Office Hours With Michael McCall: The Real Value of Customer Loyalty

Welcome to Office Hours, where current issues facing hospitality professionals will be discussed and potential solutions pursued. My name is Michael McCall and I am the NAMA Endowed Professor of Hospitality Business at Michigan State University.

My primary areas of expertise lie in customer loyalty and reward programs, but I am particularly interested in the wider consumer behavior landscape. Over the next few months I will be discussing issues that we are thinking about in the ever expanding field of Hospitality; these might include topics related to guest security, loyalty and revenue management and other areas related to consumer lifetime value. Notably, I will be commenting on those issues that are keeping hospitality executives up at night.

Welcome! In our last discussion, we considered the notion of value as it applies to why consumers might choose one firm over another. We also touched upon the notion that firms might benefit considerably from taking a deeper dive into consumer perceptions of value. Today’s discussion will take these concepts into the customer loyalty space to understand how firms might begin to capture that customer value.

A bit of brief history. The loyalty space began in earnest when Sperry and Hutchinson launched the S&H Green Stamp program back in 1896. While it was primitive in nature, it contained several features that hospitality managers would do well to keep in mind. First and perhaps foremost, it offered choice to customers who participated in the program. Participants could collect stamps when they purchased goods at selected retailers. When a specific amount of stamp point-values were acquired, they could then select from a catalogue their desired reward.

What made this special was that the consumer both chose the reward and the timing when they received it. The program was extremely popular from the 1930s through the 1960s and ended in the late 1980s. However, it is worth noting that the points never expired and even to this day there is a fund available to those individuals who still have S&H green books they wish to redeem.

When we fast forward, the next major leap in loyalty programming came in May of 1981 when American Airlines launched its AAdvantage program. In this case, frequent fliers were rewarded with airline miles that could be redeemed at a fractional value for future flights and other flight discounts. The more a customer flew with American Airlines, the more miles they acquired, thereby enhancing American Airlines’ status as a preferred carrier.
It was not long after this launch that other airlines and major hotel chains adopted this model.

A key strength of the program is that airlines, hotels and other reward providers were able to begin tracking customer spending. In other words, while green stamps provided rewards for patronage, there was no way available at the time to track customer spending and or customer characteristics. Airlines and hotels could now gather this information from their customers and the era of customer data collection and analysis took a new turn.

Further, another “perk” of these new programs was that reward points could often be earned during business travel yet redeemed for recreational purposes such as weekend getaways and family vacations. While the IRS has wandered into discussions of these benefits, at present reward redemption remains an important corporate benefit. It is this loyalty program model that dominates hospitality today.

In our next discussion we will consider in depth what these new data driven programs have not accomplished. Notably, are these programs with precious medal tiers adding value and growing the top line? Specifically, have these programs generated what hospitality managers would describe as true loyalty and customer engagement or have they merely become cost centers. As always, I welcome your thoughts questions and ideas for future discussions.

Make sure to follow along with Office Hours, a bi-weekly column by Michael McCall.

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