The 5 hidden costs of being branded (Part 1)

Marriott. Hilton. IHG. Wyndham. Choice. For years these chains have publicized the advantages of working with them: advanced loyalty programs that promise to bring consistent customers, low fees, tough negotiations with OTAs, and preferred financing options. Not so fast.

Are the brands’ claims actually true? While many owners have fallen victim to the claims of the brands, you need not do the same. As Mark Twain once said, “Whenever you find yourself on the side of the majority, it is time to pause and reflect.” Let’s take a closer look at what the brands are claiming, to make sure you know what to expect before entering into a 30-year binding agreement. 

Brand loyalty discounts aren’t working. No doubt you’ve seen the advertising campaigns that the major brands are running to tout their loyalty programs, most aggressively over the last two years. Here’s how the loyalty programs work — to increase their member base, the brands advertise a discounted rate (typically 3% to 5% off their rack rates) for members. Enrolling as a member is easy; typically this involves just giving your email address. Once a customer becomes a member of a brand loyalty program, they get discounted rates and perks at properties across that brand’s portfolio. Sounds great, right? Here’s the problem, these drive-direct discounts aren’t working. 

According to a recent BDRC study:

• No long-term shift has occurred between direct bookings and OTA bookings since the end of 2015 when many brands launched their direct booking marketing campaigns.
• No long-term shift for business travel bookings or leisure bookings, the main target of the brands’ marketing efforts.
• Of note, brand direct bookings for leisure travelers saw an initial boost after the brands launched loyalty rates, but the balance of OTA and direct bookings has since returned to the balance seen before the rates were rolled out.
• Possibly more surprising and counter to the claims of the big brands, BDRC’s study found that OTA customers are more likely to book upper scale tiers for leisure trips than non-OTA bookers.
• A recent study by J.D. Power supports BDRC’s findings.
• D. Power found that customers surveyed between 2015 and 2018 were less likely to book direct and more likely to use OTAs.

Funding loyalty programs is expensive…for owners. Direct booking campaigns that reduce owners’ distribution costs are an advantage that hotel owners believe brands can and should provide. But, the aforementioned research details that these programs aren’t working. However, the brands don’t bear the full cost of their loyalty programs because it is the hotel owners who are paying for these expensive loyalty schemes. 

For every reservation booked by a brand’s loyalty member, such as Marriott Rewards, that hotel pays a loyalty fee, typically around 5%. In addition, for every point earned on property, some brands charge owners a fee. These fees can add up quickly, but they aren’t the only costs owners have to pay. When loyalty members redeem their points with a free stay at a property, some brands will only pay out a nominal fee to cover costs – typically less than $100 – unless the property hits a high occupancy threshold such as 96%.³ Anything less than 96% and that owner’s ADR will take a major hit. 

Hotels that scramble to hit the 96% occupancy threshold by dropping rates or by using other creative tactics will impact their revenue management strategy, not to mention their ADR, if they don’t hit the threshold. Think about it: airlines have teams of people making sure last-minute flight reservations are a pricey proposition, but companies like Hotel Tonight exist simply because of how often hotels need to shed last-minute inventory. This lose-lose situation is a stiff penalty for loyalty programs that BDRC’s data shows aren’t even working.

Brands charge fees on reservations they didn’t deliver. One of the fees that franchisees pay brands are royalty fees which typically run 5%-8% of gross room revenue. The intent of the royalty fee is to pay the brand for the use of its trade name, service marks, associated logos, goodwill and other franchise services. This makes sense for direct bookings – a customer appreciates something about a brand and chooses to book one of its properties online, by phone or via walk-in. But why do brands charge royalty fees for reservations booked on OTAs^?

To be continued.

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