How Are Hotels Paid When You Redeem Points, And For Elite Perks?

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…

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.

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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 varies by hotel group, though generally, the hotel eats most of the cost there, and it factors into the overall agreement between the hotel group and the company
• 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.

For those curious, generally individual hotels don’t know how you earned your elite status. So it doesn’t matter to them if you earned it through actual hotel stays, or just by holding onto a credit card. Presumably a front desk agent could look at your stay history, but they typically wouldn’t have any reason to do so, in this context.

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?