Why Devaluations Can Be Even Worse for Programs Than They Are for Members

Program devaluations can kill the golden goose. And, it appears, we may already be seeing that with Hilton.

Ric Garrido points to a really interesting article in Hotel News Now on the value and evolution of loyalty programs which quoted hotel program execs on how the programs generate value and on the risks in disrupting that relationship.

In general frequent flyer programs are highly profitable. That’s why I’ve been so skeptical of totally remaking their business models (“revenue-based” airline frequent flyer programs).

Sure, members can be frustrated with redemptions on the airline side especially, not finding enough seats. That’s mostly an HR and technology problem. Agents aren’t incentivized to work hard for frequent flyers — they don’t get paid a bonus for successfully booking an award, or for spending lots of time on the phone with a customer looking for an award. And the computer systems looking for award seats don’t piece together every possible combination or even most combinations to find seats that are bookable.

But the programs inspire. They aren’t just a rebate for use on travel, they are a rebate that gets leveraged by the vast buying power (frequent flyer programs are ‘insiders’ booking millions of trips) and further leveraged by usually buying inventory at a deep deep discount that would go otherwise unsold. That’s why you don’t just get a penny per point in value towards travel, you get airline tickets (and sometimes even hotel rooms) that would cost thousands of dollars.

Customers become much more loyal when they successfully redeem their points. Early frequent flyer programs would deposit miles into your account if you got your balance down to zero. They were afraid that if you didn’t have built up miles, you might bolt to a competitor. What they actually learned was when you redeem your miles, you start accumulating faster because you’ve had it reinforced just how valuable the program is.

But really high redemption rates, at least as much as frustrations with the booking process, drive customers away. If a business class ticket to Europe is 500,000 points rather than 100,000 that’s going to alienate customers.

And frequent flyer programs shouldn’t want to alienate customers. Many are profitable billion dollar enterprises. I’ve often gone back to the role they’ve played over the past decade with the major US carriers — when United was in bankruptcy, the mileage program was the only consistent part of the airline. They used the program to attract debtor in possession financing and exit financing from their co-brand credit card partner, who also pre-purchased half a billion dollars worth of miles to provide additional liquidity. Major half billion and billion dollar mileage purchases were similar done with Delta’s and American’s co-brand partners. Even small Alaska Airlines sells over a hundred million dollars worth of miles a year to Bank of America, a huge deal when the airline might make or lose $15 million in a year.

So I don’t get why programs seek to upend themselves when they have a model that works better than they seem to have convinced themselves that they do.

Programs create value in several ways if you are a travel provider:

  • Your program attracts business — it increases “wallet share” (customers spend more of their travel dollars with you instead of your competitors) and your members also tend to spend more per transaction than non-members.

  • Your program saves you money. Sure, it costs money to run the program and give rewards, but there’s cost savings too. Your program members are much more likely to book directly through one of your channels rather than through other websites or agents that you have to pay commissions to.

  • You sell points and make money. You sell -them directly to consumers, you sell them to credit card companies who then reward your customers (which in turn makes them more loyal to you!), you sell them to other retailers who want to use your currency as a rebate to incentivize transactions.

  • You get really really rich marketing data, which you can use to get more business from your customers and also rent out to other businesses.

Devaluing your program risks all of these benefits, and risks the profit stream you already have.

Some programs believe their members simply won’t know the difference. Most are ignorant, they don’t pay attention, they don’t know what rewards should cost. They just want to know could they get the room or flight?

And some programs believe that points that have already been accumulated are effectively hostage, you can do with them as you will. And raising redemption costs might even mean members have to go out and earn more through your program to get the rewards they want.

That’s naïve. Not all members pay attention, but enough do. Your elites pay a lot more attention than general members, and elites represent an outsized portion of your participation and your travel revenue as well. They can and do move their business. Their points balances may be hostage, but they are not.

In fact, we may already be seeing the consequence to one program of its devaluation, or at least an early hint of it.

The CFO of the company which owns the Hilton Times Square and the DoubleTree Suites Times Square says the March 28 Hilton HHonors devaluation (bloodletting, really) is hurting their business.

“Some of the things that will affect our (revenue per available room) growth rate for the two products we have in Times Square is the change in the Hilton HHonors system,” said Bryan Giglia, senior VP and CFO for Sunstone. “They changed the points system, materially devalued the points program across the board, but it specifically impacted our two hotels. And while HHonors has been a fairly significant driver of room nights at our hotels in the New York market, that change has impacted RevPAR growth in those hotels in the second quarter.”

It’s not just Hilton HHonors members that don’t like paying 95,000 points for rooms that cost 40,000 – 50,000 just a few months ago. It’s hotel owners who are seeing customers book elsewhere because they’re giving up on the program.

While far from the best, HHonors remains frequently decent relative to its competitors. It used to represent a good value, now it’s just not terrible compared to Priority Club. But the dramatic shift is meaningful to members. And two high profile New York hotels are speaking out. This isn’t just about members wanting their perks…

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About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. It’s great that property owners are noticing this. Since the hotel companies are moving more toward divesting themselves of real estate and getting revenue through management contracts, I would argue that the big property owners are as important, if not more important, to hotel companies than guests, and may have more leverage than general outcry by elites.

  2. send a copy of this to Hilton maybe there is some hope about reversing the long term damage to their program

  3. I spoke to a senior exec at an aspirational property in Asia. They are very concerned about experiencing drop off in diamond stays after the stays are consumed that members booked pre devaluation. This is a property where guests typically come on AXON or 4 day awards. He said that such guests spend a lot on services such as spa and food, much more so than their cost conscious Asian honeymooners who are another large block of guests. He felt it probable that they will be impacted in a negative way financially by Hilton’s devaluation.

  4. I booked my 500,000+ Hilton pts prior to the devaluation all on high dollar hotels. I’m never spending a dollar again on paid stays with Hilton. I switched all of my bus. to Hyatt and Starwood.

  5. I’m with John, only with Hyatt/Marriott now. I used to really enjoy spending time at the Conrad Hong Kong, Bali and Bangkok.

    Perhaps Blackstone will feel some of the pain during their upcoming Hilton IPO… but probably not.

  6. Very well put, Gary. I’ve seen you repeat this argument several times and I keep hoping that someone in the industry will figure it out. The Hilton devaluation hit particularly hard and has definitely taken the luster off of HHonors for me.

    I wonder whether Amex/Citi will see some of the blowback as well. After all, decreasing the value of HH points from around .5cpp to .3cpp (a generous valuation to my mind) makes a material difference in the effective rebate offered by the HH Amex. Even at 5ppd @ grocery stores, the card is only returning around 1.5%. Many cards offer a superior return and I know that my HH Amex has been gathering dust recently.

  7. They lost my loyalty as well. Not that I was ever a diamond level stayer but I racked up half a million points over the years. Will still stay when it makes sense and their isn’t an alternative. But in places like DEN, LAX, SFO – no way.

  8. Very interesting analysis, Gary. While I fully agree with your sentiments and hope that your analysis of the blowback from devaluation proves true, is it possible that Hilton(from its point of revenue-enhancing view) correctly took the negatives into account? After all, Delta seems to be doing quite fine despite gutting its frequent flyer program. Or am I mixing apples and oranges here?

  9. Hilton Diamond…but not for much longer. I am down to 100,000 Hilton points and I thought I would burn them next week in New York City for two nights but even the Hampton Inn is 60,000 points a night.

    This is a good case study in how to dismantle a loyalty program. Your analysis is spot on.

  10. Great example/story Carol. would be great if that could get a little more press, maybe you can email Gary the info and have him write more on that as well. Gary gets so much exposure, that sort of thing will help.

  11. I think the public is generally much more aware of, and educated about, awards and redemptions than they used to be. At least from my own personal experience talking to friends and family. Even the least savvy person can easily find out that information on the web. And while they’re googling UA awards charts, they’ll probably see links to the many online travel forums and blogs with even more info.

    I always figure these things are driven within the companies, by accounting types more than anything. I imagine it’s fairly easy to put together a convincing PowerPoint presentation that will sell the devaluation to senior management, who will make a decision after about an hour of thought! OK, maybe a slight exaggeration but it’s about that bad where I work – airlines and hotels probably aren’t any better!

  12. Does hilton pick each hotels category, or just the general points per category needed? In other words, could these hotels simply ask Hilton to drop themselves down a category (or more) to reduce the redemption costs at their specific hotel?

  13. Having been a heavy user of Southwest’s old Rapid Rewards and Southwest’s new revenue-based Rapid Rewards 2.0, I disagree with your assessment.

    It’s definitely true that customers who take the time to learn the details of a loyalty program can benefit more from a traditional chart-based structure. It’s much more susceptible to gaming. You and I love that.

    Most customers don’t want to spend time learning the details of the loyalty program. They have enough complication in their lives without seeking out additional complexity. They want to Keep It Simple, Stupid (KISS). You and I and the readers of this blog are outliers.

    The silent majority of KISS customers bring the company the vast majority of its revenues and profits. KISS customers appreciate the ease of revenue-based redemption, especially after being frustrated by capacity controls as shown in the clever Capital One commercials. The popularity of Capital One credit cards testifies to this trend. KISS customers regard saver award redemption as a lottery they will never win.

    Southwest’s people have stated that they are very pleased with the results of their switch to revenue-based earning and redemption. To me, this implies that KISS customers have increased their purchases of premium fares in response to the large points bonuses those fares earn. If gamers of the old program have left, that’s no great loss to Southwest.

    Gary, we need to question our implicit assumption that typical customers will think the way we do. They don’t. They value their time much more highly and they want a simple and fair program. Revenue-based programs (which hotel programs have always been on the earning side) meet that requirement.

  14. I recently contacted HiltoHonors about unauthorized changes they made to my account. The call center was unable to help and promised a call back within a week. Never happened. Since that call I cancelled 3 sets of reservations, two were multi night and European (higher cost).

  15. nsx- The only thing I like about Southwest is that they don’t charge change fees. Their FF program sucks donkey dxxx. Who wants to rack up ff miles to use just in the U.S. I rarely fly SW given the choice. 100% of the reason is their ff program.

    As far as the Capital One card example, I cancelled that card after receiving my 100,000 pts. Very expensive and impractical card to use to earn int’l bus or first cl tickets.

  16. Nice article. I agree with your points. I used to stay around 15 nights with Hilton annually. But I haven’t completed a single stay with them this year after the devaluation. It really hurts when you take a look at the points you earned the hard way. However, like you said, the customer can simply move his business. This is exactly what have done.

  17. @nsx i disagree. consumers of airfare that are “bothered” by the complexity of frequent flying miles are not the ones that are persuaded by the loyalty rebate. their decision on the margin is not influenced the loyalty programs and they should be ignored. their behavior will remain the same even if the rebate is easier to use through a revenue-based format. the reason for this is because a revenue-based rebate does not carry enough value for them to care. name anyone you know that flies virgin, jetblue, or southwest for loyalty. they flY them for other reasons: non-stop, better in-flight product in coach, branding, but never for loyalty. one differentiator in thE loyatly market is credit cards and currency from other sources. this creates a way for remaining loyal to a carrier without having to fly. with a revenue-based redemption, the premise of a miles-earning card also diminishes, because the cash equivalent will not be sufficiently higher than actual cash back. airline miles need to stay as they are for this premise of credit card incentives to hold.

  18. Gary–spot on! I’m crazy-loyal to Starwood, but still managed 15-25 nights a year at Hilton properties in locations where Starwood hotels weren’t present/available. I burned a chunk of 150k in Hilton points before the devaluation and I’m working to burn my last few shortly. Hilton was great for the occasional family getaway…usually took me a few years to build up enough for a week long aspirational trip. These stays would be all but unattainable now.

    After Hilton’s customer b-slap, I’ve moved my non-Starwood stays to Hyatt….I’d never stayed at a Hyatt before and couldn’t be more happy with the switch! Thank you Hilton for introducing me to Hyatt!

  19. While Hilton may not care about its frequent stayers, if properties leave Hilton, you will see some changes quickly. That will take a while, as management contracts are long term.

  20. I’ve noticed Marriott has been losing a few properties recently. I suspect some of their recent changes have convinced a segment of their customers to be less engaged. Their devaluation was pretty bad this year, not quite as bad as Hilton but worse than Starwood. I will get Marriott gold for free next year since I’m already as good as re-qualified for 1K and Gold gets just about same the treatment as Platinum minus a few extra points. Time for a Hyatt challenge perhaps, I feel it’s really good strategy to be diversified.

  21. @ed:
    Plenty of domestic road warriors posting at FlyerTalk mention that they choose Business Select fares (often upgrading out of pocket from Anytime fare) and also choose Southwest over airlines because of the effective rebate percentage on Business Select, ranging from 20% to 60% depending on elite level and bonus promotions.

    That’s just one example of how a revenue-based program can entice KISS customers to play the frequent flyer program game when, as you observe, they weren’t interested in playing the game in a traditional program.

    A simpler program attracts a new category of customers, a category the old programs had abandoned. IMHO that’s what Southwest intended to achieve with its new program. You may disagree with Southwest on whether it worked, but they believe that it did.

  22. Well, Hilton is trying to correct an HHonors point bubble that was self-inflicted. They came out with many different CC products, all offering large bonuses and high points-per-dollar ratios. Instead of dialing back the CC points, they went the wrong way and jacked up redemption rates for all customers, not just the recent CC players. It does solve the problem of having so many outstanding HH point balances, but they truly hurt the customers who they want the most, those that stay at HH properties regularly. Many customers will be put off by the devaluation and the most savvy point players have effectively dumped HH from future consideration. I know my family just made reservations for the last of our HH points, and we specifically arranged it to spend the last of our points, and I can’t see a situation where we come back to HH as regular customers.

  23. This is a really good article. Don’t stay at Nilton but choose Hyatt and SPG because of a good balance between point accumulation and redemption. I fly UA for the same reason, though they provide a substandard product as an airline. If fact, I would greatly preferred to fly other airlines. Were UA to devalue their program substantially I would move my business elsewhere in a heart beat.

  24. I managed to score an AXON award for my honeymoon in Bora Bora 1 day before the devaluation. If I didn’t manage to book it in time, I would have stayed at the IC Thalasso and totally given up on the points I had with HH. That would have been terrible for the property since I still ended up spending a large amount of money on amazing upgrades, food, and activities. Nobody would have won in that case since my wife and I thoroughly enjoyed our stay.

    Now that I’m only sitting on ~100,000 points (1 high end night), I rarely think about Hilton for future stays and I won’t be booking them for work anymore. That’s sad because I did like Hilton.

  25. 2013: Screw Hilton, I’m taking my business to Hyatt! Hyatt occupancy goes up. Hyatt devalues.

    2014: Screw Hyatt, I’m taking my business to Starwood! Starwood occupancy goes up. Starwood devalues.

    2015: Screw Starwood, I’m taking my business to IHG! IHG occupancy goes up. IHG devalues.

    2016: Screw IHG, I’m taking my business to the Red Roof Inn!!!

  26. @CW love that !!

    Your article is very good Gary, but we must understand that a lot of this self inflicted disaster is due to the crash of 2008. Money was cheap, miles/points became cheap and easy to obtain. Now the economy is in much better shape, and there is a bubble in miles and points. Hilton was first, but the others are not far behind.

    Delta is a leader in fooling its Elite base. But it is a profitable airline. And as many have predicted, UA will come soon, now that Chase is flooding the market with UR. And AA is on hold while the merger mess clears. But they are not far behind.

    2013, the year that the game changed !

  27. Hmm…what everyone seems to be glossing over re Hilton is the obvious: IPO later this year. Just another Wall Street magic spin. Sell oodles of points for increased revenue. Looks good on the books. Oops now have to deal with future liabilities- no big deal, huge devaluation and presto! Lots of increased profit from selling those points everywhere, more than half the liability now vanished, books are cooked to perfection and ready for the IPO yay! Because after the IPO, guess what. Only the shareholders will suffer. Blackstone will have cashed out on the perfect spin.
    It really is a shame though- to be able to tear down a program like that and then cash out to boot.
    Booked all 1 mill pts pre-deval like everyone. Hate to see the carnage after March 2014 in Hilton hotels.

  28. While much of the trashing of Hilton is absolutely true I must remind you it is still a gateway drug…….40k spending gets Diamond which gets competitor matches and so on………..but it is true you can get the shakes as you use the card to earn the fractions of the Chase cards………Just saying………

  29. @CW your cynicism is unfounded. Hyatt owns many of their properties unlike Hilton so unsold rooms are truly unsold, and starwood is a high margin business that is unlikely to do anything hasty given their top tier clientele.

    Note it is the mid and low tier hotel programs who have management contracts that are devaluing.

    Flee Hilton and priority club like the plague.

  30. Gary these programs are going to feel very stupid if the bearish analysts are right and we have a double dip recession. They’ll have pissed off their most loyal customers just in time for business travel goes back in the tank, leaving them with nothing.

  31. Two things:

    1. The title of the article suggests that the Hilton devaluation is hurting the HHonors program. The contents of the article suggest that the party being hurt is not HHonors, but an independent company owning properties which are themselves, in a sense, “clients” of HHonors. The company exec cited states that the effect is specifically harmful to his two hotels. It’s not clear whether that’s because he derives income from HHonors for award stays (in which case a loss for him is a direct win for HHonors) or whether paid stays are being harmed because of the lower value of points earned. (I realize that, in a broader sense, Hilton is harmed if the owners of their hotels see a decline in revenue but I’m talking about direct, quantifiable harm).

    2. You frequently make this argument (that loyalty programs are more valuable to the airlines and hotel chains as they exist rather than as strictly revenue-based programs). You make some arguments that seem reasonable. Yet there doesn’t seem to be a single executive in these companies who agrees with you. How is it that you can be right and every single airline and hotel executive is wrong? Have you debated this with the people who actually run the programs?

  32. @1111 – while my post was a joke, yes, if demand for paid rooms goes up then the perceived need to incentivize people will go down. And the desire to free up revenue-generating inventory will go up. I’m not saying it’s good for the brand in the long run but people don’t always think in the long run. Also award redemptions are a lagging indicator because people have to put in all the paid stays before they have anything to redeem…

  33. I had a conversation with a CFO of a large investment group who has 4 Star well respected Hilton branded properties in major cities. It is interesting to note that they don’t think the way we do. They really don’t think about program devaluation, redemption value or program satisfaction. They look at this as revenue decline since the HH changes that impact their hotel/They don’t run the HH program and have nothing to do with it other than follow procedures inside at the hotel level with those trained to deal with the program.
    They care because it has impacted their bottom line noticeably and they have to answer to not Hilton but their shareholders/investors
    In their eyes right or wrong they see quantifiable harm.

  34. CW
    While the fallout may take a while to materialize if at all because of that so called time factor of acquiring points there may be more hotel financial results down the road to consider
    Let us not forget that some folks cashed out what points they had or really sitting tight with what’s left of their points.
    I know many members who are sitting on what’s left of their points who were unable to redeem and now waiting to use those points in the near or long term
    Hotels don’t get paid for that unless folks freely and regular redeem and buy paid revenue nights.
    Folks that now consider themselves engaged in other competing programs also means less current and future revenue spending and combination bookings of revenue and award together. Added to reduced spending on their cobranded credit card spending
    In my own case many thousands are now fully diverted on Chase Sapphire and American Express Cards. Citibank and Amex HH partnership card may suffer some losses here along with the hotels due to the ripple effect created by the Blackstone/HH folks

  35. Good, hopefully Hilton and others will continue to experience blow-back from the recent devaluation. I, for one, am no longer using pts. for hotel stays . . .

  36. For my personal trips I gave up chasing points years ago. Well, except for Hyatt points, which are quite valuable.

    Unless there’s an attractively priced Hyatt, I use hotwire and priceline to buy my hotel rooms. Cash savings up front beat playing the points Ponzi game. In small towns without opaque booking options I use hotels.com and earn an effective rebate approaching 10%. Or I use Choice points that I bought in the annual Amex Daily Getaway sale to book a downscale hotel.

    Most of the hotel programs have long passed the point at which people spending their own money aren’t interested in participating. The airlines are doing much better in this regard.

  37. This September we are once again staying four nights at the Hilton Paris La Defense property using points at the pre-devaluation AXON rate. I expected to repeat this next year, and probably the following year as well. But not anymore. This years AXON rate of 136K points, will become 320K points next year.

    I have cut back my spend on my HH cards, Citi HH and AMEX Surpass, to basically meeting minimum spend for the bonus miles. The 6X HH points at supermarkets and gas stations that previously seemed so generous no longer interest me. I’d rather get URs or SPG points.

    I’m now looking for the sweet spots in the HH award chart to use my cc bonus points, ie 30K per night at the Berlin Hampton Inn and the Innsbruck Hilton.

    I suspect that next August {2014}, a time when business stays evaporate, there are going to be lots of empty rooms at Hilton La Defense as most leisure travelers will be shell shocked at the $500 a night rates for a hotel located in a business park rather than the city center. And how many folks will have the 240K points needed for a 4 night stay?

    Luckily, both my wife and I now have the Club Carlson card, so with back to back second night free award stays we won’t be missing the Hilton at all.

    I now understand why, probably seeing this devaluation coming, the only Paris city center Hilton property abruptly voided it’s Hilton management contract last year. I wonder how many other properties will decide to bail?

  38. Good. I’m glad it is hurting their business. We shifted the bulk of our business away from Hilton and have found not only are the rewards better, the hotels are nicer as well.

  39. @LarryInNYC How can you argue that “doesn’t seem to be a single executive in these companies who agrees with [Gary that revenue-based programs are a bad idea]” when almost no airline or hotel programs current use revenue-based redemption?

    All of these supposed executives sure are acting timid for people supposedly so sure that revenue-based redemption are such a good idea.

  40. Participants in loyalty programs, as a group, overvalue what they have (or think they have).
    Businesses with loyalty programs undervalue their benefit.

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