Talking to IHG's VP of Loyalty Programs on the Psychology of Point Redemption

Last Updated Sep 30, 2009 10:43 AM EDT

Recently, IHG (parent company of the Holiday Inn and Intercontinental brands, among others) quietly rolled out a new feature in its loyalty program that allows members to use points to buy flights directly. There's nothing particularly innovative about this change, but the conversation I had with IHG's VP of Loyalty Programs Don Berg was a fascinating look at the psychology involved in customer point redemption decisions.

Don has been with IHG for 18 years and was with Hilton before that. He's been working on the loyalty program for nearly a decade so he has seen tremendous change in the world of hotel loyalty programs. While hotels used to be dependent upon airline mileage programs, they have nearly all made a major effort to develop their own programs to try to promote loyalty to their brand (or brands, as the case may be).

The conversation quickly turned to the new Flights Anywhere program that allows people to simply use points (or a combination of points and cash) to pay for airline tickets. I wanted to know why they decided to introduce this program, especially since they already let people convert their points into airline miles. The response isn't too surprising.

We have very few people who collect airline miles or even redeem their points for airline miles . . . . Airlines have compressed availability and started charging fees even on frequent flier tickets . . . . While you always have been able to redeem your points for frequent flier miles, you end up being in the same predicament as people who collect miles in the first place. What we thought would be better was to let customers redeem their points directly for inventory in the airlines' paid seat inventory so that there are really no restrictions.
This is really the same rationale we've seen with the countless credit cards that offer a similar program. They wanted to provide something better than just frequent flier miles that may be difficult or costly to redeem. But the name of the game is offering more options for people to be able to burn their points. This was a fascinating look at consumer behavior.

First, we talked about the decision to offer points + cash in addition to just points redemption.

We know from our points and cash program for hotel nights that it is a very popular feature for our customers. A couple reasons why . . . at one end of the scale you have the customer who doesn't have enough points to use for a free ticket . . . . The flip side of that is that we have customers who think their points are more valuable than cash and they want to protect them and not use all of them.
I wanted to know if there was a financial consideration in creating this program. Was this a way to create a more profitable program than one which would have them simply buying airline miles? He denied that quite firmly.

It could be but it's not structured that way. As with any program, you can choose to harvest value of the program more for yourself or more for the customer. . . or you can do what we are doing - charge the equivalent value of the points." So in their eyes, this is effectively a neutral proposition, though he did admit that there are other programs (like selling miles to partners) that are meant to create profit for the program.
The discussion turned deeper into redemption and the trends that IHG has been seeing.

A trend we noticed that started last fall and accelerated into the early part of this year is we have a lot of our customers . . . saying "I don't want to spend the cash because I want to save my money." So they tap their Priority Club account.
He then said it actually started even earlier that that.

We really first saw the trend in summer of last year when gas prices went through the roof. We introduced gas gift cards and we had a million dollars in redemptions in one month. Does that mean we were giving customers more value? No. But customers change their perception. When prices go up, people are less willing to use their cash to pay those prices.

One of the other things we've seen is the guilt of the business traveler. . . . I'm away from my family and away from my wife and my kids and I'm feeling guilty about that. I actually use my points quite frequently to purchase an item that I give to somebody else. We see that trend very heavily around the holiday period where we do about a third of our redemptions in a two month period in those categories.

I really found myself wondering about this. I generally use my hotel points for hotel stays because that's been the best value, but many people don't bother looking at value. Says Don, "If I were the consumer reporter for hotel or airline awards, I would tell people that the most value you'll ever extract by using your hotel points is to use them for hotel rewards. People who do the math, surprisingly a lot of people don't, find the best value is a hotel."

But simply because the value is great doesn't mean that's where everyone spends their points. "Having said that . . . when I get points, I redeem them for a Home Depot certificate. That way my wife won't complain to me when I come home with my third circular saw. I can tell her 'don't worry, I didn't use any money. I used my points.'

So with that in mind, I can understand why IHG is trying to add even more ways to burn points. That was an eye-opener.