Love your loyalty points? Consider the havoc they wreak for businesses

Clark Harrop is a partner and business lawyer in Dale & Lessmann LLP’s corporate and commercial and franchise, licensing and distribution practice groups.

Owners of nearly 1,000 Marriott-branded hotels recently sent a letter to chief executive Anthony Capuano demanding a larger share of the revenue Marriott earns from its Bonvoy loyalty program.

At the same time that Marriott’s Bonvoy-related revenues are increasing, the hotel owners – who operate independently and provide the rewards when Bonvoy members redeem their points for free hotel stays – are reimbursed by the company at steeply discounted rates. According to the hotel owners’ letter, seen by the Wall Street Journal, the compensation paid for the redemption of rewards doesn’t match up to what they receive from paying customers.

At first glance, this would appear to be a simple fee dispute and one that could be solved by increasing the revenue share paid to hotel owners when Bonvoy points are redeemed for free hotel stays at their hotel. That’s certainly part of it, but not the whole story.

The tension at the heart of the Marriott dispute doesn’t arise when the provider of the rewards is the same party that benefits from selling loyalty points. Examples of this loyalty system would be Aeroplan or Starbucks rewards. Both operate through a largely unified corporate structure.

The Bonvoy dispute reveals the unique problems that can arise when a loyalty program that involves separate parties stops rewarding customer loyalty to the frontline businesses and becomes, instead, a financial product for the profit of the brand owner. This is only made worse when the businesses that actually deliver the rewards aren’t adequately compensated for the cost.

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Marriott’s relationship with its hotel owners is, in every functional sense, a franchise relationship. The structure here will be instantly familiar to anyone in that world. The brand licenses its name and standards; independent owners operate the actual locations; and a system of fees, marketing funds and shared programs aligns everyone’s incentives toward the same outcome – a customer who keeps coming back. Loyalty programs, done right, are central to that alignment.

Many of Canada’s most popular loyalty programs involve companies with franchisees, including Loblaw’s PC Optimum, Canadian Tire’s Triangle Rewards and Tim Hortons’s Tims Rewards. They would do well to heed the lessons of the Marriott saga.

In a franchise system, loyalty points may be earned and spent at the same location, but not necessarily. The franchisee absorbs the costs of a discounted or free transaction, regardless of whether the customers patronized their location or a different location in the same system.

Franchisees are generally happy with this arrangement because the points were earned by the customer through frequent purchases at one of the franchise system’s locations – even if not the franchisee’s own location. In this context, the reward – whether a free room or a free sandwich – is an investment in brand loyalty and customer retention.

This logic begins to break down when loyalty points become a financial product earned not only through patronage of a brand, but through other means such as credit card purchases, as with the case of Bonvoy and many points-systems these days. The underlying current of the hotel owners’ letter to Marriott is that they do not see the points holder as a customer worth investing in.

Quite reasonably, the hotel owners’ letter focuses on compensation. They would like to receive a greater share of the revenue in exchange for providing free hotel stays when Bonvoy points are redeemed. This seems like a simple fix, but the reality is more complicated.

Once a brand owner starts selling its loyalty points as a wholesale product, no amount of reimbursement or revenue sharing can reconstruct the psychological connection. It is almost inevitable that the franchisee will stop prioritizing the reward recipient and may even begin to resent their customers that redeem points. Over time, this corrodes the loyalty program until it is a purely financial transaction and no longer serves to reward loyalty.

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This matters to all franchisors, because every franchise system with a points-based rewards program – quick-service restaurants, gas stations, auto service chains – faces the same temptation. Loyalty data and loyalty currency are valuable, and brand owners are increasingly aware that selling access to both, such as integrating them into credit card perks, can generate additional revenue.

But if loyalty points are nothing more than a financial product to be sold by the brand owner for profit, the loyalty program will stop delivering on its promise to deepen customer relationships, and franchisees will stop treating it as an important part of the marketing and promotional mix.