Customer Loyalty: A New Look at the Benefits of Improving Segmentation Efforts with Rewards Programs

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Reward programs continue to proliferate nearly three decades after American Airlines launched the modern day customer reward program in 1981. Due to rapid growth in these programs in the hospitality sector, it appears that many firms have fallen into the trap of developing “me too” loyalty programs that provide little differentiation from the competition. The most telling sign of these copycat programs is that the basis for most program tier structures is based on industry convention rather than a strategic analysis of a firm’s customer base and the needed differentiation in the marketplace. To demonstrate a data-driven customer segmentation strategy for a loyalty program, this study collected customer data from a major international hotel chain to track spending in three categories: rooms, food and beverage, and such supplemental services as the spa or health club. The resulting customer segments, which were based on common demographic criteria and spending patterns on these three spending categories, showed a weak match with the current three tier system offered in the chain’s rewards program. In fact, some tiers included vastly different market segments that had different spending and stay frequency. Although too many additional tiers would probably invite complications, it’s possible to create or augment loyalty program tiers that more closely match customers’ travel habits. One goal would be to encourage certain high-spending guests to visit more frequently. Creative, flexible rewards should reflect guests’ desires, but should not involve price concessions.
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hotels; rewards programs; customer spending; segmentation
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