioned, the process is `how the service worksa. It involves all activities fromboth the guests perspective and the service providers perspective. Strategies gearedaround this leg of the Loyalty Triangle are designed specically to address the rstthree potential gaps set forth in the GAP Model of Service Quality (Zeithaml andBitner, 1996). We do not discuss this model in-depth, as Lewis (1987) providesa thorough analysis of how this model can be used by hospitality rms. We dohowever provide a very brief review of Gaps 1}3. The goal for those wanting to createloyalty, of course, is to make sure that Gaps 1}3 do not exist. Gap 1 refers to the discrepancy between what the company thinks customersexpectations are and what these expectations actually are. This gap may occur for anyof the following reasons. One, there is an inadequate marketing research orientation.Companies do not ask their customers what their problems, wants, needs, or expecta-tions are. Two, there is a lack of upward communication between management andcustomers and between contact employees and managers. Customers may communic-ate their wants and needs to employees in general conversation, but if there is nomechanism for these comments to get passed up `the chain of commanda, they willstay with the employee and be forgotten. And three, there is a lack of a relationshipfocus. In other words, management is more concerned on nding new guests and lessconcerned with building long-term relationships with their current customers. Ways to close Gap 1 include informal research or `managing by walking arounda.This means spending time on the #oor talking to guests and listening to what
  11. 11. S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370 355customers are telling each other and employees. Second, formal research, whichinvolves putting together well-organized research agenda, that can be designed to askvery specic questions. Types of formal research methods include transactionalsurveys (e.g., survey measuring recent service experience); total market surveys (e.g.,analysis of customers in the market, some of whom may have no experience with thehotel while others have lots of experience); service reviews; focus groups; and customeradvisory panels. Gap 2 occurs when the service provider fails to design service procedures to meetthe expectations of guests. An example, from focus groups conducted by one of theauthors with business travelers who spend at least six nights in a hotel during the yearand pay at least $120 per night, concerns the checkout procedure. Not surprisingly,frequent business travelers claim they want to be able to checkout without having towait in line at the front desk; hence, many hotels allow guests to leave withoutchecking out if their invoice, which is put in their room, looks okay. Unfortunately forbusiness travelers, these invoices do not show a zero balance, which guests claim theyneed for their reimbursement. When asked why hotels do not zero-out the invoicesbefore putting them in guests rooms, hotel managers often claim that they cannot doit because of the belief that guests may make additional charges. From the operatorsperspective, this is a rationale explanation. The guest who plans not to make anyadditional charges, however, is inconvenienced. This is an example of knowing whatthe guest wants, but not providing it because operational concerns take priority overguests concerns. Gap 2 also exists because of inadequate service leadership, which means `anoperationally driven mentalitya. This mentality is present in the old phrase `Thisbusiness would be a great business if only the guests didnt get in the waya. A thirdreason for Gap 2 is a reward system that is counter to guests needs. For instance,managers who are rewarded based on their meeting budget, will be less likely to goover budget to satisfy a guest than a manager who is rewarded based on overall guestsatisfaction. A nal reason for GAP 2 is a poor service design. A poor service design isone where the movement of guests and employees is restricted or otherwise inhibited.When one of the authors of this paper asked a food service waiter why it took so longto get served, the waiter replied, `We closed the kitchen close to this dining area tosave costs, and now I have to walk all the way to the main kitchen, which is on theother side of the buildinga. To close Gap 2, management needs to be fully committed to customer service andloyalty. Employee rewards need to be designed so that the customer comes rst.Organizations should also undertake a service blueprint. A service blueprint is denedas a picture or a map that visually displays the service by simultaneously depicting theprocess of the service delivery. It does this by breaking down the service into logicalcomponents and steps from both the employees and the customers perspective. (SeeZeithaml and Bitner, 1996 for more on service blueprinting.) Gap 3 is dened as the gap between the customer-driven service designs andstandards and the service delivery. A gap here suggests that what was planned bymanagement was not implemented by the sta!. One of the main reasons for Gap 3is the deciency in managements human resource policies. These decient policies
  12. 12. 356 S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370usually occur because top management has failed to see the link between customerloyalty and employee satisfaction, and employee satisfaction and prots. Recentresearch by Reichheld (1996) found that service outlets (in this case, tire outlets,but the ndings do occur across industries) with the highest customer retentionalso had the best employee retention. When looking at the fast food business,Reichheld (1996) found those restaurants with `lowa employee turnover had protmargins more than 50% higher than stores with high employee turnover. This lack ofunderstanding of an employees impact on customer retention and protability resultsin managements practice of hiring `warm bodiesa, as opposed to the right person forthe job. To close Gap 3, Zeithaml and Bitner (1996), among others (Reichheld, 1996,Heskett et al., 1997), argue that organizations must take a strategic approach tohuman resources. Rather than falling into the trap of hiring `warm bodiesa, it isnecessary to develop a plan to ensure future employment needs are met. In order tohave a customer oriented service delivery system, Zeithaml and Bitner (1996, pp.313}328) argue that management must do the following:1. Hire the right people: In order to hire the right people, it is helpful that the rm: (1) be the preferred employer, (2) compete for the best people, and (3) hire for service competencies and service inclination. Berry (1997) has stated that service work is 95% volunteer. What he means is that with 5% e!ort an employee can perform the necessary service task (i.e., check a guest into the hotel). The other 95% is the attitude the employee brings to the task.2. Provide needed support systems. Components of this strategy include providing supportive technology and equipment, and developing service-oriented internal processes. For example, The Mirage hotel in Las Vegas, provides room service with its elevators (i.e., it does not need to share them with housekeeping) so they could deliver room service items hot and in a timely manner. It is usually easy to nd out what employees need to do their jobs correctly; the best way is to just ask them.3. Develop people to deliver service quality. Promoting teamwork, empowering em- ployees, and training for technical and interactive skills are all ways to develop people to deliver service quality. In its rst year of operation, The Mirage hotel invested over $3 million in employee development (Peters, 1995).4. Retain the best people. In order to retain the best people, it is necessary to measure and reward strong service performers, treat employees as customers, and include employees in the companys vision. Employees are more likely to stay at a job if they feel they are treated fairly. At the Mirage, the employee dining room is as well decorated as the guests dining room, and the food is of the highest quality. Treating employees like customers not only encourage employees to stay with the rm, it also e!ects the way they treat guests. As Bill Marriott says: `Take care of your employees and theyll take care of your customers (Cannie, 1991, p. 170)a. Joan Cannie (1991) states that `customer relations mirror employee relations. The way you treat your employees is the way they will treat your customersa. (p. 148.) For instance, if a company lets employees know what is happening, the employee is more likely to be able to help the customer with organization type questions.
  13. 13. S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370 357 Similarly, if an employee knows that an organization is solidly behind them, she/he will not be afraid to do what it takes to help the guest. The second leg of the triangle is discussed next.8.2. Value-added } value-recovery Value-added and value-recovery strategies are designed specically to enhancecustomer perceptions of the rewards and costs associated with present and futureservice transactions. Beyond the added value derived from increased reward or lowercost from specic transactions, value-added strategies permit customers to acquireadditional rewards that accumulate for future transactions so long as they maintaintheir relationship with the brand. Most value-added strategy increases relationshiprewards while relationship costs remain una!ected. Hotel customers, for example, canobtain additional privileges in present transaction, such as upgrades, expeditedcheck-in, and guaranteed check-cashing privileges. Also available are cross promo-tions with complementary services such as airlines and car rental companies. Thesecross promotions can occur in either a current or future transaction and can be eitherfree of charge or available at a minimal cost (Barlow, 1992). In general, value-added and value-recovery strategies both a!ect the value of thebuyer}provider exchange, but this in#uence is exerted in di!erent ways. Value-addedstrategies increase the rewards associated with the current relationship, whereasvalue-recovery strategies reduce or eliminate the costs associated with service failure. Consider the sources of value added or value recovery for current and futuretransactions in the hotel industry (see Table 3). Features are of six types: xnancial (e.g.,saving money on future transactions, complete reimbursement if service failure, 10%discount at gift shop); temporal (e.g., saving time by priority check-in); functional (e.g.,check cashing, web-site available); experiential (e.g., upgrades or turndown services);emotional (e.g., more recognition and/or more pleasurable service experience); and/orsocial (e.g., interpersonal link with a service provider) components of the cus-tomer/provider exchange. In fact, the companies Dube and Shoemaker (1999) studied Hall had developed strategies that presented a relatively broad portfolio of these varioussources of value. Most of them had created for each member in a value-addedprogram a preference prole that allows the hotel to `customizea the stay for eachguest, adding as much value as possible to each transaction as well as to the long-termrelationship. The combinations of value-added and value-recovery strategies, which are tied tocurrent and future transactions, may very well be necessary to in#uence customerswitching and loyalty decisions. Service guarantees, for example, are designed toreduce both the nancial cost and the psychological uncertainty associated with aservice failure. Service providers have to be careful in choosing the appropriate features to includein shaping customers perceptions of the value of their relationship with the brand, aswell as the appropriate level on each feature. Research suggests that customers may besensitive to the quality of these strategies (OBrien and Jones, 1995; Dowling and
  14. 14. 358 S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370Table 3Features of value-added and value-recovery strategies in place in eight leading hotel companiesBenets Regular tier member Middle tier member Upper tier memberFinancial rewards Either 1, 5, or 10 points Bonus points earned on Bonus points earned on(value-added: current) per dollar spent with no regular tier points; regular tier points; Bonus bonus on base points Bonus can be 10, 15 or can be 10, 25 or 30% earned 20%Financial rewards Either not available or Either not available or Either not available or can(value-added: future) can combine points can combine points combine points with with spouse with spouse spouseFinancial rewards Either no upgrades Either automatic One conrmable upgrade(value-added: future) available or automatic upgrade if available or every ve qualifying upgrade if room one conrmable stays#automatic available upgrade every ve upgrade available qualifying stays whenever paying minimum published room rate, based on availability; or automatic upgrade available whenever availableFinancial rewards 150 points for getting Bonus points earned on Bonus points earned on(value-added: future) friend to join the regular tier points; regular tier points; Bonus program or no bonus Bonus can be 0, 10, 15 can be 0, 10, 25 or 30% or threshold awards or 20% or 5000 bonus 5000 bonus points after points after 7 paid VIP 7 paid VIP stays with stays with calendar calendar quarter quarterFinancial rewards 500 points for 500 points for govern- 500 points for government(value-added: current) government or ment or commercial or commercial rate, 1000 commercial rate, rate, 1000 points for points for others; get 20% 1000 points for others; others; get 20% when when presenting rental get 20% when presenting rental agreement at check-in; or presenting rental agreement at check-in; earn 25% bonus with car agreement at check-in; or earn 25% bonus rental agreement; earn 500 or earn 25% bonus with car rental agree- points per Hertz rental with car rental agree- ment; earn 500 points ment; earn 250}500 per Hertz rental points per Hertz rental; 100 points per car rental partnerFinancial rewards Earn hotel points or Earn hotel points or Earn hotel points or(value-added: current) airline miles; one chain airline miles; one chain airline miles; one chain lets lets you earn both lets you earn both you earn both hotel points hotel points and airline hotel points and airline and airline points; airline points;airline miles for points; airline miles for miles for stay instead of stay instead of hotel stay instead of hotel hotel points; some hotels points; some hotels can points; some hotels only hotel points only hotel points only hotel points (¹able continued in next page)
  15. 15. S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370 359Table 3 (Continued)Benets Regular tier member Middle tier member Upper tier memberFinancial rewards A$nity card where you A$nity card where you A$nity card where you(value-added: future) earn hotel points for earn hotel points for earn hotel points for credit credit card spending; credit card spending; card spending; earn 2000 earn 2000 credit card earn 2000 credit card credit card points for: 150 points for: 150 hotel points for: 150 hotel hotel points, 330 hotel points, 330 hotel points, 330 hotel points, or 1000 hotel points, or 1000 hotel points, or 1000 hotel points points pointsFinancial rewards No discount in gift No discount in gift 10% discount in gift shop(value-added: current) shop shopFinancial rewards Exchange points for Exchange points for Exchange points for free(value-added: current free rooms: 8000 points free rooms: 8000 rooms: 8000 pointsoneand future) one free weekend pointsone free free weekend night, 15,000 night, 15,000 points weekend night, 15,000 pointstwo free weekend two free weekend pointstwo free nights; 20,000 points one nights; 20,000 points weekend nights; 20,000 night; 12,500 hotel one night; 12,500 hotel points one night; 12,500 points1 free night for points 1 free night hotel points1 free mid-scale brand for mid-scale brand night for mid-scale brandFinancial rewards Exchange hotel points Exchange hotel points Exchange hotel points for(value-added: current for airline miles: Some, for airline miles: Some, airline miles: Some, noand future) no change available; no change available; change available; others others 10,000 others 10,000 10,000 points2500 points2500 airline points2500 airline airline miles; 10,000 miles; 10,000 miles; 10,000 points5000 miles; some points5000 miles; points5000 miles; require minimum 9000 some require minimum some require minimum points per exchange 9000 points per 9000 points per exchange exchangeFunctional/temporal Point statement sent Point statement sent Point statement sent every(value-added) every other month with every other month other month with activity; activity; statement sent with activity; statement statement sent monthly; monthly; sent quarterly sent monthly; sent sent quarterly quarterlyFunctional/temporal Some hotels o!er Some hotels o!er Some hotels o!er(value-added: current members only reserva- members only reser- members only reservationand future) tion phone numbers vation phone numbers phone numbers at this at this level, while at this level, while level, while others have no others have no members others have no members only reservation only reservation phone members only reser- phone numbers at this numbers at this level vation phone numbers level at this levelFunctional/temporal No turndown service; No turndown service; Turndown service normal(value-added: current) availability of service availability of service at this level; availability of varies by owner of varies by owner of service varies by owner of brand brand brand (¹able continued in next page)
  16. 16. 360 S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370Table 3 (Continued)Benets Regular tier member Middle tier member Upper tier memberFunctional/temporal No separate check-in; No separate check-in; No separate check-in;(value-added: current) separate lines; Priority separate lines. Priority separate lines; Priority check-in; rooms check-in; rooms check-in; rooms assigned assigned and room key assigned and room key and room key waiting at waiting at check-in waiting at check-in check-in desk; zip-in, desk; zip-in, check-in; desk; zip-in, check-in; check-in;Functional/temporal No check cashing for Check cashing up to Check cashing up to $500(value-added: current) member at this level; $250 per stay, up to per stay; up to $200 per Check cashing up to $200 per day; no check day; no check cashing at $250 per stay; no cashing at all all check cashing at allFunctional/temporal No web-site available; No web-site available; No web-site available;(value-added: future) Web-site available Web-site available Web-site available where where guests can where guests can guests can redeem awards, redeem awards, change redeem awards, change change addresses, and addresses, and conduct addresses, and conduct conduct various various transactions various transactions transactionsFunctional/temporal No direct billing Direct billing through Direct billing through(value-added: current) through individual at individual; no direct individual; no direct this level; no direct billing at all billing at all billing at allFunctional/temporal Not available at all; Available at 10:00 a.m; Available at 10:00 a.m;(value-added: current) not available at this 7 a.m. check-in; 9}5 7 a.m. check-in; 9}5 level; 7 a.m. check-in; check-in, check-out check-in, check-out 9}5 check-in, check-outFunctional/temporal No priority waiting list No priority waiting list Priority waiting list during(value-added: future) during busy times during busy times busy timesPsychological/ Attend the Academyemotional (value- Awards as guest of Hoteladded: future) CompanyPsychological/ Customer proling so Customer proling so Customer proling soemotional (value-added: hotel knows your hotel knows your hotel knows your wantscurrent and future) wants and needs wants and needs and needsPsychological/ At least one hotel stay Must have at least Must have at least 15emotional (value- in past 12 months to be four qualifying stays qualifying stays or fouradded: future) a member during calendar year; stays and 30 nights; Can pay to join this Invitation only; level or can be earned; 60#nights; must stay 50 20#nights; must stay nights in 25 stays 20 nights in 10 staysPsychological/ Customer service Customer service Customer service centersemotional (value- centers that can help centers that can help that can help whenrecovery: current and when problems occur when problems occur problems occur that arefuture) that are not taken care that are not taken care not taken care of at hotel of at hotel level; some of at hotel level; some level; some hotels have hotels have interna- hotels have interna- international call centers; tional call centers; some tional call centers; some some call centers open call centers open 24 h call centers open 24 h 24 h (¹able continued in next page)
  17. 17. S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370 361Table 3 (Continued)Benets Regular tier member Middle tier member Upper tier memberPsychological/ Perfect stay programs Perfect stay programs Perfect stay programsemotional (value- where all problems where all problems where all problemsrecovery: current and guaranteed to be guaranteed to be guaranteed to be resolved;future) resolved; if not send resolved; if not send if not send copy of folio copy of folio and letter copy of folio and and letter to specic to specic address and letter to specic address and get free get free guaranteed address and get free guaranteed upgrade upgrade guaranteed upgradePsychological/ 100% satisfaction 100% satisfaction 100% satisfactionemotional (value- guarantee (note, hotel guarantee (note, hotel guarantee (note, hotel withrecovery: current) with this program does with this program this program does not not o!er any type of does not o!er any type o!er any type of frequency frequency program) of frequency program) program)Dube and Shoemaker (1999). HUncles, 1997). For instance, consider the cash value of the redemption reward.Members of one hotel companys frequency program can earn one free weekend roomnight with the redemption of 20,000 points. Since $1 equals 10 points, the redemptionvalue costs $2000. This does not seem to be a great value, when examined closely. Inthe context of value-recovery strategy, research has shown that the magnitude ofmonetary compensation o!ered and the e!ectiveness of the recovery (Goodwin andRoss, 1992; Webster and Sundaram, 1998) impact future loyalty and satisfaction. Onehotel chain Dube and Shoemaker (1999) talked with o!ers a 100% satisfaction Hguarantee. If anything goes wrong with the hotel stay, the stay is free. Another chaino!ers a free guaranteed upgrade certicate on the next stay for problems with thecurrent stay. Another parameter to set with caution pertains to the range of choice of theserewards and the degree of #exibility in their redemption format. For instance, manyhotel chains allow customers to earn either airline miles or hotel points, which enablesthe guest to choose the reward that she wants. One chain allows for `double-dippinga,which means the guest receives both miles and points. The aspirational value of therewards for specic market segments also has to be assessed. That is, various benetso!ered to elite members, for instance, systematic upgrade, beyond their monetary orfunctional value, may be highly sought due to the social image attached to them. The perceived likelihood of achieving the rewards is another aspect that has to beset at the appropriate level. As one of the hotel frequency program managersmentioned in one of Dube and Shoemakers (1999) interview `If the goal, i.e., a free Hhotel room or a free airline #ight, is unobtainable then the customer will nd no value.That is why we have formed alliances with the airlines, credit card companies, andrental car companies. It is all about giving customers many chances to earn points ormilesa. The programs ease of use is also critical to a strategys ability to increase customersperceptions of its relationship with a service provider. One of the problems with the
  18. 18. 362 S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370AirMiles program was that initially customers were responsible for collecting andkeeping track of their AirMiles. Many hotel rms now provide customers the abilityto keep track of their points/miles via the Internet (Jones et al., 1991). Finally, the immediacy with which the rewards or compensations are available isanother parameter that may impact customers perception of value. Some of the hotelcompanies Dube and Shoemaker (1999) talked to have policies that allow guests to Hredeem their points anytime; others, however, impose blackout dates at some of themost desirable times. The most important way in which service providers, and not just those in the hotelindustry, attempt to make it more costly for customers to end the relationship is bydi!erentiating the nature and magnitude of value being created at di!erent member-ship tiers. In most companies, value-added strategies are di!erentiated in two to threetiers, corresponding to increasing amounts of purchase at qualifying condition servicelevels. By increasing the `added-value per unit of purchasea as one moves from onetier to the next, the provider is making it more costly for the guest, not only to switchto a competitor but also, to divide their share of purchases among various providers.For instance, as one moves up the tier level (e.g., from regular to middle to upper) thepoints earned for dollars spent increases. This can be seen in Table 3, which revealsthat middle tier members can earn up to a 20% bonus on points while upper tiermembers can earn a 30% bonus. As can be seen in Table 3, there is little evidence that either value-added orvalue-recovery strategies attempt to directly change consumers perceptions of therewards and costs associated with competition. Instead, the various providers attemptto di!erentiate their o!ering from the competitors by multiple variations in thevarious features of their value-added and value-recovery strategies. For instance, a hotel chain may o!er 250 points toward a free stay if one rents a carwith a particular rental car company and another hotel chain may o!er 500 points forthe same thing. One needs to be careful when comparing such programs because therate at which one earns points can vary. While the business class chains (e.g., Sheraton,Hyatt, and Hilton) generally o!er 10 points for each $1 spent, mid-scale properties(e.g., Holiday Inn and Best Western) generally o!er fewer points. There is still variability among programs. For instance, the bonus points one canearn as they move to higher tiers (such tiers are based upon stay frequency in a giventime period) can range from 10 to 20% at the middle tier and 10 to 30% at the uppertier. Similarly, the availability of upgrades, shown by Bowen and Shoemaker (1998) tobe very important to frequent business travelers who stay in luxury properties, canvary by program both within and between tiers. In the regular tier some chains allowno upgrades while others provide an automatic upgrade if a room is available. In themiddle tier, there can be automatic upgrades depending upon availability or one canearn an upgrade every ve qualifying stays. Finally, program variability can also be seen in the way in which customers canearn points. As mentioned earlier, one hotel chain allows the customer to earn bothhotel points and airline miles, while other chains make the customer choose one or theother. The redemption of points also varies. The cost of a free room varies between8000 and 12,500 points and the conversion of a$nity card points to hotel points also
  19. 19. S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370 363varies. For example, 2000 points earned on a credit card can be worth either 150, 330,or 1000 hotel points. The third leg of the triangle is discussed next.8.3. Database management and communication Database management is critical to customer loyalty for it is the foundation ofone-to-one marketing. A properly designed database enables rms to keep track ofguests preferences; enabling the service rm to provide customized services. Forinstance, consider the hotel guest that always wants a room that is designated fornon-smokers. Also assume the guest always wants a room with a double bed andfeather pillows. This information can easily be stored in a database so when the guest,or an administrative assistant, makes a hotel reservation, the guest will get thepreferred room type. Bowen and Shoemaker (1998) found that such customizationwould increase loyalty. Specically, they found the following:E 57.7% of their sample claimed that they would be loyal to a hotel that uses information from prior stays to customize services. (Surprisingly, only 24.3% claimed that the hotels they stayed in most frequently provided this service.)E 44.7% claimed they would be loyal to a hotel that allowed them to request a specic room.E 41.1% of their respondents claimed they would be loyal to a hotel that expedited the registration process.E 37.7% claimed they would be loyal to a hotel that called them and asked them if they would like to make a reservation if the hotel is going to be sold out at a time they normally visit the hotel.E 38.3% claim they want to be recognized when they arrive.All these activities can occur with a proper database. Ritz Carlton is probably the bestexample of chains that use databases to customize services. Other hotel companies,however, both independents and chains, are moving in similar directions. (To see howRitz Carlton uses its database to customize services see Barsky, 1995). For MarriottHotels, `2knowing their customers is their lifeblood. Through their computer system, the Marriott receptionist knows, as the customer checks in, whether he appreci- ates an iron in his room, whether she prefers a non-smoking room on the rst #oor, whether the bill will be customer-settled, sent to the rm, or charged to a monthly account, whether the customer is a member of the Diamond Club and entitled to an upgrade. This information is an important element in Marriotts strategy to stay ahead through customer knowledge (Cram, 1994, p. 123).A database can also be used to estimate a customers value. Examining how recentlythey last visited, how frequently they visit, and how much they spend per visit(monetary value) does this. This is referred to as RFM or RF ( value) analysis;
  20. 20. 364 S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370where R is recency, F is frequency, and M is monetary value. This information canthen be used to classify customers into one of four cells. In addition, Magson (1998)explains that the strategic objectives for creating value information are as follows:E understanding allowable marketing recruitment costs between di!erent customers, and therefore helping to determine recruitment strategy;E understanding the performance of di!erent customer types over time and therefore forming communications strategy, i.e., allowable investment costs after recruitment;E to be able to monitor e!ects of other elements of communications strategy, contact methods, etc.; andE for business planning purposes to enable forecasting, trending, and understanding `what if a scenarios through generating predicted lifetime values, and therefore being able to estimate the added value of marketing activity for the benet of an organization as a whole (p. 28). One advantage of databases is that information from partners databases (i.e., thepartnership between a hotel company, a rental car company, and an airline) can becombined with the rms current database to learn more about a customers travelpatterns. This information can then be used in site selection models and in targetedmailings. When communicating with guests, it is critical that external communications donot over-promise what the service can deliver. Gap 4, occurs when external commun-ications over-promise what the service can deliver. This gap is a result of (1)inadequate management of service promises; (2) promising unrealistic expectationsand rewards in advertising and personal selling; (3) insu$cient customer communica-tion; and (4) inadequate horizontal communication, particularly among operations,marketing, and human resources. In other words, because customers are receiving thewrong message, they are forming the wrong expectations. Unfortunately, miscom-munication can happen frequently when the team of employees involved in thedevelopment of the communication pieces is di!erent than the team of employees whomust execute the promises made through the communications. This leads to unhappyguests and a decrease in loyalty. This ends the discussion of the Loyalty Triangle . We now turn to measuring thesuccess or failure of a loyalty program.9. The metrics of loyalty The key benchmark for any loyalty program is the incremental part; that is, whatpercentage of business would not be coming through the door if not a$liated with theloyalty program. Judd Goldfedder, president of the Customer Connection, a loyaltymarketing rm specializing in restaurants, states that such as gure cannot be easilyquantied. While we try to do all we can to objectively and accurately measure the sales generated by a frequent diner program, no analysis can provide absolute
  21. 21. S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370 365 evidence that any program produces a denitive amount of incremental sales. Therefore, the best we can do is make some subjective assumptions, temper them with common sense and good business judgement, and reach a `comfort zonea regarding what portion of sales were generated as a direct result of the program versus guest patronage that would have occurred anyway (Goldfedder, 1998). In interviews with managers of frequency programs at major hotel companies,Dube and Shoemaker (1999) found that many measure the impact of their programs Hby performing di!erent types of analyses. First, they make comparisons betweenmembers and non-members. To do this analysis, frequency program managers pull asample from the entire universe of people who are staying at the hotel (or across asystem of hotels) during a given time period. From this sample they examine thefollowing pieces of information.E Average folio revenue generated by program members relative to non-program members. This involves examining the total purchase behavior while they are on the property. As discussed earlier, Bowen and Shoemaker (1998) found that loyal guests spent more than non-loyal guests did.E The di!erences in satisfaction scores between program members and non- members.E The di!erences in willingness to return scores between program members and non-members.E Average number of visits between program members and non-members.E The `share of walleta between program members and non-members. That is, the percentage of all hotel stays for both groups that goes towards the specic hotel or chain conducting the analysis.E The contribution the program makes to overall occupancy at a particular property or throughout the system.E The growth in program related occupancy to the growth in occupancy for the industry at large. A second method to understand the impact of a program is to conduct researchamong the members who belong to the loyalty program and ask them if theirpurchase behavior would remain the same or if they would migrate to anothercompany if the frequency program went away. One way to ask this question would beas follows: Please think about what a business hotel might o!er you to develop a feeling of loyalty to that hotel. For each of the possible benets listed below, please indicate the e!ect that benet, if provided, would have on developing a feeling of loyalty to the hotel. Use a 1 to 7 scale where 1 means `would have no e!ect on loyaltya and 7 means `it would have great e!ect on loyaltya. Using this scale, Bowen and Shoemaker (1998) found that 27.8% of frequentbusiness travelers who stay in luxury hotels when traveling for business rated the
  22. 22. 366 S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370benet `the hotel has a frequent-guest program that allows you to earn points towardfree accommodationsa a 7. A total of 49.2% rated the benet a 6 or a 7. A second wayto measure purchase behavior would be to use trade-o! analysis techniques such asconjoint analysis (Dolan, 1990). One of the features would be the presence or absenceof a frequency program. A third method to understand the impact of a program is to examine the ROI bothon a system basis and a property basis. Since most hotels pay a fee contributing to theprogram based on stay activity, it is necessary to examine whether the investment thehotels are making to the program are more than o!set by the revenues generated bythe users who are members of the program. A fourth metric is what Goldfedder (1998) calls `they would have come anywayanalysisa. This method works by calculating the cost of the total program and thetotal revenue earned during the time the program is running. One then makesassumptions about the percentage of revenue that is generated by consumerswho would have come anyway. The total costs of the program are then subtractedfrom the revenue generated by those who would have come anyway to determine theincremental revenues. An example of this type of analysis is shown in Table 4. In thisexample, even if people who would have come anyway generated 95% of the revenue,the program still would have been protable. (Although the reader is correct inassuming that while the program was protable it was not terribly successful, giventhe money spent to earn $8720. The programs success does look much better as morerevenue is generated because of the program.)Table 4They would have come anyway analysis*Assumptions regarding birthday card promotions: Redemption revenue from card-swipe frequent diner transactions $1,329,150 Redemption revenue without using frequent diner card 65,258 Total revenue from promotion $1,394,408 Total cost of the promotion $61,000Percent who would have Sales anyway Incremental amount less $61,000come anyway 5 $69,702(0.05*$1,394,408) $1,263,688 ($1,394,408-$69,702-$61,000) 10 $139,441 $1,193,967 15 $209,161 $1,124,247 20 $278,882 $1,054,526 25 $348,602 $984,806 50 $697,204 $636,204 75 $1,045,806 $287,602 90 $1,254,967 $78,441 95 $1,324,688 $8720100 $1,394,408 ($61,000) ($1,394,408-$1,394,408-$61,000)Goldfedder (1998).
  23. 23. S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370 367 A fth method used to understand the nancial impact of the program is to examinerevenue lost because of a service failure that results in brand switching. In discussionswith managers of loyalty programs at major hotel chains, Dube and Shoemaker H(1999) found that practically all the major hotel chains have customer service centersthat handle customers complaints about a particular property. Within certain con-straints, the employees at these centers are authorized to resolve problems and o!ercompensation (e.g., extra award points or upgrade certicates) to guests who feel as ifthey have been mistreated. The goal of such centers, of course, is to keep customersfrom switching to another brand. Not surprisingly, given the ndings of Bowen andShoemaker (1998), the majority of calls to the service centers are from programmembers. If one assumes that service failures occur equally to program members andnon-members, one can estimate the revenue lost by non-members, who switch toanother brand instead of calling the service center for compensation, by examining thenumber and type of complaints by members. One can rene this measurement bydeveloping a classication of service failures that would cause a consumer to switchbrands if the problem was not resolved su$ciently. Lost revenue could then becalculated as follows: Total lost revenue(Number of people who have complaint that would cause them to switch * potential revenue per guest) * percentage who would actually switch A sixth and nal method used to understand the nancial impact of a program is touse an experimental design when conducting research. The most useful design wouldbe a pre-test/post-test with a control group. With this type of design, a number ofcustomers with similar behavior and demographic characteristics are randomly se-lected and divided into two groups. (The number depends upon such things as desiredcondence interval and budget. See Churchill (1995) for more specics on sample sizecharacteristics.) The travel behavior of each group is then observed and recorded. Onegroup then receives the treatment (i.e., a promotional o!er), while the other groupreceives nothing. The travel behavior of both groups is then recorded. The di!erencein behavior between the groups can be attributed to the treatment e!ect. This type ofdesign can be seen in Table 5. This ends the discussion on customer loyalty. The next section examines futureresearch issues.10. Future research issues In preparation for this article and an earlier article (Dube and Shoemaker, 1999), HShoemaker asked each of the directors of the frequency programs at eight major hotelrms based in the U.S., what the issues were that kept them awake at night. Theresponses to this question, along with our own reading of the academic literature,provide the basis for this section. One area for future research is to identify those features that can create value forboth the guest and the rm that (1) do not raise the cost of the program; and (2)
  24. 24. 368 S. Shoemaker, R.C. Lewis / Hospitality Management 18 (1999) 345}370Table 5Basic form of pre-test post-test with control groupClassication Group type Average number of visitsnumber last 3 months01 Pre-test test group 5.302 Post-test test group 6.803 Pre-test control group (does not receive the treatment) 5.404 Post-test control group(does not receive the treatment) 5.6Treatment e!ect(Post-test test group } pre-test test group) } (post-test control group } pre-test controlgroup) (02!01)}(04!03) (6.8!5.3)}(5.6!5.4) 1.3 increase in number of visitsROI(No. of visits * average amount spent) } cost of the program.provide a competitive advantage. As discussed in this paper, those benets can relateto any side of the loyalty triangle. The literature on the Process side of the loyaltytriangle is well developed (see, e.g., Cannie, 1991; Barsky, 1995; Bhote, 1996; Zeithamland Bitner, 1996). In contrast, literature on the Value Creation side and theDatabase/Communication side is relatively scarce in the hospitality eld. Bowen andShoemaker (1998) examined the benets needed to create loyalty in the luxurysegment. Similar studies need to be conducted for each of the lower tiers. Ho!man andChung (1999) investigated hospitality recovery strategies for a hotel and restaurant inthe southeast region of the United States. A similar study should be conducted withlarge hotel chains. The impact of communication also needs to be examined. Forinstance, what is the best way to communicate with the loyal customer (i.e., theinternet, mailings) and the frequency of communication. A second area for research is the need to develop better metrics to answer thequestion `would they have come anywaya. While di!erent metrics are presented inthis article, rms are still searching for ways to measure the incremental business thatresults because of the program. A third area for research is to investigate the usefulness of the loyalty triangle acrossdi!erent service businesses. A fourth area is to investigate what creates customer loyalty across di!erentcultures. Given that travel service rms operate internationally, the natural questionis, `Should loyalty programs be tailored for specic geographic regions or will oneprogram be su$cient for all cultures?a A fth area of research is to investigate the impact of partnerships on loyalty. Mosthotel companies, rental car companies, and airlines have partnerships with each other.These partnerships do cost money. One question for a hotel rm would be `Is it
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