Mar012010

The Grand Illusion: Why Starpoints are worth less despite no category changes in 2010

Starwood Preferred Guest announced last week there will be no hotel reward category changes for 2010. That is a good thing – right?

Hilton HHonors adjusted its category levels in January 2010 with a widespread shift of about 82 to 83% of hotels to higher cost reward categories. This was an obvious devaluation of points when over 2,500 hotels increased the cost for a free night by 5,000 to 10,000 points.

But why are SPG members complaining their points have been devalued after SPG announced there will be no changes to hotel reward categories in 2010?

Reward category matters when it comes time to spend your points for hotel free nights. The value of points is your ability to redeem earned points for free and discounted hotel nights.

As room rates change the value of your points goes up or down. The strategic traveler can leverage hotel points value by selectively redeeming points for higher value hotel rewards.  

Example calculation of hotel reward value:

Rewind back to 2006 and a $200 per night Starwood Hotel was a SPG Category 4 hotel reward at 10,000 points per night. Spending your points for a free hotel night gave a value of $20 per 1,000 points.

This is an objective valuation of points. The member needs to make a subjective decision as to whether $20 per 1,000 points is an acceptable value when redeeming points.

In 2007 when hotel rates were making double digit increases, that $200 per night Starwood Hotel increased to an average $250 per night. While your wallet suffered from the average room rate increase, your points actually gained in potential value. The Category 4 reward night for 10,000 points meant your points were redeemed for $250/10,000 or $25 per 1,000 points. The value of your points increased by 25% for this reward night.

But the on-the-ball SPG program gurus with their research analytics adjust hotel reward categories annually to keep free night rewards at specific hotels in balance with room rates. In theory, SPG members may choose to redeem more reward nights rather than paying the higher room rate, but that is a company secret. Whether reward demand increased or not, the reward category was quite likely adjusted in 2008 to move the hotel into SPG category 5 with a reward cost of 12,000 points.

Then the $250 per night hotel at 12,000 points reduced the point value back to $250/12,000 points or $20.83 per 1,000 points. The SPG hotel reward category adjustment establishes a new value for points and they are once again nearer the $20 per 1,000 points value they had when the hotel was $200 per night and a category 4 reward for 10,000 points.

Then came late 2008 and the precipice of rate declines. By February 2009 SPG announced more hotels were moving down in category than moving up. Great news. Right?

Here is a “big picture” historical view of reward categories over the past four years. Let’s go back four years to 2006 when hotel rates globally saw unprecedented average room rate increases. Hotel profits soared. Hotel builders invested lots of money in the construction of new hotels. Many of the hotels started in the boom time opened in 2009 or will open this year. The hotel industry in the past year experienced the worst decline in hotel rates since the depression of the 1930s. Hotels in many locations around the world have room rates in 2010 that are lower than they were in 2006.

A look at SPG reward categories from 2006 to the present shows that while average room rates have dropped across the globe, particularly in the US where there are no currency fluctuations affecting the US dollar cost of rooms, the reward categories are overwhelmingly higher across the Starwood chain than they were in 2006.

These numbers are a quick sort and may be off a few hotels here or there, but the big picture is plain to see.

SPG Reward Category Shifts

    from 2006 to 2010

 Hotel Reward Category shift Number of Starwood hotels shifted Change in points cost for reward night
Cat 1 to Cat 2 25 Up 40%
Cat 1 to  Cat 3 10 Up 64%
Cat 2 to Cat1 2  Down 29%
Cat 2 to Cat2 90  No change
Cat 2 to Cat 3 100 Up 100%
Cat 2 to Cat 4 16  Up 186%
Cat 3 to Cat 2 15  Down 50%
Cat 3 to Cat 3 315  No Change
Cat 3 to Cat 4 120 Up 43%
Cat 3 to Cat 5 3  Up 71%
Cat 3 to Cat 6 3  Up 186%
Cat 4 to Cat 3 5  Down 30%
Cat 4 to Cat 4 110  No Change
Cat 4 to Cat 5 72  Up 20%
Cat 4 to Cat 6 5  Up 100%
Cat 5 to Cat 4 0  na
Cat 5 to Cat 5 19  No change
Cat 5 to Cat 6 22 Up 67%
Cat 5 to Cat 7 1  Up 150%
Cat 6 to Cat 5 0  na
Cat 6 to Cat 6 4  No change
Cat 6 to Cat 7 12 50%

 

Only about 22 hotels of nearly 1,000 SPG properties are one category level lower today than they were four years ago.

389 hotels, or 40% of the properties worldwide, have increased reward cost by one or more categories.

SPG devalued.

When I spent 3,000 points for a category 2 weekend night in 2006, I could save $135 on a hotel room.  I was receiving $45 tangible value for every 1,000 points. Now that same hotel in 2010 is probably a Category 3 hotel reward at 7,000 points. (The table shows more Category 2 hotels in 2006 are now Category 3 rewards than the number of hotels remaining in Category 2  after four years.) And the room rate today for the category 3 hotel may be closer to $100 to $110 a night much of the time since the great 2009 decline in hotel room rates. My points are worth maybe $17 to $19 per 1,000 points.

The decision needs to be made whether to spend points for a hotel reward that I consider a relatively low value or pay cash?

Personally, I like to get $35 or more per 1,000 Starpoints, although I just redeemed 10,000 points in lieu of a $290 hotel rate. Category 2 hotel rewards (there are very few category 1 hotels left in the system) or Cash & Points are generally the only awards around these days for a redemption value of $35 per  1,000 points.

I can try and save my points for a better value on a hotel reward night in the future, but what if I don’t find better value?

I can keep spending cash and collecting more points that sit in my account waiting for better value reward nights. Or eventually, I decide the value of my points has dropped and I accept $20 per 1,000 as the new norm for my Starwood points.

Hotels realize their guests expect to pay lower room rates for some time to come. And frequent guests may need to accept that points will not have as much value in a hotel reward system where low hotel room rates compete with high hotel reward rates to devalue the reward equation of points-based hotel loyalty program benefits.

In a cost-benefit analysis my points typically do not get as much value today as they did in the past.

Of course there are always the elite in-hotel benefits like free breakfast, complimentary internet, and room upgrades that generate much of the loyalty love for rewards programs. But you don’t need a points-based loyalty program for in-hotel benefits. Four Seasons, Fairmont, and a host of small and independent hotel chains will shower guest love your way if you decide to move your hotel spend away from the rewards program hotel chains in this economic climate.

About Ric Garrido

Ric Garrido of Monterey, California started Loyalty Traveler in 2006 for traveler education on hotel and air travel, primarily using frequent flyer and frequent guest loyalty programs for bargain travel. Loyalty Traveler joined BoardingArea.com in 2008.

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