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As I explained yesterday, I just redeemed my IHG® Rewards Club Select Credit Card annual free night certificate for a stay at the InterContinental Hong Kong. The card has just a $49 annual fee and offers an annual free night certificate valid at any IHG property, with no category restrictions.
So in my case I had an overnight in Hong Kong, and it’s tough to beat the InterContinental Hong Kong for that purpose, given its location. Since I was redeeming my annual certificate, the stay was completely “free” — there were no taxes and fees, or anything.
However, I’m sure I’m not the only one who has wondered how much this free night is really costing IHG. Yesterday I checked my reservation through IHG’s mobile website, and it listed a price. Specifically, it said that the stay cost 504HKD, or a total of ~555HKD including tax and service charge. That comes out to ~$72. That’s the internal reimbursement rate that IHG is paying the hotel.
For whatever reason, IHG’s website often lists the internal reimbursement rates used between IHG and the hotel on award stays. So at ~$72 for the one night stay, IHG was getting quite a deal. However, that’s still quite a bit more than the $49 annual fee that I paid on the IHG® Rewards Club Select Credit Card in order to get this stay.
Contrary to popular belief, for the most part the global hotel chains don’t actually own individual hotels. Instead they simply have management contracts for them, and they get a percentage of the revenue in exchange for their services. When it comes to award redemptions, typically:
- The loyalty program compensates the hotel at some reimbursement rate that’s slightly above the marginal cost of servicing a room, etc., when the hotel isn’t full
- The loyalty program compensates the hotel close to the average daily rate when the hotel is full (call it somewhere around 90%+ occupancy)
Of course the exact details vary by hotel group, but that’s how it works in general.
This also explains the business of hotel loyalty programs selling points. At the moment IHG is offering a 100% bonus on purchased points, meaning you can buy points for 0.575 cents each. That can represent a great deal, though the loyalty program can also come out way ahead.
For example, the InterContinental Hong Kong requires 60,000 points for a free night, which you could buy for $345. If I had used points for my stay, the hotel would have been reimbursed ~$72, meaning that IHG has huge margins there. Of course that can also be very different if the hotel is actually full, in which case the reimbursement rate is much higher.
Anyway, I find the business side of the hotel industry to be interesting, and I’m sure I’m not the only one. It’s not often we see the numbers behind all this, though this is just a small glimpse.