Hotel brands float loyalty member rates, but are they good for business?

Hotel companies are always looking for an edge in the quest for customer acquisition. They want customers to book direct rather than through an intermediary. Makes sense: Direct-with-the-hotel bookings are the cheapest distribution channel, avoiding the higher commissions paid to online travel agencies when a customer books instead through an Expedia or Priceline. Still, there remains the specious notion that you will find a cheaper hotel rate on an OTA rather than a hotel website. Millions of dollars in advertising spend have made it so.

Soon, hotel companies got smart: “What if we offer a member rate, exclusive to our loyalty members, that is cheaper than any rate found on an OTA and cheaper than the best available rate on the brand website?”

This is a boon for consumers. In only a few keystrokes, a customer can join a loyalty program and have available to them rates that are as much as 10 percent off the best available rate. Hey, sign me up!

Hotel companies like Marriott, Hilton, Choice, IHG, Hyatt, Wyndham and Best Western all have some form of this. For guests booking rooms, it’s a no-brainer; for owners of those hotels, it may be a different story altogether—a potential loss of million of dollars in revenue. It’s the classic case of one man’s meat is another man’s poison. At least that’s how some perceive it.

Jeff Crowley, SVP of HVS Hotel Management, who advises hotel owners, clearly understands their perception, which is: Member rates are still so new that the long-term impact is still trying to be quantified. Crowley believes member rates could be dangerous, as loyalty members without a negotiated rate are essentially being moved to a lower rate. He says the math is clear: “For a 100-room hotel, at a 10-percent member discount off a $100 rate, that’s $365,000 per year of potential NOI loss. Throw an 8 cap on that, and that’s $4.5 million of lost value. People aren’t looking at this from a valuation standpoint,” he said.

Understandably, it comes down to customer acquisition through the cheapest channel. And some, like Brad Rahinsky, president and CEO of Hotel Equities, see member rates as a net-net gain for the owner in a world where third-party intermediaries can take as much as 20 percent of a booking. “It’s getting more aggressive and brands are trying to own their customers,” he told me. “Third parties have commoditized our inventory and member rates are an effort to combat this.”

But member rates still could have a deleterious effect if you take into account shrewd corporate travel managers, who are always looking to negotiate a better deal for their company. Member rates are published and transparent, so managers are now looking for a leg up by seeking to negotiate off the member rate, not BAR. “People who negotiate corporate rates are smart,” Crowley said. “There is potential to lose money on a whole new segment.”

And while online travel agencies have for the most part abandoned dimming practices, which involves an OTA deliberately minimizing a hotel’s appearance or ranking in results, Crowley said that OTAs are not pleased about the member-rate practice and “can still play with their algorithm and back up a ranking.”

Anecdotally, member rates have been a huge boost to customer acquisition. On Marriott’s Q1 call, CEO Arne Sorenson said he is “encouraged by what we’ve seen” and that “member rates have value and are here to stay.”

But, does that value extend to hotel owners? It does if it’s a parry to more expensive OTA business.

Member rates are certainly a way to boost loyalty programs, but is it at too high a cost? The jury is still out.