InterContinental Hotels Group (IHG) has disclosed some changes to the economics of the IHG One Rewards loyalty program, which the company hopes will help boost profits, as flagged by Head for Points. It remains to be seen what this means for guests, though…
The basic economics of IHG One Rewards
The hotel business model is a bit more complicated than most consumers assume, given that for the most part, the major hotel groups don’t actually own their participating hotels. Instead, they primarily profit off of the fees they earn from hotels, for management, franchising, and marketing. Currently IHG makes its money from hotels in one of two ways:
- IHG receives a fee equal to 5-6% of revenue from hotels, for the privilege of using the brand’s name and more; this is very high margin for IHG
- IHG is paid a “system fund” fee for its loyalty program, marketing, IT, and more, with hotels paying 4.75% of reward qualifying revenue for IHG One Rewards, and 3% of revenue toward general spending
What’s noteworthy is that up until now, virtually all the revenue that IHG earned from its loyalty program also had to be put into the system fund fee account. So it wasn’t just hotels that were paying into this, but IHG was also paying into this when it sold points to third parties (like credit card companies, airline and rental car partners, etc.). While that extra funding is of course great for being able to invest more in the loyalty program, it hasn’t been great in terms of directly contributing to the company’s bottom line.
As IHG describes it, the system fund fee is “not managed to a profit or loss for IHG over the longer term, but for the benefit of hotels in the IHG system.”
IHG will profit more off of its loyalty program
IHG is making updates to its system fund fee agreement with hotels, with several key changes:
- IHG is lowering its system fund fee that hotels have to pay; it’s not clear how much this is decreasing, but this is intended to improve owner economics
- IHG is increasing reimbursement that hotels receive for reward nights, intended to improve owner economics
- IHG is now able to recognize profit from selling points to third parties; that means the entire amount of revenue generated from selling points will no longer exclusively go into the system fund fee, but instead the hotel group will be able to realize a profit on this
Regarding that last point, the expectation is that this will deliver around $25 million in additional operating profit for IHG in 2024, and that this will increase significantly in 2025 and beyond.
Keep in mind that in late 2023, IHG executives revealed that the company wanted to greatly increase its revenue from its co-brand credit cards, believing that it was greatly lagging competitors in this regard.
What are the implications of this change?
It’s hard to know what exactly to make of these changes, from the perspective of IHG One Rewards members:
- On the hand, it doesn’t sound good if hotels will be paying less money toward loyalty program fees, and at the same time, IHG will be pocketing more money from the loyalty program
- On the other hand, perhaps IHG actually being able to better profit off its loyalty program will cause the company to try to make it more compelling, to increase engagement and revenue
Similarly, hotels reportedly getting increased reimbursement when members redeem points is a mixed bag. It’s good in terms of more incentives for hotels to make award nights available, though I have to imagine this will also lead to higher award costs, reflecting the costs incurred by the program.
I’m really not sure what to expect here, though I do believe that we’ll see some material change to the program as a result of these updates…
Bottom line
IHG is updating economics as it relates to the IHG One Rewards loyalty program. Hotel owners will pay lower fees related to the loyalty program, reward night reimbursement will increase, and IHG will also be able to pocket more money from selling points to third parties.
These changes seem like a mixed bag for members. On the one hand, IHG has more of an incentive to increase engagement in the program, and to make it more compelling. On the other hand, less money being paid into the loyalty program while hotels get paid more for award nights doesn’t sound great in terms of the program offering better value for members.
What do you make of these changes to IHG One Rewards economics?
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