There’s a real thrill to redeeming points for stays at luxury properties, and getting outsized value. I’m sure many people have wondered about the economics of that. How much is the hotel getting reimbursed for your stay? Who is paying for any elite perks that you receive? Does the hotel care if you redeemed points or not? Let’s talk about those various points in this post…
In this post:
The complicated economics of hotel loyalty programs
The major global hotel groups (Hilton, Hyatt, IHG, Marriott, etc.) don’t own a vast majority of their properties. Instead, the companies have an asset light strategy, and have management or franchise contracts for the individual properties.
In some cases, large investment firms own hotels, and they may have properties belonging to all kinds of brands. In other cases, a hotel may even be family owned.
The way the major hotel groups make money is primarily through fees (they’re also increasingly directly monetizing their loyalty programs, but that’s a whole different topic). There’s typically an initial fee to open the hotel, and then on top of that, there are fees on ongoing revenue. The ongoing fees typically fall into one of two categories (and they’re typically a percentage of revenue):
- There’s a general fee for belonging to a particular hotel group, and being able to use the name and branding
- There’s a system fund fee, which is used for funding the loyalty program, marketing, IT, and more
Then any upside (or downside) typically falls with the hotel owner. So the major hotel groups are making money, regardless of whether a hotel is raking in the cash or hemorrhaging money.
Now, one of the reasons that consumers flock to certain hotel groups is because of their loyalty programs, which are massive marketing machines. A big part of the value proposition of these loyalty programs is the ability to redeem points.
As you’d expect, those points are redeemed centrally through the program, and then the loyalty program has to “buy” that room from the hotel. After all, the hotel owner wants to be compensated for each head in a bed, especially since they’re already paying a system fund fee, to fund these perks. That brings us to the question of how hotels are reimbursed…
How are hotels reimbursed for award nights?
As you’d expect, hotel groups don’t publicly disclose how they reimburse their properties when members redeem points. However, over the years we’ve been able to get some insights into this.
Sometimes guests are given folios that are actually intended for the loyalty program, while in other cases the reimbursement rates showed up online when they weren’t supposed to.
While the exact reimbursement policies differ by program, here’s the general concept:
- When a hotel isn’t full, the loyalty program compensates the hotel at a pre-determined rate that’s above the marginal cost of accommodating a guest, but hardly lucrative for the hotel
- When a hotel is full (think 90-95%+ occupancy), the loyalty program compensates the hotel at close to the average daily rate, in recognition of the fact that the room may have otherwise been sold to a guest paying with cash
So I’m totally making this up here, but if a hotel is charging $400 on a particular night, maybe the loyalty program would pay $80 for that room if occupancy is under 90%, while it might be paying $350 if occupancy is over 90%.
Note that the number of points you redeem for a stay doesn’t directly determine reimbursement for a hotel. In other words, a hotel doesn’t get paid X amount per redeemed point. Similarly, if a program offers a fifth night free on award redemptions, the hotel is getting reimbursed for all five nights, as it’s the loyalty program incurring the cost there.
Instead, points redemption rates are set by the loyalty program, and are intended to reflect the cost incurred by the program. That’s why in many cases you’ll find that redemption rates don’t correlate directly to how much a property would cost in cash, but rather also factor in average occupancy at a property.
A hotel loyalty program would probably rather you redeem your points at a $1,000 per night hotel that’s 50% full, rather than a $500 per night hotel that’s 95% full, because the latter redemption will cost the program more. Hotel loyalty programs use historical data to determine points pricing, and the costs they incur.
How do elite perks fit into all of this?
If you have elite status with a hotel loyalty program, how does taking advantage of elite perks factor into this when redeeming points? Who pays for breakfast? Who pays for suite upgrades? Who pays for waived destination fees and parking?
The answer is that “it depends,” though here are a few general considerations:
- Hotels aren’t compensated for most space available and non-confirmed benefits they provide, like room upgrades subject to availability, late check-out, etc.
- Some confirmed benefits, like Marriott Bonvoy Nightly Upgrade Awards and World of Hyatt Suite Upgrade Awards, do offer some compensation to the hotels (think tens of dollars, not hundreds of dollars)
- Reimbursement for breakfast is something I’m not 100% sure of, as I’ve heard different policies for different hotels; generally I think the hotel eats most of the cost there, and it factors into the overall (if anyone can provide any anonymous insights, I’m sure many us would be curious)
- World of Hyatt offers some generous perks like waived resort and destination fees when redeeming points, and free parking for World of Hyatt Globalist members when redeeming points; hotels are reimbursed for this, at least some percentage
- Points that are awarded to members for stays are covered by the system fund fee, so hotels aren’t paying extra beyond that
As you can see, funding elite benefits is a combined effort between the loyalty program and hotels.
Do hotels care if you redeemed points for your stay?
This is a loaded question, and there’s obviously no single right or wrong answers. A few thoughts, though.
Hotel staff are trained by corporate to treat guests redeeming points the same way as those paying cash. Many hotel groups even train front desk staff to thank people for redeeming their points, since it reflects engagement in the program. Officially, you should expect exactly the same treatment as if you paid cash, and you absolutely shouldn’t feel sheepish about the fact that you didn’t pay cash for your stay.
Now, in practice that might not always be how things play out. There’s sometimes a back and forth between hotel owners and hotel groups. Hotel owners often want it both ways — they want the power of the major hotel group distribution channels and loyalty programs, without actually incurring the costs associated with it, whether it’s complimentary upgrades, points redemptions, or a decent breakfast.
Will you sometimes find a hotel that’s perhaps a bit condescending if you redeem points and have an issue? Absolutely, but it’s not how it should be, and it’s the exception rather than the norm. Some may remember my stay at the Aegon Mykonos, at the time a Marriott Autograph Collection property (the hotel has since… mysteriously disappeared?).
Long story short, I was downgraded despite using a confirmed upgrade, and the manager was completely unapologetic about it, and was unwilling to do anything meaningful. One of his defenses was that I was staying “complimentary,” and therefore shouldn’t be complaining.
Bottom line
The hotel industry is complex, given the various parties involved, from the hotel group to the individual hotel owners. Hopefully the above is a useful rundown of how reimbursement works when redeeming points. The important thing to understand is that hotels get paid a lot more when you’re redeeming points if the property is full.
When redeeming points, you definitely shouldn’t feel sheepish about it. You earned your stay, and the reason hotels belonging to major loyalty programs are able to command a revenue premium is because of the points and loyalty perks they offer.
What’s your take on how hotels are reimbursed for award stays? And do you feel like you’ve ever been treated differently when redeeming points?
Thank you, Ben, really interesting.
I think smaller chains, e.g., Radisson, offer better conditions for property owners. A friend of mine is currently investing in a new property, which will become a Radisson, because they apparently made a more competitive proposal.
Thanks Ben, really interesting read.
Would love a similar article on how airlines are compensated by partners via redemptions also!
Your comment/experience is exactly why I will not choose the suite nights anymore. They are difficult to use and when you are downgraded then it becomes a hassle every time. I think the 5 elite nights are more useful. At least they renamed this benefit.
What I find more annoying is many luxury hotel are charging on points just above the limit to use for a credit. For example, luxury hotels charging 100,000 or...
Your comment/experience is exactly why I will not choose the suite nights anymore. They are difficult to use and when you are downgraded then it becomes a hassle every time. I think the 5 elite nights are more useful. At least they renamed this benefit.
What I find more annoying is many luxury hotel are charging on points just above the limit to use for a credit. For example, luxury hotels charging 100,000 or 101,000 points when with an 85,000 coupon + 10,000 points cannot be used anymore.
Do hotels know how I received my status? I know for airline, the gate agent has some ideas. But hotels are franchised and I wonder how much they know about my status. Especially for hotel where many guests get their status via credit card instead of actually earning it.
Based on a conversation I had with someone working at the executive lounge, the hotel staff would not have a clue as to how one got the hotel status. It just lists on the computer what status the guest currently has. At least, based on this hotel chain so not sure about the other hotel chains.
What I'm curious about is the edge-cases on points: when I book a $164 cash+points rate at Grand Hyatt Abu Dhabi and fork out a paltry 9,000 Hyatt points for the Pearl Suite, they're missing out on over $1000 for that 9k points. That seems like a questionable transaction at any reasonable exchange rate...
Yes, the individual hotels provide the free breakfast loyalty perk without any compensation from the brand.
Why do hotels call their invoice a folio? I can't fly using a folio. I can't get a restaurant meal with a folio. Does this go back to some hotel owner trying to write a poem about a guest with polio?
It does go back, but not to poetry. Folio refers to the size of the paper the invoice is printed on, folio paper which was large enough to set out the many incidental charges of a long stay. Airplane tickets and restaurant receipts have their own stories, mainly to do with what was practical to the method of handover and the extent of content. The traditional menu in an elegant old restaurant is, however, often...
It does go back, but not to poetry. Folio refers to the size of the paper the invoice is printed on, folio paper which was large enough to set out the many incidental charges of a long stay. Airplane tickets and restaurant receipts have their own stories, mainly to do with what was practical to the method of handover and the extent of content. The traditional menu in an elegant old restaurant is, however, often the size of a piece of folio paper folded in half! Fun stuff!
At the Bangkok Hilton Millenium (a privately owned property) they graciously recognize Hilton Diamond in upgrading, the lounge service and at breakfast irregardless of points or cash. A wonderfully run hotel with Thai hospitality.
I can speak to Best Western, as the family runs one. For 90% or more occupancy, BW pays 80-95% of the BAR (sometimes rack rate, depends on property), and only 40% of the going rate if occupancy is below the 90% number.
Don’t resort hotel get much more points stays than business focused hotels? If that’s the case, isn’t the burden unfairly placed on leisure hotels?
I've sometimes noticed my Hyatt folio backs out breakfast/parking and on the next page I see some kind of bill to WoH. So I guess in this case, it's the loyalty program paying for the free breakfast.
From experience, I have always found that stays during New Year's Eve and New Year's Day period to be stupidly expensive in major cities (Singapore, Hong Kong, Tokyo, etc.) - most likely because so many people are traveling.
I've always spent points on those stays, and hope that it means that the hotel gets rewarded for the silly numeric price from the program - because ultimatley, it's the hotel that does the service.
...
From experience, I have always found that stays during New Year's Eve and New Year's Day period to be stupidly expensive in major cities (Singapore, Hong Kong, Tokyo, etc.) - most likely because so many people are traveling.
I've always spent points on those stays, and hope that it means that the hotel gets rewarded for the silly numeric price from the program - because ultimatley, it's the hotel that does the service.
What I've noticed a few times with Hilton is that they also put a little "Diamond" flag on the table when we have breakfast and I'm not sure whether that is meant to attract better service or "they're getting it for free" service.
To be honest...I don't see why anyone should feel bad about using points or playing the points game, it's our money and we're trying to spend it wisely, wouldn't the staff do the exact same?
The diamond flag at Hilton hotels are usually tables with better views or it is a separate area with tables for Diamonds only. Sometimes they even have a special breakfast menu for Diamonds only. I’ve noticed this mostly in the UAE and Asia. Pretty awesome perk in my opinion.
Any insight into how Amex Fine Hotels and Resorts work in terms of those benefits?Does the hotel get reimbursed for any of those or is that just part of the marketing expense to be a part of that group of hotels?
Argh, somehow replied to another comment rather than the post overall. Feel free to move it out if you want.
Some hotel loyalty programs pay out fixed, pre-set amounts for award nights, but those programs are more niche and don’t have the public panache for members that being a Hyatt or Marriott top-tier member has.
I worked at a couple major brand hotels (same group) in NYC about 10+ years ago. I can say that not only did we thank them for their loyalty to the group, we would always strive to upgrade their room as a courtesy and make sure to inform them of this. We never wanted people to feel “sheepish” about redeeming points at all. To us, it was the opposite; that they (or their company) spent...
I worked at a couple major brand hotels (same group) in NYC about 10+ years ago. I can say that not only did we thank them for their loyalty to the group, we would always strive to upgrade their room as a courtesy and make sure to inform them of this. We never wanted people to feel “sheepish” about redeeming points at all. To us, it was the opposite; that they (or their company) spent thousands of dollars at our group and this was the reward for it.
As you stated, I realize not every hotel does this, which is unfortunate. And yes, I said group and not brand. We realized that they could be staying at lower tier brands and redeeming at higher tier ones but that’s just the nature of the business. If the hotel owners don’t want to be a part of it, then they shouldn’t manage that brand.
While I won’t disclose how much the parent company was paying our specific property for each reward night, your range was accurate. We used to see the actual cost and had to make sure we didn’t accidentally print out the folio that showed it when the guest checked out. In the end, we did still make out though because a good percentage of guests would rack up incidental charges.
Like I said, this was over a decade ago and I realize things have changed in the industry, especially coming off COVID but that was my two cents.
Can you explain what happens when you book using points/certificates and don't show. I mistakenly booked a room at the Royal Palms Scottsdale (Hyatt) for May 15th instead of June 16th and by the time I realized it, it was May 16th- the stay was considered a no show. My credit card was charged for the price of the room, the certificate is showing as being used and Hyatt's Globalist won't budge on helping rectify...
Can you explain what happens when you book using points/certificates and don't show. I mistakenly booked a room at the Royal Palms Scottsdale (Hyatt) for May 15th instead of June 16th and by the time I realized it, it was May 16th- the stay was considered a no show. My credit card was charged for the price of the room, the certificate is showing as being used and Hyatt's Globalist won't budge on helping rectify what was an honest/obvious mistake. Are hotels double dipping in these cases where they're getting paid by corporate for the used points and then charging you for the missed night on a credit card?