Free Wi-Fi Is Coming!

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Free Wi-Fi is coming!

Well, perhaps not everywhere, but at every Hyatt hotel. I just received an email from Hyatt that they will offer free Wi-Fi for all guests in all rooms and lobbies worldwide, beginning 14 February 2015, just a month away.

How did Hyatt come to that decision? Why wasn't it free before? What does it mean for their profits? Most important of all, what lessons can be learned for our businesses?

Since widespread WiFi adoption, hotels have had a 3-tier system for guest access:

  • Select service hotels, those that are family or long-term stay oriented, offer free WiFi. These include Hilton Garden Inn, Hampton Inn, Marriott Residence Inn, Hyatt Home, Hyatt Place, etc.
  • Full-service hotels, like Hilton, Hyatt, Marriott and luxury chains like Mandarin-Oriental and Shangri-La, charge fees ranging from $10 per day up to 3-4 times that for Wi-Fi access.
  • Elite frequent travelers, usually gold tier and above, receive free Wi-Fi everywhere.

The process of deciding what to offer, where, to whom and at what price, is "packaging". In packaging WiFi, hotels have had three primary considerations:

  1. Willingness to pay / demand for service: Travelers to select service hotels are unable or unwilling to shoulder $10+/day for WiFi, while their need for it, especially at long-term stay hotels, is high. Free WiFi thus became an important differentiator in making the "package" appealing to those travelers. By contrast, guests choosing full-service hotels are looking for more luxury and service and more willing to pay for it, either themselves or by expensing to their employer. The whole package at these hotels requires the availability of WiFi, while customers are willing to pay for the privilege.
  2. Revenue impact: Offering free WiFi at a hotel means giving up a significant amount of revenue, at nearly 100% gross margin (all profit), in exchange for a greater appeal to travelers. Select hotels clearly required free WiFi to get guests. Will free WiFi at full-service hotels attract more profit from additional travelers than the lost WiFi revenue?
  3. Loyalty Perks: Travel services providers view providing loyalty perks as an important element of recurring revenue. People often choose to fly an airline or stay at a hotel because of the points or miles they accumulate and the status they have. For example, as painful as commercial air travel is, it is made a lot easier by having faster security lines, lounge access, economy plus seats, free drinks, first-to-board privileges, and first-out luggage, as well as dedicated customer service. Sure, you can buy all of these without status, but it adds up very quickly.

Over time, the value of all of these changes, and what needs to be included in the package changes as well. How has the market changed?

  1. More people are choosing to stay at select service hotels, both business and personal travelers. This is partially out of a desire to save money, but also because everything is included. There are no "nasty bill surprises" at the end, leading to a higher-than-expected cost of vacation or an impending fight with the employee expense department. The market, of course, is not segmented into "people who always stay select" and "people who always stay full service", but rather more nuanced. Providing more in the "package" at full-service hotels will entice some who otherwise would stay at a select service to upgrade to full-service.
  2. Employee expense policies have been tightened. Travelers are encouraged to reduce costs wherever possible, and avoid any hotel extras. A hotel that offers more in the package can entice travelers to stay there without concern about violating corporate policy. It also makes it easier for individual hotels and chains to be on the "recommended" or "preferred" list of corporate travel departments.
  3. WiFi has become ubiquitous. Whereas ten years ago you had to pay for WiFi at many coffee shops, today people go to Starbucks for hours just to use the WiFi. WiFi has changed from an extra to an expectation.
  4. Loyalty has become less valued. Hotels and airlines have aggressively devalued their loyalty programs over the last five years, a clear indicator of reduced competition and less perceived loyalty value among the providers. To my mind, this is a serious mistake, but that is a topic for another day. Either way, the loss of sense of privilege for having free WiFi when everyone else is paying, the "I'm special" factor, is immaterial in its impact compared to the actual loyalty losses suffered by providers gutting their programs.

Hyatt deserves credit for willingness to reevaluate its package, but especially for its willingness to give up lucrative high-margin immediate revenue for strategic goals.

Every other business - including yours and mine - needs to evaluate on a regular basis what is in its packages, and determine where it can add items for free, where it can raise prices, what it needs to add to make it easier for customers to buy and stay.