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Are frequent-guest programs effective?
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Are Frequent-Guest Programs Effective? Even though they're expensive to maintain and promote, and relatively few guests actually use them, this study suggests that frequent-guest programs are destined to linger on unless all lodging chains were to drop such programs at the same time by Ken W. McCleary and Pamela A. Weaver FREQUENT-TRAVELER programs have been used as a marketing tool by major airlines for many years. In 1983, Holiday Inn, followed shortly by Marriott, effectively pushed the hotel
Ken W. McCleary, Ph.D., and P a m e l a A. Weaver, Ph.D., are professors in the department of Hotel, Restaurant, and Institutional Management at Virginia Polytechnic Institute and State University, Blacksburg, Virginia. AUGUST 1991
industry into the mire of patronage-reward programs. But there is a considerable amount of controversy surrounding the value of hotels' frequent-guest programs (FOPs) as a means of increasing customer loyalty, and therefore, profits for hotel chains? Robert Lewis, a professor at the University of Guelph, questions the long-term value of frequent-guest programs because he feels they don't expand the market and they don't address the real needs of ' See the a c c o m p a n y i n g article by R.S. Toh a n d M-J. Rivers, " F r e q u e n t - G u e s t P r o g r a m s : Do They Fly?," in this issue of The Quarterly•
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travelers. `) Lewis notes that a study conducted by the U.S. Travel Data Center indicated that only 2 percent of business travelers may consider FOPs important when selecting a hotel. Peter Yesawich, an industry marketing consultant, seems to agree with Lewis, noting that patronage-reward programs may be only a short-term solution to product-differentiation problems. 3 Other industry writers also question the value of frequent-guest 2Robert C. Lewis, "Are You L i s t e n i n g To C u s t o m e r s - - O r To Competitors?," Hotel & Motel Management, N o v e m b e r 2, 1990, p. 55. :~P e t e r C. Yesawich, "The F r e q u e n t Traveler Frenzy," Lodging Hospitality, J u l y 1987, p. 28.
programs. Much of the skepticism about such programs centers on their cost. Edward Watkins, editor of Lodging Hospitality, reports that the cost of advertising just the changes in Hyatt's frequent-guest program was $15 million. He further makes the point that "some research shows th at it is difficult, if not impossible, accurately to quantify the payback generated from frequent-traveler programs. ''4 If only a small percentage of travelers think FGPs are important, and if the cost of FGPs is high, why does nearly every major chain offer some sort of program? The answer seems to be t hat frequent-guest programs do have some impact. Mike Ribero, senior vice president of marketing for Hilton Hotels, is quoted as saying t ha t a survey indicated t hat 19 percent of the members of Hilton's HHonors would not have stayed at Hilton if it had not been for their frequentguest program. 5 Douglas Shifflet, of D.K. Shifflet and Associates, notes that, while chain loyalty decreased industry-wide between 1986 and 1988, those chains with highbenefit frequent-guest programs had less of a reduction in loyalty.6 And a survey of travel agents sponsored by Hotel & Travel Index found th at 71 percent of travel agents reported that frequent-stay programs are "very effective" or "somewhat effective.''7 More s t u d y n e e d e d . While frequent-guest programs provide a nice advertising ploy and may be useful in developing and maintaining mailing lists, there are m a ny questions th at need to be answered ' E d w a r d W a t k i n s , "Keeping Up with the Hiltons," Lodging Hospitality, J u n e 1989, p. 2. Carmen Anthony, "Frequent-Guest P r o g r a m s : R e w a r d T h r o u g h Repetition," Hotel & Resort Industry, October 1986, p. 88. ~'Douglas K. Shifflet, " S e g m e n t a t i o n Backfire?," Lodging, F e b r u a r y 1989, p. 5. 7J a n i c e Somerville, " F r e q u e n t - S t a y P r o g r a m s : Necessity or N i g h t m a r e ? , " Hotels & Restauronts International, April 1988, p. 62.
regarding the real effectiveness of the programs. This article reports on a study of business travelers regarding their use and opinions of frequent-guest programs. The study was designed to answer the following questions: (1) What are some characteristics of business travelers who belong to frequent-guest programs? (2) Are frequent-guest-program members willing to pay more than other business travelers to stay at a hotel with an FGP? If they are, how much more are they willing to pay and does the incremental amount vary depending upon whether they are paying their own bill or if their company is paying? (3) Does it make a difference whether an individual or the individual's company is paying for the room in terms of the likelihood of selecting a hotel which has a frequent-guest program? (4) What proportion of people would switch hotel chains if their preferred chain dropped its frequent-guest p r o g r a m - - t h a t is, how brand loyal are FGP members? (5) Is there a difference among FGP members who express a high degree of brand loyalty and those who don't, relative to how likely they are to choose a hotel chain which offers an FGP? (6) Are highly brand-loyal FGP members willing to pay more to stay at a chain with a frequentguest program than FGP members who are not highly brand loyal? (7) Are brand-loyal members of FGPs more likely than less brandloyal members to specify particular chains or properties? That is, do travelers who specify particular chains or properties indicate a high likelihood of switching chains if the FGP of their favorite chain is dropped? (8) What demographic factors are related to the level of brand loyalty of FGP members? 40
S a m p l e . A random sample of 3,187 U.S. subscribers to Corporate Meetings and Incentives magazine was sent a mail survey in April of 1990. A total of 433 completed questionnaires were received for a response rate of 13.6 percent. For our study, respondents were qualified depending on whether or not they belonged to a frequent-guest program. Among all survey replies, 243 (56 percent) respondents indicated t hat they belonged to at least one frequent-guest program. This group of 243 became the effective sample for the analysis presented in this article. T h e s u r v e y i n s t r u m e n t . The data presented in this article are a portion of a larger study of frequent business travelers sponsored by Hotel & Motel Management magazine. The entire questionnaire was pretested several times for clarity of language and to ensure that questions were interpreted consistently. One section of the questionnaire was dedicated specifically to gathering information on those who belonged to frequent-guest programs; the data from t h a t section are presented here.
What We Asked Outlined below are the survey results relating to the eight questions posed in this article. (1) C h a r a c t e r i s t i c s o f memhers. Exhibit 1 presents a profile of the 243 people who belonged to frequent-stay programs. In reading this article, it is important to note t hat this sample was very upscale and, therefore, may not be reflective of all members of FGPs. s Over 87 percent of our sample classified themselves as top management, nearly 90 percent of the sample was over 34 years of age, and 74.1 percent earned over $75,000 per year. Note, however, t h a t Toh a n d Rivers obtained a similar result. See t h e i r article b e g i n n i n g on page 46 of this Quarterly.
THE CORNELL H.R.A. Q U A R T E R L Y
The respondents were on the road a lot, taking an average of 21.5 domestic business trips during the previous year, staying an average 2.4 nights per trip, and using upscale hotels nearly 42 percent of the time. Some characteristics of the sample have interesting implications for marketing strategy. Approximately 55 percent of the FGP-member sample said they made their own reservations, which, of course, means that about 45 percent of the time someone else made the reservation for them. (For the total sample, more than 61 percent made their own reservations.) This underscores the importance for hotel marketers to consider not only the travelers themselves, but also those who may be asked to make the reservations. FGP members also are heavy users of hotels' toll-free numbers. Finally, FGP members took their families with them frequently when they traveled. In fact, they took their families with them more times when traveling on business than they took their families for pleasure trips in a year. While it is not the purpose of this article to make comparisons between frequent travelers who are members of FGPs and those who are not, the differences between these groups were significantY (2) Will F G P m e m b e r s p a y m o r e ? One of the major issues surrounding frequent-guest programs is their cost relative to the benefits received. This issue can be viewed not only from the hotel's standpoint, but also from the guest's standpoint. To determine the incremental value of frequent-guest programs, sample 9Ken W. McCleary and Pamela A. Weaver, "A Comparison of the Behavior and Characteristics of Members and Non-members of FrequentGuest Programs," an unpublished study, Virginia Polytechnic Institute and State University (Blacksburg, VA); and Toh and Rivers, op. cit.
A U G U S T 1991
EXHIBIT 1 Profile of study's frequent-guest-program members • 7.4 percent of respondents were female, 92.6 percent male. • Averaged 21.5 domestic business trips in 1989 • Stayed at a hotel an average of 2.4 nights per trip • 55.1 percent always make their own hotel reservations • 26.3 percent always use hotels' 800 numbers (34.2 percent use them "often") • Families joined the business traveler on 3.7 trips in 1989 • Took 3.3 leisure trips with their family in 1989 • These business travelers stayed in a luxury hotel 41.9 percent of the time, in a midscale hotel 46.3 percent of the time, and at a budget property 11.8 percent of the time • 87.4 percent were top managers, 2.9 percent were middle managers, 3.8 percent were field salespersons, and 3.8 percent were in other professional occupations. Other individual categories represented less than 1 percent each. • Income profile: • Age profile: Less than $25,000 0.8 percent Under 25 2.5 percent $25,001-$50,000 7.9 percent 25-34 8.0 percent $50,001-$75,000 17.2 percent 35-44 25.6 percent $75,001-$100,000 20.3 percent 45-54 29.9 percent $100,001 -$150,000 24.1 percent 55-64 27.3 percent $150,001-$200,000 16.8 percent Over 64 6.7 percent Over $200,000 12.9 percent
members were asked several questions regarding how much they expected to pay for a hotel room. First, the entire sample was asked how much they would pay for a hotel room when traveling on business both (1) when they pay for their own room, and (2) when their company pays. It may come as no surprise that respondents, in general, were willing to secure a more expensive room if their company was paying. The average rate the total sample said they would pay if they were responsible for their own expenses was $86.03, compared to $99.22 if their company was paying. Those who belong to frequentguest programs indicated that, on average, they are willing to pay more per night for a hotel room than those who don't belong, thus answering "yes" to the first part of question number two. Furthermore, they are willing to pay more regardless of whether they pay their own expenses or their company pays. FGP members responded that they personally would pay an average of $94.61 and would let their company 41
pay $107.70. This compares to $73.64 and $86.03, respectively, for those business travelers who don't belong to FGPs. These statistics certainly support a case for courting FGP members. Even though FGP members are willing to pay more for hotel rooms than non-members, this does not mean t hat the FGP is the sole reason for this willingness. To get at how much the FGP is worth to FGP members (the second part of question number two), they were asked how much m o r e they would be willing to pay to stay at a hotel with an FGP, both when they pay their own way and when their company foots the bill, rat her than at a hotel without an FGP. The responses indicate that, when they pay their own way, travelers are willing to pay a smaller premium for the frequentstay program than when their company is paying. About 54 percent of FGP members felt that FGPs were worth $2 or less extra per night if they were paying their own expenses. But that leaves about 46 percent of the sample willing to
EXHIBIT 2 Room-rate premiums FGP members are willing to pay When paying for their own rooms (n = 233)
When the members' companies pay for the rooms (n = 230)
Acceptable premium
Acceptable premium
$2 or less $2.01-$4 $4.01-$6 $6.01-$8 $8.01-$10 More than $10
Percent
54.1 6.0 8.2 6.4 10.3 15.0
Percent
$2 or less $2.01-$4 $4.01-$6 $6.01-$8 $8.01-$10 More than $10
47.4 4.8 6.5 6.1 14.3 20.9
EXHIBIT 3 Importance of FGPs to members The survey asked the question, "What would you do if your preferred chain dropped its FGP?" and 243 respondents answered as follows: Response
Percent
• Switch to a chain that offers an FGP
12.8
• Stay less often at my preferred chain, but still stay upon occasion • That move would have no effect • My preferred chain does not offer an FGP
32.5 49.4 5.3
p a y m o r e t h a n $2 p e r night for the p r o g r a m ; a n d 20.9 p e r c e n t said t h a t if t h e i r c o m p a n y is paying, t h e y are willing to go $10 or m o r e in additional room rate. Exhibit 2 p r e s e n t s the frequencies for each r e s p o n s e category for F G P m e m b e r s . The d a t a indicate t h a t m a n y m e m b e r s of f r e q u e n t - s t a y p r o g r a m s are willing to p a y e x t r a to s t a y a t a hotel t h a t offers the a d v a n t a g e s of m e m b e r s h i p in such a p r o g r a m . W h e t h e r those e x t r a dollars cover the hotel's cost of r u n n i n g the p r o g r a m depends, of course, on the cost of the p r o g r a m . O u r guess is t h a t the ability to charge m o r e for a room would not, by itself, result in a positive r e t u r n - o n - i n v e s t m e n t for FGPs. Therefore, we need to look at willingness to p a y a p r e m i u m relative to how loyal t r a v e l e r s are to hotels t h a t h a v e the p r o g r a m s . (3) W h o p a y s ? T h e t h i r d question a s k e d if the selection of a hotel w i t h a n F G P w a s r e l a t e d to who w a s p a y i n g expenses, the t r a v e l e r s or t h e i r company. To find out, frequent-guest-program members were a s k e d to r a t e on a five-point
scale how likely t h e y were to s t a y at hotels w i t h F G P s both w h e n t h e y p a y t h e i r own e x p e n s e s a n d w h e n t h e i r c o m p a n y pays. The scale r a n g e d b e t w e e n 1 = v e r y unlikely a n d 5 = v e r y likely. T h e d a t a analysis revealed no difference in the likelihood of F G P m e m b e r s as a group selecting a hotel with a n F G P r e g a r d l e s s of who is paying. (The m e a n response w a s 3.7 w h e t h e r the F G P m e m b e r w a s p a y i n g or t h e i r c o m p a n y w a s paying.)
(4) H o w loyal are members o f frequent-guest programs? R e s p o n d e n t s who belonged to f r e q u e n t - s t a y p r o g r a m s were a s k e d how t h e y would r e a c t if t h e i r p r e f e r r e d hotel chain dropped the FGP. T h e y were given four possible responses: (a) I would switch to a chain t h a t offered a f r e q u e n t - g u e s t p r o g r a m . (b) I would s t a y (at m y p r e f e r r e d chain) less often, b u t would still use the chain u p o n occasion. (e) It would h a v e no effect on me. (d) M y p r e f e r r e d chain does not offer a f r e q u e n t - g u e s t p r o g r a m . Exhibit 3 shows the p e r c e n t a g e 42
of responses falling in each category. The lowest b r a n d loyalty is indicated by those who would switch a n d the highest by those who felt t h a t dropping the p r o g r a m would h a v e no effect on t h e m . The responses m a y also indicate t h a t those who would switch chains are loyal to the F G P itself, r a t h e r t h a n to the chain. This would validate the fears t h a t hotel executives h a v e w h e n t h e y consider e l i m i n a t i n g t h e i r FGPs. T h e responses s h o w n in Exhibit 3 m a y be h e a r t e n i n g to the hotel i n d u s t r y b e c a u s e t h e y indicate t h a t n e a r l y h a l f (49.4 percent) of the s a m p l e said t h a t dropping F G P s would h a v e no effect on t h e i r b r a n d loyalty. To get a feel for the differences a m o n g the brand-loyal F G P m e m b e r s a n d those who show a lower level of loyalty or no loyalty at all, f u r t h e r analysis w a s necessary. 10 T h e r e m a i n d e r of the r e s e a r c h questions e x a m i n e d w h e t h e r t h e r e were differences a m o n g the first t h r e e options in Exhibit 3 (Switch, S t a y Less, No Effect) with r e g a r d to selected d e m o g r a p h i c a n d behavioral variables. The fourth response option (Does Not Offer) allowed people to indicate that, while t h e y belonged to a n FGP, t h e i r p r e f e r r e d chain did not h a v e one. Those people were left out of the rest of the analysis. (5) Is brand loyalty related to
frequent-guest programs? Are brand-loyal t r a v e l e r s m o r e likely to select a hotel w i t h a n F G P '" One-way a n a l y s i s of v a r i a n c e (ANOVA) or K r u s k a l Wallis calculations were p e r f o r m e d on the interval-like behavioral and d e m o g r a p h i c variables. A C h i - s q u a r e test of independence w a s performed on the d e m o g r a p h i c classification variables. The first three response categories shown in Exhibit 3 were used as the g r o u p i n g or i n d e p e n d e n t v a r i a b l e s a n d each of the behavioral and d e m o g r a p h i c v a r i a b l e s w a s t r e a t e d as a dependent v a r i a b l e in the ANOVA a n d K r u s k a l Wallis tests. For a difference to be considered statistically significant, a probability level of less t h a n or equal to .05 h a d to be obtained. The K r u s k a l Wallis test w a s used in a few i n s t a n c e s because the equal v a r i a n c e a s s u m p t i o n of ANOVA was not m e t a n d equal s a m p l e size had not been obtained.
T H E C O R N E L L H.R.A. Q U A R T E R L Y
EXHIBIT 4 Brand loyalty and FGPs t h a n those who indicated less b r a n d loyalty, as d e t e r m i n e d by the responses to the questions in Exhibit 3? The analysis found t h a t there is a significant difference among those who indicated t h a t dropping the F G P would have no effect on t h e i r patronage habits; those who would switch; and those who would still stay, but probably less often. Exhibit 4 displays the results of two questions t h a t reveal this significance: Question A. How likely are you to stay at a hotel t h a t rewards you with frequent-stay points w h e n you are paying for y o u r room? Question B. How likely are you to stay at a hotel t h a t rewards you with frequent-stay points w h e n y o u r company is paying for the room? As can be seen from the m e a n responses for the questions in Exhibit 4, the g r e a t e r the likelihood of staying at a hotel with an FGP, the g r e a t e r the likelihood of switching if the F G P is dropped. In other words, there's a group of travelers who choose hotels for the F G P awards, and a n o t h e r group t h a t takes the awards but would choose the hotel even if it had no FGP. People who have a high tendency to stay at hotels with F G P s are significantly different from those who are less likely to stay at hotels with FGPs. T h a t difference is reflected by a willingness to switch chains if the F G P s are dropped. The a n s w e r to the question t h a t introduced this section is "yes": b r a n d loyalty is, indeed, related to the selection of hotels offering FGPs. (6) A r e b r a n d loyal t r a v e l e r s w i l l i n g to p a y m o r e ? It was established earlier t h a t F G P members, in general, are willing to pay more for hotel rooms t h a t e a r n F G P credit t h a n for rooms t h a t don't, especially w h e n t h e i r comp a n y is paying. The next topic of A U G U S T 1991
Survey respondents were asked questions A and B, using a scale of 1 = very unlikely and 5 = very likely, and the responses were analyzed according to how they answered the question from Exhibit 3, "What would you do if your preferred chain dropped its FGP?"
Question A. How likely are you to stay at a hotel that rewards you with frequent-stay points when you are paying for your room? Response if FGP w a s droDDed
M e a n response to Question A
• "No effect" group • "Stay less" group • "Switch" group
3.15 4.25 4.66
Question B. How likely are you to stay at a hotel that rewards you with frequent-stay points when your company is paying for the room? Resoonse if FGP was dronoed
M e a n response to Question B
• "No effect" group • "Stay less" group • "Switch" group
3.09 4.33 4.71
This statistical analysis answers the question, "Is there a relationship between how likely respondents are to stay at a hotel with an FGP and their likely reaction if that hotel drops its FGP?" The "stay less" and "switch" groups were significantly different from the "no effect" group, but not from each other, at a significance level of .05. (Post hoc analysis utilized Duncan's range test.)
interest was to determine if t h e r e were differences in the degree of b r a n d loyalty associated with how m u c h more F G P m e m b e r s were willing to pay to stay at hotels with such programs. The questions t h a t deal with this issue are as follows, and the responses are shown in Exhibit 5 (on the next page). Question A. How m u c h more are you willing to pay per night to stay at a hotel with a frequent-guest p r o g r a m w h e n you are paying for your own expenses? Question B. How m u c h more are you willing to pay per night to stay at a hotel with a frequent-guest p r o g r a m w h e n your company is paying your expenses? Again, brand-loyal F G P members were significantly different from the two less-brand-loyal groups. For the total sample of F G P members, respondents who are likely to switch chains if the F G P is dropped are also willing to pay more to stay at a hotel with an 43
F G P regardless of who is paying the bill. W h e n respondents' companies are paying the bill, F G P m e m b e r s are willing to pay the most for the FGP. This can be seen by looking at the m e d i a n and modal response categories in Exhibit 5 u n d e r Question B, regarding the "Switch to Another Chain" option. Exhibit 5 reflects the results mentioned earlier, namely, t h a t all response categories are willing to pay something extra for the FGP.
(7) Are b r a n d - l o y a l g u e s t s m o r e likely to s p e c i f y c h a i n s or p r o p e r t i e s ? To respond to question seven, it was first necessary to d e t e r m i n e how likely F G P m e m b e r s are to specify the hotel or chain where they wish to stay. To a n s w e r this question, F G P members were asked to indicate on a five-point scale, ranging from n e v e r (1) to always (5), how often they would specify both a specific chain and a specific property if someone
EXHIBIT 5 Brand loyalty, FGPs, and room-rate premiums Survey respondents were asked questions A and B, and the responses were analyzed according to how they answered the question from Exhibit 3, "What would you do if your preferred chain dropped its FGP?" (that is, would respondents switch, stay less often, or do nothing different if their FGP were cancelled?). Question A. How much more are you willing to pay per night to stay at a hotel with a frequent-guest program when you are paying for your own expenses? Response if FGP was dropped
• "No effect" group • "Stay less" group • "Switch" group
Response to Question A Mode* Median**
$2.00 or less $2.00 or less More than $10
$2.00 or less $2.01-$4.00 $6.01-$8.00
Question B. How much more are you willing to pay per night to stay at a hotel with a frequent-guest program when your company is paying your expenses? Response if FGP was dropped
• "No effect" group • "Stay less" group • "Switch" group
Resnonse to Question B Mode* Median**
$2.00 or less $2.00 or less More than $10
$2.00 or less $6.01-$8.00 More than $10
For both questions A and B, the "Stay less" and "Switch" groups were significantly different from the "No effect" group (but not from each other) at a significance level of .05. *Mode is the response category that has the highest frequency of responses. **Determining the mean was not useful because the data were ordinal and coded in the following fashion: (1) $2 or less, (2) $2.01 -$4.00, (3) $4.01 -$6.00, (4) $6.01-$8.00, (5) $8.01-$10.00, (6) more than $10.00. (Median is the response category that has half of the responses falling below and half falling above.)
else was m a k i n g their reservation. A one-way ANOVA d e t e r m i n e d t h a t t h e r e were significant differences between levels of b r a n d loyalty with r e g a r d to the likelihood of respondents specifying either chains (question A) or specific properties (question B). Exhibit 6 displays the results of the analysis. The m e a n scores reveal t h a t those who are most likely to switch chains if the F G P is dropped are also the most likely to specify both lodging chain and individual hotel property. Those who indicated they would stay less were second most likely to specify and those who said t h e r e would be no effect were least likely to specify a chain or property. Note t h a t in the chain specification situation (question A in Exhibit 6), the "switch" and the "stay less" groups
were both statistically different from the "no effect" group, but were not significantly different from each other at the .05 level. In the individual-property-specification situation, however, all three groups were significantly different from each other. This indicates t h a t F G P m e m b e r s who specify hotels are susceptible to the FGPs. T h a t is, F G P m e m b e r s are loyal as long as the F G P is in place, but would leave if it were eliminated.
(8) Demographic differences. Demographic information g a t h e r e d from the survey included: gender, age, occupation, job title, and income. One-way ANOVAs r u n on the interval-like demographic variables and Chi-square tests of independence r u n on the categorical d a t a did not reveal a n y significant differences associated with 44
demographic characteristics and b r a n d loyalty. This could possibly be due to the homogeneity of the sample (i.e., differences in demographics m a y be found in a more heterogeneous sample). Clearly, however, it is behavioral and not demographic variables t h a t are related to the loyalty effect brought about by FGPs. One other note with r e g a r d to demographic trends is t h a t the small percentage of females in our sample m a y preclude our m a k i n g any gender-based conclusions. A cross tabulation t h a t related gender to the brand-loyalty question revealed t h a t the percentage of females who said they would either switch or stay less often was considerably higher t h a n for males. Again, r e m e m b e r i n g t h a t the female sample was small (only 17 of the 243 F G P m e m b e r s responding), it would not be appropriate to claim a significant difference in this paper, but it would seem fruitful to design a study aimed specifically at the behavior of women belonging to FGPs.
What We T h i n k It All Means Assuming our sample is representative of business travelers, we found t h a t those who belong to frequent-guest programs r e p r e s e n t an e x t r e m e l y upscale m a r k e t t h a t travels extensively and r e p r e s e n t s a substantial portion of the business-travel market. Business travelers in general were willing to pay more for a room when their company was paying, but w h e t h e r the company was paying or not did not affect w h e t h e r they would choose a hotel with an FGP. Members of F G P s are willing to pay a p r e m i u m of more t h a n $21 for a room w h e n compared to w h a t other business travelers in the sample who are not m e m b e r s of F G P s are willing to pay (as explained u n d e r question n u m b e r two on page 41). W h e n they are paying THE CORNELL
H.R.A. Q U A R T E R L Y
EXHIBIT 6 their own bill, over 10 percent of FGP members are still willing to pay a premium of from $8 to $10 for the FGP and 15 percent said they would pay an additional $10 to stay at a hotel offering an FGP. When their company is paying the bill, over 14 percent said they would pay $8-$10 more for the FGP and nearly 21 percent said they would pay a premium of more than $10. There has been a great deal of speculation as to what guests' reactions would be if a chain dropped its FGP. In this sample, nearly 50 percent said such a move wouldn't affect them. Even though they are members of FGPs, they can either take them or leave them and would really prefer not to pay for them. The problem for operators who would like to cancel their FGPs is that approximately 33 percent of FGP members said they would stay less often at their preferred chain if the program was dropped, and nearly 13 percent said they would switch chains altogether. This finding runs contrary to the U.S. Travel Data Center's study that indicated that only 2 percent of business travelers consider FGPs important in selecting a hotel. In our study, 433 business travelers responded, 243 belonged to frequent-guest programs, and 111 (45 percent of the FGP members) said that dropping the program would affect their hotel choice. The statistical tests employed in this study provide even more scary results for any hotel chain that is considering dropping its FGP. They reveal what we might call the "hard-core" FGP members. These people represent those most likely to stay at hotels with FGPs regardless of who is paying the bill and are also the people who are willing to pay the greatest premium to get the FGP. Hard-core FGP members are most likely to switch chains or AUGUST
1991
The selection of specific brands and properties relative to FGPs and brand loyalty Survey respondents were asked to answer questions A and B, using a scale of 1 = never and 5 = always, and the responses were analyzed according to how they answered the question from Exhibit 3, "What would you do if your preferred chain dropped its FGP?" (that is, would respondents switch, stay less often, or do nothing different if their FGP were cancelled?).
Question A. If someone is booking a hotel room for you for business travel, how often do you tell that person to select a specific lodging chain? Response if FGP was droDoed
Mean resoonse to Question A
• "No effect" group • "Stay less" group* • "Switch" group*
3.38 3.94 4.31
Question B. If someone is booking a hotel room for you for business travel, how often do you tell that person to select a specific hotel property? Resoonse if FGP was dropped
Mean resoonse to Question B
• "No effect" group** • "Stay less" group** • "Switch" group**
3.52 3.99 4.59
*The main effects ANOVA was significant at the .05 level. A Duncan's range test found the "Stay less" and "Switch" groups were significantly different from the "No effect" group (but not from each other). **All categories were significantly different from each other.
stay less if their preferred chain drops the program. These people are not only likely to stay at the chain with their preferred FGP when they make they o w n reservation, they are also more likely to designate a specific chain and a specific property when someone else books their room. Based on the empirical study presented here, the hotel industry appears to be confronted with an interesting situation. There is a core of business travelers who seek out chains with FGPs and are willing to pay a premium to stay at those chains. They are very loyal to their chain (or chains) of choice as long as the FGP is in place. However, if the chain dropped the program, they would switch to a chain that had one. If business travelers are a major segment of your hotel's business, it could be extremely dangerous to drop your 45
FGP. If the sample in this study is representative, as many as 12.8 percent might switch chains completely and another 32.5 percent would stay less often. Even though nearly half the respondents said it would make no difference if their preferred hotel chain dropped its FGP, the large proportion (i.e., the other half) who said it would have an effect makes it a risky proposition for a chain to drop its program. While it is expensive to maintain frequent-guest programs, they seem to be effective in keeping a large, lucrative portion of the businesstravel market coming back to those hotels that offer FGPs. Therefore, unless the industry as a whole drops FGPs, it appears that individual chains will be forced to maintain their programs as a means of encouraging and maintaining customer loyalty. [
•
•
•
,,
.
Are Frequent-Guest Programs Effective? Even though they're expensive to maintain and promote, and relatively few guests actually use them, this study suggests that frequent-guest programs are destined to linger on unless all lodging chains were to drop such programs at the same time by Ken W. McCleary and Pamela A. Weaver FREQUENT-TRAVELER programs have been used as a marketing tool by major airlines for many years. In 1983, Holiday Inn, followed shortly by Marriott, effectively pushed the hotel
Ken W. McCleary, Ph.D., and P a m e l a A. Weaver, Ph.D., are professors in the department of Hotel, Restaurant, and Institutional Management at Virginia Polytechnic Institute and State University, Blacksburg, Virginia. AUGUST 1991
industry into the mire of patronage-reward programs. But there is a considerable amount of controversy surrounding the value of hotels' frequent-guest programs (FOPs) as a means of increasing customer loyalty, and therefore, profits for hotel chains? Robert Lewis, a professor at the University of Guelph, questions the long-term value of frequent-guest programs because he feels they don't expand the market and they don't address the real needs of ' See the a c c o m p a n y i n g article by R.S. Toh a n d M-J. Rivers, " F r e q u e n t - G u e s t P r o g r a m s : Do They Fly?," in this issue of The Quarterly•
39
travelers. `) Lewis notes that a study conducted by the U.S. Travel Data Center indicated that only 2 percent of business travelers may consider FOPs important when selecting a hotel. Peter Yesawich, an industry marketing consultant, seems to agree with Lewis, noting that patronage-reward programs may be only a short-term solution to product-differentiation problems. 3 Other industry writers also question the value of frequent-guest 2Robert C. Lewis, "Are You L i s t e n i n g To C u s t o m e r s - - O r To Competitors?," Hotel & Motel Management, N o v e m b e r 2, 1990, p. 55. :~P e t e r C. Yesawich, "The F r e q u e n t Traveler Frenzy," Lodging Hospitality, J u l y 1987, p. 28.
programs. Much of the skepticism about such programs centers on their cost. Edward Watkins, editor of Lodging Hospitality, reports that the cost of advertising just the changes in Hyatt's frequent-guest program was $15 million. He further makes the point that "some research shows th at it is difficult, if not impossible, accurately to quantify the payback generated from frequent-traveler programs. ''4 If only a small percentage of travelers think FGPs are important, and if the cost of FGPs is high, why does nearly every major chain offer some sort of program? The answer seems to be t hat frequent-guest programs do have some impact. Mike Ribero, senior vice president of marketing for Hilton Hotels, is quoted as saying t ha t a survey indicated t hat 19 percent of the members of Hilton's HHonors would not have stayed at Hilton if it had not been for their frequentguest program. 5 Douglas Shifflet, of D.K. Shifflet and Associates, notes that, while chain loyalty decreased industry-wide between 1986 and 1988, those chains with highbenefit frequent-guest programs had less of a reduction in loyalty.6 And a survey of travel agents sponsored by Hotel & Travel Index found th at 71 percent of travel agents reported that frequent-stay programs are "very effective" or "somewhat effective.''7 More s t u d y n e e d e d . While frequent-guest programs provide a nice advertising ploy and may be useful in developing and maintaining mailing lists, there are m a ny questions th at need to be answered ' E d w a r d W a t k i n s , "Keeping Up with the Hiltons," Lodging Hospitality, J u n e 1989, p. 2. Carmen Anthony, "Frequent-Guest P r o g r a m s : R e w a r d T h r o u g h Repetition," Hotel & Resort Industry, October 1986, p. 88. ~'Douglas K. Shifflet, " S e g m e n t a t i o n Backfire?," Lodging, F e b r u a r y 1989, p. 5. 7J a n i c e Somerville, " F r e q u e n t - S t a y P r o g r a m s : Necessity or N i g h t m a r e ? , " Hotels & Restauronts International, April 1988, p. 62.
regarding the real effectiveness of the programs. This article reports on a study of business travelers regarding their use and opinions of frequent-guest programs. The study was designed to answer the following questions: (1) What are some characteristics of business travelers who belong to frequent-guest programs? (2) Are frequent-guest-program members willing to pay more than other business travelers to stay at a hotel with an FGP? If they are, how much more are they willing to pay and does the incremental amount vary depending upon whether they are paying their own bill or if their company is paying? (3) Does it make a difference whether an individual or the individual's company is paying for the room in terms of the likelihood of selecting a hotel which has a frequent-guest program? (4) What proportion of people would switch hotel chains if their preferred chain dropped its frequent-guest p r o g r a m - - t h a t is, how brand loyal are FGP members? (5) Is there a difference among FGP members who express a high degree of brand loyalty and those who don't, relative to how likely they are to choose a hotel chain which offers an FGP? (6) Are highly brand-loyal FGP members willing to pay more to stay at a chain with a frequentguest program than FGP members who are not highly brand loyal? (7) Are brand-loyal members of FGPs more likely than less brandloyal members to specify particular chains or properties? That is, do travelers who specify particular chains or properties indicate a high likelihood of switching chains if the FGP of their favorite chain is dropped? (8) What demographic factors are related to the level of brand loyalty of FGP members? 40
S a m p l e . A random sample of 3,187 U.S. subscribers to Corporate Meetings and Incentives magazine was sent a mail survey in April of 1990. A total of 433 completed questionnaires were received for a response rate of 13.6 percent. For our study, respondents were qualified depending on whether or not they belonged to a frequent-guest program. Among all survey replies, 243 (56 percent) respondents indicated t hat they belonged to at least one frequent-guest program. This group of 243 became the effective sample for the analysis presented in this article. T h e s u r v e y i n s t r u m e n t . The data presented in this article are a portion of a larger study of frequent business travelers sponsored by Hotel & Motel Management magazine. The entire questionnaire was pretested several times for clarity of language and to ensure that questions were interpreted consistently. One section of the questionnaire was dedicated specifically to gathering information on those who belonged to frequent-guest programs; the data from t h a t section are presented here.
What We Asked Outlined below are the survey results relating to the eight questions posed in this article. (1) C h a r a c t e r i s t i c s o f memhers. Exhibit 1 presents a profile of the 243 people who belonged to frequent-stay programs. In reading this article, it is important to note t hat this sample was very upscale and, therefore, may not be reflective of all members of FGPs. s Over 87 percent of our sample classified themselves as top management, nearly 90 percent of the sample was over 34 years of age, and 74.1 percent earned over $75,000 per year. Note, however, t h a t Toh a n d Rivers obtained a similar result. See t h e i r article b e g i n n i n g on page 46 of this Quarterly.
THE CORNELL H.R.A. Q U A R T E R L Y
The respondents were on the road a lot, taking an average of 21.5 domestic business trips during the previous year, staying an average 2.4 nights per trip, and using upscale hotels nearly 42 percent of the time. Some characteristics of the sample have interesting implications for marketing strategy. Approximately 55 percent of the FGP-member sample said they made their own reservations, which, of course, means that about 45 percent of the time someone else made the reservation for them. (For the total sample, more than 61 percent made their own reservations.) This underscores the importance for hotel marketers to consider not only the travelers themselves, but also those who may be asked to make the reservations. FGP members also are heavy users of hotels' toll-free numbers. Finally, FGP members took their families with them frequently when they traveled. In fact, they took their families with them more times when traveling on business than they took their families for pleasure trips in a year. While it is not the purpose of this article to make comparisons between frequent travelers who are members of FGPs and those who are not, the differences between these groups were significantY (2) Will F G P m e m b e r s p a y m o r e ? One of the major issues surrounding frequent-guest programs is their cost relative to the benefits received. This issue can be viewed not only from the hotel's standpoint, but also from the guest's standpoint. To determine the incremental value of frequent-guest programs, sample 9Ken W. McCleary and Pamela A. Weaver, "A Comparison of the Behavior and Characteristics of Members and Non-members of FrequentGuest Programs," an unpublished study, Virginia Polytechnic Institute and State University (Blacksburg, VA); and Toh and Rivers, op. cit.
A U G U S T 1991
EXHIBIT 1 Profile of study's frequent-guest-program members • 7.4 percent of respondents were female, 92.6 percent male. • Averaged 21.5 domestic business trips in 1989 • Stayed at a hotel an average of 2.4 nights per trip • 55.1 percent always make their own hotel reservations • 26.3 percent always use hotels' 800 numbers (34.2 percent use them "often") • Families joined the business traveler on 3.7 trips in 1989 • Took 3.3 leisure trips with their family in 1989 • These business travelers stayed in a luxury hotel 41.9 percent of the time, in a midscale hotel 46.3 percent of the time, and at a budget property 11.8 percent of the time • 87.4 percent were top managers, 2.9 percent were middle managers, 3.8 percent were field salespersons, and 3.8 percent were in other professional occupations. Other individual categories represented less than 1 percent each. • Income profile: • Age profile: Less than $25,000 0.8 percent Under 25 2.5 percent $25,001-$50,000 7.9 percent 25-34 8.0 percent $50,001-$75,000 17.2 percent 35-44 25.6 percent $75,001-$100,000 20.3 percent 45-54 29.9 percent $100,001 -$150,000 24.1 percent 55-64 27.3 percent $150,001-$200,000 16.8 percent Over 64 6.7 percent Over $200,000 12.9 percent
members were asked several questions regarding how much they expected to pay for a hotel room. First, the entire sample was asked how much they would pay for a hotel room when traveling on business both (1) when they pay for their own room, and (2) when their company pays. It may come as no surprise that respondents, in general, were willing to secure a more expensive room if their company was paying. The average rate the total sample said they would pay if they were responsible for their own expenses was $86.03, compared to $99.22 if their company was paying. Those who belong to frequentguest programs indicated that, on average, they are willing to pay more per night for a hotel room than those who don't belong, thus answering "yes" to the first part of question number two. Furthermore, they are willing to pay more regardless of whether they pay their own expenses or their company pays. FGP members responded that they personally would pay an average of $94.61 and would let their company 41
pay $107.70. This compares to $73.64 and $86.03, respectively, for those business travelers who don't belong to FGPs. These statistics certainly support a case for courting FGP members. Even though FGP members are willing to pay more for hotel rooms than non-members, this does not mean t hat the FGP is the sole reason for this willingness. To get at how much the FGP is worth to FGP members (the second part of question number two), they were asked how much m o r e they would be willing to pay to stay at a hotel with an FGP, both when they pay their own way and when their company foots the bill, rat her than at a hotel without an FGP. The responses indicate that, when they pay their own way, travelers are willing to pay a smaller premium for the frequentstay program than when their company is paying. About 54 percent of FGP members felt that FGPs were worth $2 or less extra per night if they were paying their own expenses. But that leaves about 46 percent of the sample willing to
EXHIBIT 2 Room-rate premiums FGP members are willing to pay When paying for their own rooms (n = 233)
When the members' companies pay for the rooms (n = 230)
Acceptable premium
Acceptable premium
$2 or less $2.01-$4 $4.01-$6 $6.01-$8 $8.01-$10 More than $10
Percent
54.1 6.0 8.2 6.4 10.3 15.0
Percent
$2 or less $2.01-$4 $4.01-$6 $6.01-$8 $8.01-$10 More than $10
47.4 4.8 6.5 6.1 14.3 20.9
EXHIBIT 3 Importance of FGPs to members The survey asked the question, "What would you do if your preferred chain dropped its FGP?" and 243 respondents answered as follows: Response
Percent
• Switch to a chain that offers an FGP
12.8
• Stay less often at my preferred chain, but still stay upon occasion • That move would have no effect • My preferred chain does not offer an FGP
32.5 49.4 5.3
p a y m o r e t h a n $2 p e r night for the p r o g r a m ; a n d 20.9 p e r c e n t said t h a t if t h e i r c o m p a n y is paying, t h e y are willing to go $10 or m o r e in additional room rate. Exhibit 2 p r e s e n t s the frequencies for each r e s p o n s e category for F G P m e m b e r s . The d a t a indicate t h a t m a n y m e m b e r s of f r e q u e n t - s t a y p r o g r a m s are willing to p a y e x t r a to s t a y a t a hotel t h a t offers the a d v a n t a g e s of m e m b e r s h i p in such a p r o g r a m . W h e t h e r those e x t r a dollars cover the hotel's cost of r u n n i n g the p r o g r a m depends, of course, on the cost of the p r o g r a m . O u r guess is t h a t the ability to charge m o r e for a room would not, by itself, result in a positive r e t u r n - o n - i n v e s t m e n t for FGPs. Therefore, we need to look at willingness to p a y a p r e m i u m relative to how loyal t r a v e l e r s are to hotels t h a t h a v e the p r o g r a m s . (3) W h o p a y s ? T h e t h i r d question a s k e d if the selection of a hotel w i t h a n F G P w a s r e l a t e d to who w a s p a y i n g expenses, the t r a v e l e r s or t h e i r company. To find out, frequent-guest-program members were a s k e d to r a t e on a five-point
scale how likely t h e y were to s t a y at hotels w i t h F G P s both w h e n t h e y p a y t h e i r own e x p e n s e s a n d w h e n t h e i r c o m p a n y pays. The scale r a n g e d b e t w e e n 1 = v e r y unlikely a n d 5 = v e r y likely. T h e d a t a analysis revealed no difference in the likelihood of F G P m e m b e r s as a group selecting a hotel with a n F G P r e g a r d l e s s of who is paying. (The m e a n response w a s 3.7 w h e t h e r the F G P m e m b e r w a s p a y i n g or t h e i r c o m p a n y w a s paying.)
(4) H o w loyal are members o f frequent-guest programs? R e s p o n d e n t s who belonged to f r e q u e n t - s t a y p r o g r a m s were a s k e d how t h e y would r e a c t if t h e i r p r e f e r r e d hotel chain dropped the FGP. T h e y were given four possible responses: (a) I would switch to a chain t h a t offered a f r e q u e n t - g u e s t p r o g r a m . (b) I would s t a y (at m y p r e f e r r e d chain) less often, b u t would still use the chain u p o n occasion. (e) It would h a v e no effect on me. (d) M y p r e f e r r e d chain does not offer a f r e q u e n t - g u e s t p r o g r a m . Exhibit 3 shows the p e r c e n t a g e 42
of responses falling in each category. The lowest b r a n d loyalty is indicated by those who would switch a n d the highest by those who felt t h a t dropping the p r o g r a m would h a v e no effect on t h e m . The responses m a y also indicate t h a t those who would switch chains are loyal to the F G P itself, r a t h e r t h a n to the chain. This would validate the fears t h a t hotel executives h a v e w h e n t h e y consider e l i m i n a t i n g t h e i r FGPs. T h e responses s h o w n in Exhibit 3 m a y be h e a r t e n i n g to the hotel i n d u s t r y b e c a u s e t h e y indicate t h a t n e a r l y h a l f (49.4 percent) of the s a m p l e said t h a t dropping F G P s would h a v e no effect on t h e i r b r a n d loyalty. To get a feel for the differences a m o n g the brand-loyal F G P m e m b e r s a n d those who show a lower level of loyalty or no loyalty at all, f u r t h e r analysis w a s necessary. 10 T h e r e m a i n d e r of the r e s e a r c h questions e x a m i n e d w h e t h e r t h e r e were differences a m o n g the first t h r e e options in Exhibit 3 (Switch, S t a y Less, No Effect) with r e g a r d to selected d e m o g r a p h i c a n d behavioral variables. The fourth response option (Does Not Offer) allowed people to indicate that, while t h e y belonged to a n FGP, t h e i r p r e f e r r e d chain did not h a v e one. Those people were left out of the rest of the analysis. (5) Is brand loyalty related to
frequent-guest programs? Are brand-loyal t r a v e l e r s m o r e likely to select a hotel w i t h a n F G P '" One-way a n a l y s i s of v a r i a n c e (ANOVA) or K r u s k a l Wallis calculations were p e r f o r m e d on the interval-like behavioral and d e m o g r a p h i c variables. A C h i - s q u a r e test of independence w a s performed on the d e m o g r a p h i c classification variables. The first three response categories shown in Exhibit 3 were used as the g r o u p i n g or i n d e p e n d e n t v a r i a b l e s a n d each of the behavioral and d e m o g r a p h i c v a r i a b l e s w a s t r e a t e d as a dependent v a r i a b l e in the ANOVA a n d K r u s k a l Wallis tests. For a difference to be considered statistically significant, a probability level of less t h a n or equal to .05 h a d to be obtained. The K r u s k a l Wallis test w a s used in a few i n s t a n c e s because the equal v a r i a n c e a s s u m p t i o n of ANOVA was not m e t a n d equal s a m p l e size had not been obtained.
T H E C O R N E L L H.R.A. Q U A R T E R L Y
EXHIBIT 4 Brand loyalty and FGPs t h a n those who indicated less b r a n d loyalty, as d e t e r m i n e d by the responses to the questions in Exhibit 3? The analysis found t h a t there is a significant difference among those who indicated t h a t dropping the F G P would have no effect on t h e i r patronage habits; those who would switch; and those who would still stay, but probably less often. Exhibit 4 displays the results of two questions t h a t reveal this significance: Question A. How likely are you to stay at a hotel t h a t rewards you with frequent-stay points w h e n you are paying for y o u r room? Question B. How likely are you to stay at a hotel t h a t rewards you with frequent-stay points w h e n y o u r company is paying for the room? As can be seen from the m e a n responses for the questions in Exhibit 4, the g r e a t e r the likelihood of staying at a hotel with an FGP, the g r e a t e r the likelihood of switching if the F G P is dropped. In other words, there's a group of travelers who choose hotels for the F G P awards, and a n o t h e r group t h a t takes the awards but would choose the hotel even if it had no FGP. People who have a high tendency to stay at hotels with F G P s are significantly different from those who are less likely to stay at hotels with FGPs. T h a t difference is reflected by a willingness to switch chains if the F G P s are dropped. The a n s w e r to the question t h a t introduced this section is "yes": b r a n d loyalty is, indeed, related to the selection of hotels offering FGPs. (6) A r e b r a n d loyal t r a v e l e r s w i l l i n g to p a y m o r e ? It was established earlier t h a t F G P members, in general, are willing to pay more for hotel rooms t h a t e a r n F G P credit t h a n for rooms t h a t don't, especially w h e n t h e i r comp a n y is paying. The next topic of A U G U S T 1991
Survey respondents were asked questions A and B, using a scale of 1 = very unlikely and 5 = very likely, and the responses were analyzed according to how they answered the question from Exhibit 3, "What would you do if your preferred chain dropped its FGP?"
Question A. How likely are you to stay at a hotel that rewards you with frequent-stay points when you are paying for your room? Response if FGP w a s droDDed
M e a n response to Question A
• "No effect" group • "Stay less" group • "Switch" group
3.15 4.25 4.66
Question B. How likely are you to stay at a hotel that rewards you with frequent-stay points when your company is paying for the room? Resoonse if FGP was dronoed
M e a n response to Question B
• "No effect" group • "Stay less" group • "Switch" group
3.09 4.33 4.71
This statistical analysis answers the question, "Is there a relationship between how likely respondents are to stay at a hotel with an FGP and their likely reaction if that hotel drops its FGP?" The "stay less" and "switch" groups were significantly different from the "no effect" group, but not from each other, at a significance level of .05. (Post hoc analysis utilized Duncan's range test.)
interest was to determine if t h e r e were differences in the degree of b r a n d loyalty associated with how m u c h more F G P m e m b e r s were willing to pay to stay at hotels with such programs. The questions t h a t deal with this issue are as follows, and the responses are shown in Exhibit 5 (on the next page). Question A. How m u c h more are you willing to pay per night to stay at a hotel with a frequent-guest p r o g r a m w h e n you are paying for your own expenses? Question B. How m u c h more are you willing to pay per night to stay at a hotel with a frequent-guest p r o g r a m w h e n your company is paying your expenses? Again, brand-loyal F G P members were significantly different from the two less-brand-loyal groups. For the total sample of F G P members, respondents who are likely to switch chains if the F G P is dropped are also willing to pay more to stay at a hotel with an 43
F G P regardless of who is paying the bill. W h e n respondents' companies are paying the bill, F G P m e m b e r s are willing to pay the most for the FGP. This can be seen by looking at the m e d i a n and modal response categories in Exhibit 5 u n d e r Question B, regarding the "Switch to Another Chain" option. Exhibit 5 reflects the results mentioned earlier, namely, t h a t all response categories are willing to pay something extra for the FGP.
(7) Are b r a n d - l o y a l g u e s t s m o r e likely to s p e c i f y c h a i n s or p r o p e r t i e s ? To respond to question seven, it was first necessary to d e t e r m i n e how likely F G P m e m b e r s are to specify the hotel or chain where they wish to stay. To a n s w e r this question, F G P members were asked to indicate on a five-point scale, ranging from n e v e r (1) to always (5), how often they would specify both a specific chain and a specific property if someone
EXHIBIT 5 Brand loyalty, FGPs, and room-rate premiums Survey respondents were asked questions A and B, and the responses were analyzed according to how they answered the question from Exhibit 3, "What would you do if your preferred chain dropped its FGP?" (that is, would respondents switch, stay less often, or do nothing different if their FGP were cancelled?). Question A. How much more are you willing to pay per night to stay at a hotel with a frequent-guest program when you are paying for your own expenses? Response if FGP was dropped
• "No effect" group • "Stay less" group • "Switch" group
Response to Question A Mode* Median**
$2.00 or less $2.00 or less More than $10
$2.00 or less $2.01-$4.00 $6.01-$8.00
Question B. How much more are you willing to pay per night to stay at a hotel with a frequent-guest program when your company is paying your expenses? Response if FGP was dropped
• "No effect" group • "Stay less" group • "Switch" group
Resnonse to Question B Mode* Median**
$2.00 or less $2.00 or less More than $10
$2.00 or less $6.01-$8.00 More than $10
For both questions A and B, the "Stay less" and "Switch" groups were significantly different from the "No effect" group (but not from each other) at a significance level of .05. *Mode is the response category that has the highest frequency of responses. **Determining the mean was not useful because the data were ordinal and coded in the following fashion: (1) $2 or less, (2) $2.01 -$4.00, (3) $4.01 -$6.00, (4) $6.01-$8.00, (5) $8.01-$10.00, (6) more than $10.00. (Median is the response category that has half of the responses falling below and half falling above.)
else was m a k i n g their reservation. A one-way ANOVA d e t e r m i n e d t h a t t h e r e were significant differences between levels of b r a n d loyalty with r e g a r d to the likelihood of respondents specifying either chains (question A) or specific properties (question B). Exhibit 6 displays the results of the analysis. The m e a n scores reveal t h a t those who are most likely to switch chains if the F G P is dropped are also the most likely to specify both lodging chain and individual hotel property. Those who indicated they would stay less were second most likely to specify and those who said t h e r e would be no effect were least likely to specify a chain or property. Note t h a t in the chain specification situation (question A in Exhibit 6), the "switch" and the "stay less" groups
were both statistically different from the "no effect" group, but were not significantly different from each other at the .05 level. In the individual-property-specification situation, however, all three groups were significantly different from each other. This indicates t h a t F G P m e m b e r s who specify hotels are susceptible to the FGPs. T h a t is, F G P m e m b e r s are loyal as long as the F G P is in place, but would leave if it were eliminated.
(8) Demographic differences. Demographic information g a t h e r e d from the survey included: gender, age, occupation, job title, and income. One-way ANOVAs r u n on the interval-like demographic variables and Chi-square tests of independence r u n on the categorical d a t a did not reveal a n y significant differences associated with 44
demographic characteristics and b r a n d loyalty. This could possibly be due to the homogeneity of the sample (i.e., differences in demographics m a y be found in a more heterogeneous sample). Clearly, however, it is behavioral and not demographic variables t h a t are related to the loyalty effect brought about by FGPs. One other note with r e g a r d to demographic trends is t h a t the small percentage of females in our sample m a y preclude our m a k i n g any gender-based conclusions. A cross tabulation t h a t related gender to the brand-loyalty question revealed t h a t the percentage of females who said they would either switch or stay less often was considerably higher t h a n for males. Again, r e m e m b e r i n g t h a t the female sample was small (only 17 of the 243 F G P m e m b e r s responding), it would not be appropriate to claim a significant difference in this paper, but it would seem fruitful to design a study aimed specifically at the behavior of women belonging to FGPs.
What We T h i n k It All Means Assuming our sample is representative of business travelers, we found t h a t those who belong to frequent-guest programs r e p r e s e n t an e x t r e m e l y upscale m a r k e t t h a t travels extensively and r e p r e s e n t s a substantial portion of the business-travel market. Business travelers in general were willing to pay more for a room when their company was paying, but w h e t h e r the company was paying or not did not affect w h e t h e r they would choose a hotel with an FGP. Members of F G P s are willing to pay a p r e m i u m of more t h a n $21 for a room w h e n compared to w h a t other business travelers in the sample who are not m e m b e r s of F G P s are willing to pay (as explained u n d e r question n u m b e r two on page 41). W h e n they are paying THE CORNELL
H.R.A. Q U A R T E R L Y
EXHIBIT 6 their own bill, over 10 percent of FGP members are still willing to pay a premium of from $8 to $10 for the FGP and 15 percent said they would pay an additional $10 to stay at a hotel offering an FGP. When their company is paying the bill, over 14 percent said they would pay $8-$10 more for the FGP and nearly 21 percent said they would pay a premium of more than $10. There has been a great deal of speculation as to what guests' reactions would be if a chain dropped its FGP. In this sample, nearly 50 percent said such a move wouldn't affect them. Even though they are members of FGPs, they can either take them or leave them and would really prefer not to pay for them. The problem for operators who would like to cancel their FGPs is that approximately 33 percent of FGP members said they would stay less often at their preferred chain if the program was dropped, and nearly 13 percent said they would switch chains altogether. This finding runs contrary to the U.S. Travel Data Center's study that indicated that only 2 percent of business travelers consider FGPs important in selecting a hotel. In our study, 433 business travelers responded, 243 belonged to frequent-guest programs, and 111 (45 percent of the FGP members) said that dropping the program would affect their hotel choice. The statistical tests employed in this study provide even more scary results for any hotel chain that is considering dropping its FGP. They reveal what we might call the "hard-core" FGP members. These people represent those most likely to stay at hotels with FGPs regardless of who is paying the bill and are also the people who are willing to pay the greatest premium to get the FGP. Hard-core FGP members are most likely to switch chains or AUGUST
1991
The selection of specific brands and properties relative to FGPs and brand loyalty Survey respondents were asked to answer questions A and B, using a scale of 1 = never and 5 = always, and the responses were analyzed according to how they answered the question from Exhibit 3, "What would you do if your preferred chain dropped its FGP?" (that is, would respondents switch, stay less often, or do nothing different if their FGP were cancelled?).
Question A. If someone is booking a hotel room for you for business travel, how often do you tell that person to select a specific lodging chain? Response if FGP was droDoed
Mean resoonse to Question A
• "No effect" group • "Stay less" group* • "Switch" group*
3.38 3.94 4.31
Question B. If someone is booking a hotel room for you for business travel, how often do you tell that person to select a specific hotel property? Resoonse if FGP was dropped
Mean resoonse to Question B
• "No effect" group** • "Stay less" group** • "Switch" group**
3.52 3.99 4.59
*The main effects ANOVA was significant at the .05 level. A Duncan's range test found the "Stay less" and "Switch" groups were significantly different from the "No effect" group (but not from each other). **All categories were significantly different from each other.
stay less if their preferred chain drops the program. These people are not only likely to stay at the chain with their preferred FGP when they make they o w n reservation, they are also more likely to designate a specific chain and a specific property when someone else books their room. Based on the empirical study presented here, the hotel industry appears to be confronted with an interesting situation. There is a core of business travelers who seek out chains with FGPs and are willing to pay a premium to stay at those chains. They are very loyal to their chain (or chains) of choice as long as the FGP is in place. However, if the chain dropped the program, they would switch to a chain that had one. If business travelers are a major segment of your hotel's business, it could be extremely dangerous to drop your 45
FGP. If the sample in this study is representative, as many as 12.8 percent might switch chains completely and another 32.5 percent would stay less often. Even though nearly half the respondents said it would make no difference if their preferred hotel chain dropped its FGP, the large proportion (i.e., the other half) who said it would have an effect makes it a risky proposition for a chain to drop its program. While it is expensive to maintain frequent-guest programs, they seem to be effective in keeping a large, lucrative portion of the businesstravel market coming back to those hotels that offer FGPs. Therefore, unless the industry as a whole drops FGPs, it appears that individual chains will be forced to maintain their programs as a means of encouraging and maintaining customer loyalty. [