I’m sure I’m not the only one who finds the economics of hotel loyalty programs to be fascinating. For the most part, the global hotel chains don’t actually own their individual hotels. Rather they typically just have management contracts for them, and they get a percent of the revenue.
This raises the question of how hotels get paid when you redeem points, since the individual hotel and loyalty program are very different parties for these purposes. As a general rule of thumb, here’s how it works:
- When the hotel isn’t full, the loyalty program compensates the hotel at some reimbursement rate that’s slightly above the marginal cost of servicing a room, etc.
- When the hotel is full (think 90-95%+ occupancy), the loyalty program compensates the hotel close to the average daily rate, in recognition of the fact that the room may have otherwise been sold
This is why you may often notice an inverse correlation between how generous a hotel loyalty program’s promotions are and how good the global economy is. That makes sense in general (hotels don’t need to do much to get heads in beds when the economy is doing well), but it makes sense even more with hotel loyalty programs.
That’s because when hotels aren’t full, it costs a loyalty program very little for you to redeem your points. Meanwhile when hotels are full, they’re paying dearly for your redemptions.
Anyway, for the most part this reimbursement is something that goes on completely on the back end, and as consumers we never see how much money changes hands.
Well, I’ve spent the past two nights at Marriott properties in Africa, and I redeemed points for both stays. For whatever reason, in both cases I was asked to sign a document that showed my “room rate,” which presumably is their internal reimbursement rate.
So, what was the cost?
First I stayed at the Four Points by Sheraton Nairobi Airport, which cost 17,500 Marriott points (for the record, I value Marriott points at ~0.8 cents each). At check-out I signed a document showing a rate of $36 (in Kenya taxes and fees are included in the hotel rate).
My suite at the Four Points by Sheraton Nairobi Airport
So that means Marriott was paying about 0.2 cents per point for me to redeem. Marriott got a good deal. 😉
Then I stayed at the Marriott Kigali, where a free night cost 16,000 Marriott points. This time around I took a picture of that document. As you can see, my room rate was $42, or $52.04 including taxes and fees. So in this case Marriott was paying about 0.3 cents per redeemed point.
I would assume neither of these hotels were completely full, or else the reimbursement rate would have been significantly higher.
Bottom line
As you can see, these are the types of redemptions that can both make a lot of sense for consumers, and also be a great deal for the loyalty program. My guess is that a vast majority of redemptions cost Marriott in the same 0.2-0.3 cent per point range. Of course that’s an ideal situation for them.
However, then there are also plenty of redemptions where I’m sure they’re paying several cents per point, and losing a lot of money. But that all balances out, and that’s how the economics of these programs works.
In retrospect I feel sort of guilty. I loved the Four Points by Sheraton Nairobi Airport, got incredible suite upgrades both times, the service and breakfast were excellent, etc., and the hotel only cost $36 for each stay?!
Do any of the above numbers surprise you?
I know this isn't Marriott/SPG related but I stayed at an IHG Brand Holiday Inn and it was 20K for the room and IHG paid the property $34.49 for the night or at least that's what my receipt said
You mentioned that franchised hotels with hotel management companies typically pay a percentage of revenues for the management/marketing of the property by the management company. My past experience with hotel owners and management companies (which could have changed) is that the latter are also paid a percentage of the hotel profits, which can be adjusted for certain non-recurring items. This is akin to the contractual return a financial hedge fund receives for investing a clients...
You mentioned that franchised hotels with hotel management companies typically pay a percentage of revenues for the management/marketing of the property by the management company. My past experience with hotel owners and management companies (which could have changed) is that the latter are also paid a percentage of the hotel profits, which can be adjusted for certain non-recurring items. This is akin to the contractual return a financial hedge fund receives for investing a clients money. If I were a passive hotel owner, it would be in my interest to pay a percentage of profit, because otherwise, the management company could inject expenses into the hotel operation that could produce a loss and/or neglect important marketing duties that drive people to stay at the hotel property.
Can you request a folio with any hotel after your stays/during check out by email?
Staying at 4P Brisbane right now on a 5th night free award. On second day I notice the folio displayed was AUD 47.xx for a Package Rate for the first night. I went downstairs to inquire about it. The CS asked me what I saw. I told her it probably what the hotel charges Marriott program. Then she took a look and told me there was no charge. She showed me the screen which is...
Staying at 4P Brisbane right now on a 5th night free award. On second day I notice the folio displayed was AUD 47.xx for a Package Rate for the first night. I went downstairs to inquire about it. The CS asked me what I saw. I told her it probably what the hotel charges Marriott program. Then she took a look and told me there was no charge. She showed me the screen which is split into 2 sides. She deliberately covered up the heading of one side of the screen though.
When I returned to the room and checked folio again, the previous info was gone.
What would the revenue rates have been for your stays? I'm assuming significantly higher than $36 and $52, since you decided to redeem points?
I requested a folio by email for my 60,000 points stay at the St. Regis New York. One attachment to my own folio was 547 USD room rate and a 547 USD credit as SPG instant award.
This was my experience working in Starwood hotels. For the non corporately owned hotels, the owners are paying a franchise fee to Starwood, which is X% of room revenue (X is based upon brand and other factors). The room rate for a redemption defaults to the rate that some of you have brought up (which by the way is never supposed to be seen, that is poor/lazy execution by the front desk associates), but is...
This was my experience working in Starwood hotels. For the non corporately owned hotels, the owners are paying a franchise fee to Starwood, which is X% of room revenue (X is based upon brand and other factors). The room rate for a redemption defaults to the rate that some of you have brought up (which by the way is never supposed to be seen, that is poor/lazy execution by the front desk associates), but is changed to the appropriate rate in high occupancy situations prior to running the night's audit or adjusted at a later time when occupancy is reconciled. I most frequently worked for a Starwood managed property and we changed it at night, but I don't recall having to do that at franchised properties, I wonder if that has to do with how revenue is accounted for between the different entities?
The amount of redemption revenue for a month is then credited to the property's franchise fee total, lowering the amount that they would be paying to Starwood.
The properties also paid for the points that are issued to guests. I don't remember the amount that was paid for guests that stayed, it wasn't part of what I needed to know, but I do remember that when we would process point credits for service recovery we were charged something like half a cent per point. The cost may have been the same, but again it wasn't something that I ever needed to concern myself with. So, giving someone 10,000 points for an issue on a $300 room rate wasn't something that we would have been too concerned with doing.
What would have been logical to me is that the hotels have a ‘settle up’ period in which either the chain, or the property, has to reimburse the other for the difference in points issued vs redeemed.
For example, if the property issued 10M points, but guests redeemed 12M points in the same time period, then the chain would owe the property a conversion value for the balance of 2M points.
I recently used points to stay at a sold out Residence Inn on a big football weekend in a small college town. I got a bill for $31 + taxes. When I asked about the $31, the front desk told me was their internal reimbursement rate. As this amount was quite low for a sold out hotel, I'm guessing that the incremental $$ for 90%+ occupancy must be done through another means.
The $36-$47 amount that shows up is what Marriott pays when the hotel is below 96% occupancy. If a hotel is at or above 96%, Marriott pays ADR (avg daily rate) for each room being covered by points or a certificate. While you may have signed a paper saying the rate Marriott paid was $36, that may not be the case. The lowest rate shows up on the hotel’s operating system no matter what occupancy...
The $36-$47 amount that shows up is what Marriott pays when the hotel is below 96% occupancy. If a hotel is at or above 96%, Marriott pays ADR (avg daily rate) for each room being covered by points or a certificate. While you may have signed a paper saying the rate Marriott paid was $36, that may not be the case. The lowest rate shows up on the hotel’s operating system no matter what occupancy is, so if they require you to sign something while redeeming points, it will always say $36/nt. In reality, Marriott could be paying $199, $299, $599, etc for that room if occupancy is above 96%. They just reimburse the hotel the difference later after final occupancy numbers come in for each night. Many properties oversell in order to ensure a 96% occupancy so that Marriott will pay the ADR after no-shows, duplicate reservations, and late cancellations are processed. If a hotel has 95% occupancy vs 96%, they stand to lose thousands of dollars that night.
Interesting read Lucky. I recently had a bad experience at a Westin and they offered me 25,000 points. I asked for half my bill refunded, and stays are 50,000/night so the offer of 25k was reasonable to me. I assume this is a better rate for the property than the refund, but I’m curious as to what they pay per point in this type of situation.
Hey Lucky, I'd like an article about how the loyalty program is making money (from hotels) as well. What's the flow in the other direction (hotels paying the loyalty program as recognition for bringing people to their properties).
I recently stayed at a property that was 17,500 points. I booked it day-of arrival on points, but realized a couple of weeks later that the points were never debited. I checked my CC statement and sure enough, they charged me $50 and some change. I'm assuming I got charged the rate Marriott would have paid.
I didn't get elite credit for the night, but I was happy enough to buy back 17,500 points for $50.
Given that the chain, Marriott or another company, doesn’t own the hotel, I wonder about how upgrades get compensated? Or what entity bears the cost if there is a really bad service issue that results in some type of compensation, maybe points or a comped night? Or really what incentive does a particular hotel have to make me love Marriott or Hilton if the particular hotel is just managing that one property? Don’t see how...
Given that the chain, Marriott or another company, doesn’t own the hotel, I wonder about how upgrades get compensated? Or what entity bears the cost if there is a really bad service issue that results in some type of compensation, maybe points or a comped night? Or really what incentive does a particular hotel have to make me love Marriott or Hilton if the particular hotel is just managing that one property? Don’t see how they benefit if my great stay at their hotel causes me to book another stay with the same hotel chain?
I stayed at the JW Marriott Cairo on points. My bill notes "Rewards Redemption" and was 662.38 EGP per night which is ~37 USD.