Loyalty Programs and Direct Website Performance: An Empirical Analysis of Global Hotel Brands

According to [18], loyalty programs first became popular at the beginning of the twentieth century. It was only in the 1980s that they began to diffuse into travel, as airlines and hotel companies introduced formalised schemes to enhance their relationships with customers. These initiatives were driven by a belief that loyal customers exhibit long-term commitment to the brand, leading to increased buying intention [5]; higher revenue per customer; a willingness to pay more for comparable products/services; and reduced vulnerability to substitution by alternative brands [35]. Loyal customers are also thought to be more likely to use lower-cost, and in particular direct, channels as well as to generate additional ancillary revenues during their stay. In addition, leveraging data from loyalty programs allows firms to reduce their reliance on wasteful mass marketing and concentrate on targeting more efficient customised messages to an already receptive audience [16]. As a result, many feel that building and maintaining an effective loyalty program is important, particularly in the highly competitive and increasingly commoditised hotel sector [44].

However, comprehensive empirical studies investigating the effects of loyalty programs on performance in the hotel sector has been relatively rare [39]. [18] investigated how programs affect revenue, occupancy rate and operating margin, revealing that investment yielded a modest but positive impact. Similarly [46] found that loyalty programs positively impacted revenues and occupancy, but only in high-end luxury hotels. Other studies [see, for example, 11 or 28] address the issue only indirectly, using aggregate loyalty measures that do not reliably reflect loyalty spend. A more recent study [12] found that loyalty expenses positively impacted RevPAR, ADR, occupancy and gross operating profit. In a follow up study [10], Hua demonstrates that this is moderated by e-commerce spend.

Loyalty programs, however, are not without their challenges, leading some to challenge their effectiveness [9, 23, 43]. For example, [40] point out that consumer benefits from hotel loyalty programs remain functional and are easily replicated by competitors, making any advantaged gained unsustainable. With programs largely undifferentiated, switching costs are low. In addition, travellers typically belong to multiple programs, further reducing the bond with the brand [47]. As they permeate throughout the sector, their overall benefit decreases, with the result that hotel loyalty programs have now become a commodity that is expected, but not necessarily valued, by customers, and which generates questionable returns for its sponsoring company.

Despite this, it’s clear that hotel brands believe that loyalty programs are important for competing in today’s marketplace [47]. Cumulatively over 1.1 billion Americans are members of hotel programs, with, in contrast to other sectors, membership levels growing quickly [3]. This may be because the barriers to membership has been dramatically reduced [47]. In an effort to compete, particularly with the powerful global online travel agencies, many hotel chains have launched what O’Connor [30] has dubbed ‘the loyalty wars’, placing increased emphasis on their loyalty program as a competitive method and automatically enrolling anyone making a reservation by offering substantial instant discounts for sign-up, in effect artificially inflating their membership numbers. Although in the short term this may bring some benefits, particularly in making the brand more attractive to real estate owners for franchise/management contract deals, in the longer term it is problematic as these new members compromise the integrity of the database, polluting it with subjects with little intention of subsequently interacting with the brand. Also, this strategy has implications in terms of running cost [6]. Administrative and technological costs increase proportionately with size [18], and brands must also make allowance for reward points as liabilities on balance sheets [47]. Thus, growing the database with less than optimal subjects has negative implications from both a strategic and financial perspective.

Given the increased emphasis hotel companies place on loyalty programs, combined with the aforementioned database quality issues, it’s clear that a deeper understanding of the mechanisms through which loyalty programs deliver their promised benefits is needed. In addition, since loyalty programs typically operate at the brand level, there is a need to shift the unit of analyses away from the hotel property level used in previous studies to the chain (brand) level. Prior research specifically identifies the need for further research on the mechanisms of how customer loyalty tools affect firm performance [14, 43]. We answer this call, attempting to bring clarity to how loyalty programs affect hotel performance by investigating their impact on driving business through direct distribution channels.

Over the past decades, technology has become deeply ingrained in the hotel marketing, sales and distribution processes [2]. In particular Internet-based distribution has become a key feature of hotels, with customers increasingly searching for, and booking, their hotel stays through online (web and mobile) channels [31]. Due to the perishable nature of the hotel product, having the right mix of distribution channels is important in terms of maximise revenue opportunities [19]. As a result, most hotels use a dynamic portfolio of direct and indirect, and online and offline channels, to reach out to the customer in an effective and efficient manner [26].

However in recent years overall distribution costs have been rising due to the rising prominence of online intermediaries in the hotel distribution process [33]. OTAs provide consumers with a wide range of value-added services, including supplemental information on destinations [17], room rate, facility and amenity comparison facilities [22] as well as, in many cases, more attractive pricing [7]. As a result, their value proposition is highly attractive from a customer perspective, with the result that online penetration figures have shifted substantially towards the indirect OTA route [21]. From a financial perspective this has two major implications for hotels. Firstly, selling through OTAs necessitates either the payment of a commission or the provision of net rates at a substantial discount, decreasing the resulting net revenue [42]. Alternatively, hotels have to invest more marketing funds to compete with the OTAs for the customer, again driving up costs and reducing profitability. In both cases the presence of OTAs in the marketplace has a significant effect on the competitiveness of hotels over reliant on these channels [2].

Direct channels, in contrast, have lower transaction costs and also allow hotels to communicate with customers more efficiently [15]. [34] suggest strategies for encouraging customers to book directly, in particular through the hotel’s or brand’s direct website. One way of driving such bookings is by nurturing a direct relationship with customers through loyalty programs operations. [37] hold that it requires less effort and is less costly to retain current customers rather than trying to attract new ones. And in addition, rather than booking through third parties, loyal customers tend to book through direct channels and in particular the hotel’s direct web presence [12]. Thus, attempting to better leverage loyalty programs to decrease dependence on OTAs, thus driving higher proportions of higher-margin direct business and enhancing profitability, would appear to be an attractive strategy for hotels.

To facilitate this process, this study specifically examines two interrelated issues. Firstly, as discussed above, hotel brands use loyalty programs to enhance customers’ perceived value, brand image and trust, leading to enhanced customer engagement [14]. As a result, the traditional “consider -> evaluate -> buy -> enjoy -> advocate ->  bond” purchase continuum is short-circuited, prompting loyal customers to skip earlier stages and move directly to “buy” [4]. This is particularly important in the hotel sector, which compete not only with each other but also with the powerful OTAs whose added value includes expediting consumer access to product choice and facilitating comparative evaluations. Thus, locking customers into an abridged customer journey is advantageous, reducing or eliminating the threat of substitution, resulting in higher direct sales [8].

The brand’s direct website plays a key role in this strategy [26]. Since loyal customers tend to book through the brand’s direct web presence [43], we theorise that there is a relationship between loyalty program effectiveness and brand website performance. With a deeper connection to the brand, loyal customers tend to be more engaged, browse more information and spend longer on the brand website [38]. We operationalise loyalty program effectiveness using a membership satisfaction score but given the afore mentioned efforts to grow loyalty program membership numbers, examining whether program size affects website performance is also relevant. This is assessed in two ways: traffic (number of unique visitors arriving on the website per month) and the resulting engagement of this traffic [20]. This is operationalised as “stickiness’ - the site’s ability to retain visitors as measured by number of pages viewed by each visitor and time spend on the site [36]. Bounce rate, the percentage of visitors who view only a single page (regarded as a negative sign in terms of user satisfaction) was also investigated. Thus, we put forth the following hypothesis:

While absolute traffic levels are important, the source of this traffic is also relevant. If loyalty programs are effective, they should have a positive effect on how the website attracts visitors. With an established connection to the brand, program members should already be aware of the brand’s existence and more likely to navigate directly to its website. They also could arrive through brand marketing efforts that leverage the loyalty database to communicate with members, prompting them to reengage [43]. In contrast, transient customers, as they are less aware of the brand and do not receive promotional efforts, arrive through search, and in particular paid search, where the resulting transaction costs negate many of the benefits of capturing a direct booking [32]. Thus, we put forth the following hypothesis: