How Much Does A Points + Cash Stay Cost Hyatt?

I find the financials of hotel loyalty programs to be fascinating. Even more so than airline loyalty programs, given that in almost all cases the hotel brand doesn’t actually own the individual hotels, but rather just has a management contract for them.

For example, when you have your Hyatt Diamond breakfast, who pays for it, and how much do they pay for it? Is it a fixed amount, or does it depend on how much you order? Do the servers still get tipped the full amount? Who pays for the Diamond welcome amenity (be it 1,000 points or a food & beverage amenity), and how much does it cost them? What about promotions — who pays for those? And for confirmed suite upgrades, do the hotels get reimbursed anything for those, or is it just a “cost of doing business” with the hotel brand?

Park-Hyatt-Abu-Dhabi-2
Nice Diamond welcome amenity!

Unfortunately I’m not really privy to most of the details, so I have no clue. But that doesn’t stop me from wondering. 😉

How much do award stays cost hotel loyalty programs?

The one aspect of hotel loyalty programs that I do understand is reimbursement when it comes to award nights.

Here’s the explanation I provided last year about why most of the major hotel loyalty programs seemed to have mega-devaluations all at once:

During the recession most hotel loyalty programs introduced “no blackout dates” as a selling point of their programs, and that worked great at the time since hotel occupancy was extremely low, and the marginal cost of filling an extra room was very low.

But keep in mind that hotel chains run the hotel loyalty programs, while the individual hotels are typically franchises, and both have their own best interests in mind. Hotel loyalty programs want to make their loyalty programs as profitable as possible, while the hotels themselves want to make their individual properties as profitable as possible.

As a result, the arrangement that most hotels have with their loyalty programs is that if hotel occupancy is above a certain number (usually 90-95%) then the loyalty program has to reimburse the hotel at the average daily rate for an award reservation, while if it’s below that “magic number” they reimburse the hotel just slightly above the marginal cost.

As such, during the recession the hotel loyalty programs were typically only paying slightly above the marginal cost for award redemptions, while post-recession they’re often reimbursing the hotel at the exponentially more expensive average daily rate.

In other words, when you redeem points at the Park Hyatt Sydney and it ends up being nearly full, Gold Passport is literally paying the hotel ~$1,000 per night for that stay. Of course this is part of a much bigger math equation so cash isn’t always directly changing hands (since the hotel also owes Gold Passport money for the points they’re issuing), but that’s how it works in a nutshell.

When Hyatt introduced the new Category 7 properties earlier this year, it’s interesting to note that the Park Hyatt Maldives wasn’t on the list, despite the fact that it had average daily rates which were at least as high as most of the other newly minted Category 7 properties.

Park-Hyatt-Maldives-Rate

So why did it remain a Category 5 property? Probably because it was rarely at capacity, so redemptions at the resort weren’t costing Gold Passport a lot of money. That’s my guess, at least.

How much do Cash & Points stays cost hotel loyalty programs?

But what about Cash & Points stays? Late last year I gave an example of how much SPG was reimbursing individual hotels for a Cash & Points stay. Specifically, the St. Regis Houston was accidentally publishing the reimbursement rates in the rate description:

St. Regis Houston

In this case, the hotel gets to keep all the cash, and gets reimbursed a small amount from SPG — in this case, $21.19 for the 6,000 Starpoints. So they’re looking at ~$130 in revenue for that stay.

Yesterday a reader sent along another interesting data point as to how much Points + Cash stays cost Hyatt Gold Passport. He was staying at a Category 2 Gold Passport property, which ordinarily goes for 8,000 points per night, or otherwise 4,000 points + $55 using the Points + Cash rate.

Hyatt-Cash-Points1

He was accidentally given the folio for Gold Passport as opposed to the hotel. And it indicated that the hotel got to keep the $55 cash, plus was being reimbursed $35 for the points.

So all-in-all, the hotel was being “paid” $90 for that stay.

Why don’t hotels release more Cash & Points availability?

As you can see, for hotels the upside potential of Cash & Points is somewhat limited. Ultimately it’s well above their marginal cost, so they’re making money if they couldn’t otherwise sell the rooms. But even if the hotel were 100% full of people redeeming points, the reimbursement rates would be much higher.

That being said, there could be some upside. The $90 reimbursement rate is probably more than what the hotel would be paid if someone redeemed points for a free night but the hotel wasn’t more than 90-95% full.

So when hotels make Cash & Points space available, they’re sort of gambling. They’re taking a “sure thing” which won’t make them rich, but if the room would otherwise go empty, it’s a no brainer.

The Cash & Points reimbursement rate could very well be higher than a free night reimbursement rate if the hotel otherwise wouldn’t be full. But if it were full, it’s going to cost the loyalty program dearly if you redeemed points for a free night.

Bottom line

I found the data point interesting, so hopefully others did as well. A small glimpse into the fascinating world of the hotel loyalty program business…

Hopefully this explains why a lot of hotels only make Cash & Points available closer to the stay date, when they know they couldn’t otherwise sell all rooms.

Comments

  1. Since you are so interested in the accounting behind hotel loyalty programs, did you catch the news piece about how the Le Parker Meridien New York scammed Starwood on SGP Night reimbursments?

    http://nypost.com/2013/01/03/suit-le-meridien-la-scam/

    As some one who works in hotel finance, typically the costs of rewarding loyal guests (upgrades, comp breakfast, amenities) falls on the hotel and you could consider it a cost of doing business to maintain brand compliance. It can be expensive but often these are your most profitable guests, they often willing to pay higher rates because they value the benefits and are much more likely to book directly with the hotel (avoiding costly GDS fees, travel agent commissions, etc.)

  2. With IHG Rewards things are different. When using cash + points, IHG adds points to your account for the cash portion, and corporate keeps the cash. They then reimburse the hotel as if it was a rewards stay with all points. As such, IHG Rewards typically makes a profit on cash + points stays because the cash they charge is higher than the amount they reimburse the hotel for an all points stay unless the hotel is above set occupancy thresholds where they need to reimburse the hotel the regular rate . This is one of the reasons that IHG offers the cash + points option on all hotel stays that have rewards nights available. As such, if the hotel is close to max occupancy the hotel receives the benefit of a regular rate for the rewards night, and if not, the hotel covers its marginal cost while IHG Rewards makes money while reducing their outstanding points liability.

  3. Good stuff. Now we need to get to the bottom of the breakfast reimbursement. I’m very interested to learn what the hotel pays and what the server gets when I get my Diamond breakfast covered. I think for my wife, son and me at the Park Hyatt Beaver Creek last week our breakfast was about $120 all in. I tipped 20%, maybe a bit more. Obviously these breakfast costs have no basis in reality, and many times they’re buffet type, so hardly any server interaction. Curious if these guys are getting the full tip. And what if I tip, say 50% on the bill? What do they get? The whole thing, or some standard percentage?

    Inquiring minds want to know.

  4. When I receive a comp breakfast, I usually ask servers whether the tip is included. Often they say “no”, in which case I leave a reasonable ($3-5 for 2 people) tip in cash. (I once tried adding a tip for a comp breakfast to my room folio; after seeing the hassle it caused the staff I’ll never do that again.)

  5. Great insight…..I love how points+cash can be coupled with a Diamond Suite upgrade……..did it at Seattle twice and will do it in Maui in Feb at Regency and Andaz…….and coupled with the Diamond challenge it has definitely added to my Hyatt stays………

  6. I checked out of the DFW Hyatt Regency last Sunday morning (also a CAT 4) and there was a line item on my invoice that read “Gold Passport Cash and Points Fee with a cost of $35” making my stay $90 instead of $55 – the front desk removed it, but it makes sense now. Front Desk agent said it had happened a couple other times and that it was some kind of IT glitch :-\

  7. Lucky – Ever had Hyatt contact you about a property that will no longer be a Hyatt for an upcoming award reservation? This is happening to us for an award at Hyatt Oubaai in January. So far, we are disappointed in what they are only offering to convert our res into a pure cash stay @ $250 per night. Please contact me if you want to discuss.

  8. @ Mark — Ouch, that sucks. Haven’t had it happen personally, but seems that’s what typically happens, unfortunately.

  9. I wonder if it makes any difference when the Points stay is booked. If it is booked on points well in advance the hotel doesn’t know what the occupancy is going to be.

    If the hotel has a lot of points stays booked, it would have a pretty strong incentive to push occupancy up to the 90-95% level where it gets reimbursed higher for the points stays – so they should then issue some Hot Escapes or C&P to fill up remaining rooms. I guess that would come into play if they have a number of points rooms booked and are within reach of the threshold

    The interesting thing is that C&P is a way for them to discount rooms without triggering any best rate guarantees nor with having any significant risk of existing bookings being rebooked at lower rates. Whereas if they discount their “regular” rates to fill rooms, then I am sure there are both programs that recheck bookings periodically and savvy travelers who do so, so they risk eroding their existing bookings. I can see that C&P could be profitable for the program itself if they don’t have to reimburse much for the points being consumed.

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