Hotels get nearly half of their revenues from the small segment of travelers who spend about a month each year on the road: frequent visitors make up only 10 percent of all hotel guests but account for 44 percent of hotel nights (Exhibit 1). In the early 1980s, hotel chains began to recognize the value of such customers by introducing loyalty programs patterned on the airlines' frequent-flier model. These programs have succeeded in maintaining the loyalty of people who travel moderately often (spending 6 to 22 nights a year in hotels) but are not as effective as they might be with other segments, our research suggests.

In general, frequent travelers belong to more than one program, spend less than half of their nights on the road in their favorite chains, and spread the rest around to other establishments (Exhibit 2). Light travelers—those who stay in hotels only a few times a year—have yet to build up points in any one loyalty program, so the advantages of always staying with the same chain are low. Hotels can court both groups in at least two ways: by learning more about them and by adapting loyalty programs to suit their tastes and needs.

The frequent-traveler segment represents $40 billion to $50 billion in revenues each year. These guests spend some of that money in their preferred hotel chains, but their wandering ways leave $22 billion to $27 billion in play. Persuading such people to narrow the field from three or more chains to their favorite two could add seven to ten nights at the chain they prefer. To capture this opportunity, hotel executives must ask, "What do you get the person who has everything—or at least more points than he or she can use?"

Part of the answer might involve changing the way points are redeemed. Even for elite-status members of a loyalty program, redeeming them for free hotel rooms can be cumbersome at popular times and destinations. To complicate matters, hotel chains have partnered with other companies to offer alternative rewards, such as airline miles. But partners must be paid, and these redemptions are a real expense to hotels.

Hotel chains can make their loyalty programs more attractive by simplifying the redemption process and by making their most desirable properties more available. To persuade these popular hotels to accept more redemptions, parent companies should offer strong incentives, including remuneration close to full room rates during peak periods. Chains should limit the number of their reward partnerships in order to control costs and retain as much money as possible.

Hotel operators should also search for innovative ways to distinguish programs from those of the competition and to make them more appealing to frequent travelers. Free meals aren't much of an incentive to anyone on an expense account. Instead, these customers want their rewards to be personalized with things that matter to them: benefits such as upgrades to concierge floors or offerings (including free movies or minibar items) not covered by their expense policies. Moreover, some guests may be planning special events (such as weddings, honeymoons, vacations, or large parties) that could not only serve as the focus of innovative rewards programs but also use up lots of points—if hotels were aware of them.

In fact, a hotel can learn a good deal by conducting a better dialogue with its guests and by giving frontline staff members an incentive to note their observations. Someone who uses a credit card affiliated with a frequent-flier program or another hotel chain, for example, is clearly worth courting.

Chains should also review their loyalty programs' status tiers, which often ignore the needs of customers at either end of the guest spectrum. New members who show signs of becoming heavy users (those with a sudden increase in hotel stays within a chain, for example) should be offered tangible, easily attained incentives to lock them into the hotel's program. At the other extreme, many programs max out at around 50 or 75 nights a year, while frequent customers can easily log twice that. Incentives and status levels should be recalibrated to keep the interest of these sought-after guests, to reduce their proclivity to play the field, and to raise the cost of switching.