From our perspective – the points collectors – redeeming for a free night in a hotel sounds like nothing but fun. Rather than forking over cold hard cash, we get to convert this almost fictional currency a loyalty program created into real life enjoyment. But, if everyone staying at a hotel was paying with points, would the hotel be able to afford cleaners, breakfast buffets and staff? Here’s how it works for hotels, when you pay with points…
First and foremost, individual hotels don’t have actual bank accounts, and then points bank accounts, stuffed with billions of hotel points from all the people who redeemed at their hotel. Loyalty programs pay a hotel a certain rate in actual cash, when they accept a reservation with points.
The amount a loyalty program compensates a hotel can vary from as much or more than most people are paying in the hotel using cash, to a mere fraction, which is why some conflicts flare up every once in a while.
A perfect example, this article from View From The Wing yesterday, where a hotel claimed that it was being paid 1/3 of what it used to receive under the days before the SPG – aka Starwood merger with Marriott.
The short answer is that it varies by each loyalty program, and also by how busy the hotel is. What may be surprising to many, is that the busier the hotel, the more it typically gets paid for allowing a points redemption. As a ballpark: if a hotel is 95% full, it receives the average daily rate people are paying in cash, when you pay in points.
Basically, it costs the loyalty program more when you redeem for these nights, but the hotels mind you using points less, because they get more for making a room available for redemption at these highly sought after times.
When a hotel isn’t remotely full, it typically gets much less when you use points than what a cash paying guest is giving the hotel. This is traditionally based on a percentage of the average rate. Sometimes, this can be as low as 1/4 of what the average rate paid by a cash customer is, and is often around 1/3 – hence why hotels aren’t always thrilled to have so many points wizards in residence.
Expelliarmus!
Of course, things get trickier for hotels when someone flashes their loyalty card at check in on a points stay too. The loyalty program guarantees certain benefits, such as daily breakfast, and the hotel must then fork out on these service elements. Depending on the status, that can get expensive.
If a hotel was far from full occupancy and only had an average daily rate of $125, the hotel may be getting $40 for the stay, but then need to send a welcome amenity, room upgrade and breakfast, all of which doesn’t cost what we pay retail – but does cost something.
If You’re Really Interested…
View From The Wing has gone down the rabbit hole on these things, and more than once. If you’re interested in more precise mathematical breakdowns and caveats, check out Gary’s article on this compensation concept for Hyatt, Hilton and Marriott.
Another interesting tidbit? The hotel doesn’t necessarily receive better compensation if you pay Marriott’s peak, off peak or standard rates, so don’t feel like you’re doing them any favours by saying “I paid peak pricing for this”. They don’t care, unless the hotel is nearly full…
While technically correct, I feel that last statement is misleading. Just because it’s not guaranteed that a hotel is getting more for that night doesn’t mean probability of it isn’t higher.
If the hotel played with the rates and peak calendar “correctly” (maximizing both room rate and occupancy), that will indeed be the case.
But there’s a chance that the hotel got greedy (setting it as a peak date or pricing it too high) and pushed enough people away, ending up below the threshold for “average rate payout.”
They may have also boosted occupancy too much by charging low rates or setting it as an off-peak/standard night when they shouldn’t have. If they were too late in raising the price and switching it to “peak” (to stem the flow and increase their average rate), they could have filled up the rest of it with “peak” bookings but already locked in a lousy “average nightly rate.” Of course, there are ways for them to play with availability; if they can make their last rooms unavailable with points, they can charge what they want for them. However, if they sold 80% of rooms on points or at disadvantageous rates, it could be hard to make that up on the last 20%. An overly aggressive (off-peak/standard when not) points calendar screws both; overly-aggressive (too low) cash rates screw the hotel but make Marriott happy.
When you say “hotels aren’t always thrilled” it sounds like the hotel building has a life of its own. No, it is hotel owners who are not thrilled about the low reimbursement rates. It is probably their #1 complaint. As you mentioned, if free breakfast is included, award stays can turn into bottom-line killers.
OTOH, the hotel employees don’t give a hoot. Guests need not be embarrassed about showing up at the front desk on a points redemption. I stay dozens of nights on points and have never been treated less than wonderfully.
The Marriott link takes me to an unrelated article.
JW Phuket was never under SPGs program…