Your loyalty is not worth what we said it was: the pitfalls of devaluing customer loyalty points

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Hilton Hotels has recently come under widespread criticism for their decision to devalue the points that members of the Hilton HHonors program have accumulated. As of January, members will need to redeem approximately 25% more points for reward nights at Hilton properties.

By taking this step at this time, Hilton has created a monster. Travel journalists and Hilton HHonors members have been burning up the electronic airwaves. Some see it as the epitome of bad timing in that most hotel chains would welcome a few more guests in these difficult economic times. But, it’s not just bad timing that Hilton is guilty of.

Hilton’s action may be seen as just one example of a widespread practice amongst corporations that run so-called loyalty programs to reduce the trillions of points that represent contingent liabilities on corporate financial statements. If they can get us to use our points more quickly, or to spend more points to get rewards, then they will burn through more points and reduce their exposure.

And, this isn’t a new issue. I am reminded of my brief experience with the frequent flyer program of Aer Lingus more than ten years ago. At that time, their policy was one of taking points away from members if they did not fly with the airline regularly. I was flying back and forth to Ireland quite regularly to visit clients, and had accumulated a lot of points. But, once the consulting project ended and my travel to Ireland was much less frequent, I watched as the number of points in my account declined month by month as the airline systematically took away points that I had “earned.” Eventually, my points diminished to zero, and I left the program.

A more current example reflects how, in the interest of clawing back as many points as possible, some programs tie the cost of a reward to the availability of rooms or seats or to the rank/class of the customer. For example, I recently encountered this example. According to the reward chart published by the airline, a reward seat between my home town and another Canadian city required 25,000 points in economy class. To redeem my points for this seat, given that I am a highest-ranked, top-tier member of the program, I actually had to spend 32,500 points because of the limited availability of seats. A colleague who resides at the basis level of membership in the program enquired how many points would be needed if she were to redeem points for a seat on the same flight. The answer? 116,000 points!

The reaction of members of loyalty programs who encounter examples of companies that require them to spend more points than they had expected or than had been advertised is entirely predictable. The outpouring of reaction to Hilton’s recent move reflects how these loyal customers feel. “I was proud to be a Diamond member; no more.” “They don’t care about us and want us to go elsewhere.” “They’ve taken away 1/5 of my vacation.” Several commented on having to use more points to obtain rooms that are actually priced lower at the moment than they were when the points were earned.

The response has been overwhelmingly emotional. Elite members in particular, who have amassed thousands of points by spending 30 or 40 or more nights at Hilton properties annually, felt especially aggrieved. There is an overwhelming sense of entitlement, of having earned those points. Many feel they have no choice but to use up the balance in their HHonors account and move on to Marriott or Hyatt or someone else who may just value their business a little more.

It suggests to me that Hilton just doesn’t understand or haven’t paid sufficient attention to the psychology of loyalty programs. Customers feel they have earned the points. When these points are devalued, they feel that their “loyalty” has been violated. They use very emotive terms to describe their reaction.

So what can a frequent flyer/guest/shopper program do? How can it encourage its members to use more points, while at the same time avoid the backlash that Hilton is experiencing and the feeling on the part of customers that they are being treated unfairly?

One option may have been to “grandfather” the value of the points and let people use up their “old” points at the current rate until they are gone. They would actually be creating two classes of points and customers would earn “new” points for each stay at a Hilton property after, say, January 15, 2010. Then, after that date, customers could obtain a one-night reward stay, for example, by redeeming 30,000 old points or 40,000 new points.

What do you think? Would this idea work? Would such a solution be any more acceptable to frequent guests? Are there other solutions that Hilton could have implemented to accomplish their corporate goal without incurring the wrath of their most frequent guests?

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