On 1st April, there were noticeable changes made to IHG Rewards redemption pricing.
Some hotels shot up to crazy levels of pricing. People were posting examples of Holiday Inn Express hotels at 70,000 points and InterContinental hotels at 120,000 points.
It wasn’t clear at first what was happening or if it was an IT screw up. After all, nothing had been sent to IHG Rewards members.
IHG eventually issued a statement:
“We rolled out our Dynamic Pricing models to our hotels around the world last year which enabled the amount of points required for IHG Rewards members to redeem a Reward Night to flex up and down, just like cash rates.
Previously, Reward Night point amounts were static throughout the year. This model allows point amounts to decrease when demand is lower, providing greater value to our members.
Conversely, redemption amounts may also increase based on demand and other factors and can update as often as daily. Reward Nights are not defined by categories or with minimum and maximum point amounts.
Under our new model, the number of points required for Reward Nights will vary with demand and seasonality.”
What is IHG saying here?
Let’s pick out the key points from this statement:
- all reward pricing categories are scrapped
- unlike Hilton, which has a similar dynamic pricing model, there are no longer pricing caps – theoretically there is no limit to how expensive a reward night can be
- pricing will change daily in some cases, meaning that you literally have no idea what a redemption will cost when you come to book
- pricing is based on demand and seasonality – but not, weirdly, on the actual cash price of the room as I will show
What does this mean in practice?
The reason this is a two-part article is that I have run a very detailed analysis of reward pricing in London. You find this in part 2 which is here.
The results are very interesting. However, the slightly surprising result is that IHG Rewards points have not necessarily been devalued.
Why has IHG done this?
No idea. As far as I can see, there is no major benefit to IHG (because average pricing hasn’t changed) but there is a substantial disadvantage to members.
Economics students will know that price stability is a key part of a sensibly functioning economy.
Whilst modest inflation is beneficial – because it inflates away debt which acts as a drag to personal and business spending – price stability is important. You need to be confident when you take a job that the money will cover your expenses. A business needs to know that its input costs will be static after it has committed to sell a finished product. Saving for a product is difficult when the price changes constantly.
By, literally, changing reward prices daily, IHG Rewards is creating a system that makes no sense for members. Why should you focus on earning points for a particular redemption when you have no confidence in what it will cost when you come to book?
This isn’t driven by how IHG Rewards works …..
For readers who are not familiar with how hotel reward schemes work, you only need to know four things:
- Unlike frequent flyer schemes, hotel loyalty schemes are not allowed – by US law – to make a profit. They must run at break-even. This is because most branded hotels are franchised. US franchise law says that – apart from the franchise fee (% of room rate) – all other money handed over to the brand owner for ‘services’ such as points issuance must not generate a profit. This is to stop brand owners ripping off franchisees with spurious additional charges.
- Hotels are usually obliged to make at least 5% of their room inventory each day available for reward nights. Some schemes go a lot further – Hyatt tells its hotels that they must make standard rooms available for points for as long as they have standard rooms left to sell for cash.
- On low and standard occupancy days hotels are paid a flat fee, which can be as low as $25, for a redemption. This is meant to cover direct costs to the hotel, eg cleaning and laundry, but not generate a profit.
- If a hotel is full (95%+ occupancy) on a particular night, the loyalty programme pays the FULL rate for the night to the hotel, not the $25+ flat fee. This ensures that the hotel does not lose out on nights when it could have sold all of its rooms.
If you look at this in the context of running a loyalty programme, the ‘old’ system made sense.
- Hotels were placed into categories
- The points required for that category could be based on the $ payment to the hotel for a reward night.
The only problem is when hotels start hitting 95%+ occupancy and the programme has to pay the hotel the full rate. This is when the scheme economics can start to wobble as more and more reward nights end up costing it ‘full’ price.
However …. is this really a risk at the moment?
- Even in the US, hotel occupancy is only back to 80% of 2019 levels
- Average daily rate is also only at 80% of 2019 levels
This means that
- The reward programme is seeing a far lower % of reward nights triggering ‘full’ payment to the hotel because the hotel is at 95% occupancy
- Even when the ‘full’ payment is triggered, it will be at a lower level than it would have been because average daily rates are down
With fewer reward nights triggering ‘full’ payment due to a hotel reaching the 95% occupancy level, it should be possible to make the loyalty programme simpler, not more confusing.
How IHG Rewards member behaviour will change
Here is an example of how this will impact the behaviour of IHG Rewards members.
Going forward, you need to book your IHG Rewards redemption nights as single nights, even if you are staying for a week.
This is because, with pricing changing as often as daily – and with the number of points needed not being closely correlated with the room rate – you can expect to see extreme fluctuations.
If one night drops in points price, you need to have flexibility to cancel that particular night and rebook it. You don’t want to have to cancel the rest of your stay, because you are stuffed if other nights have gone up in points price or, worse, are no longer available at all.
Onto our London analysis
To help you put all this in context, I carried out a detailed analysis of London reward pricing for a random date in July.