F. Jallat - CFVG - 2011Hilton HHonorsWorldwide:Loyalty Wars
Teaching Objectives. To understand the forces that shape a service firm’s profitability.. To understand how frequency programs are used to deliver on customerneeds.. To appreciate how loyalty programs allow the practice of one-to-onemarketing.. To understand how loyalty programs create incentives for increasedspending.. To demonstrate how loyalty programs may cover some of the expensesof building a brand.. To appreciate how frequency programs track the purchase of a guestacross multiple outlets (B2B2C).. To appreciate how frequency programs take the ownership of thecustomer away from the outlet where the service is purchased and giveit to the owner of the brand (‘Go Downstream’).
I- Global Distribution SystemsFINAL CUSTOMEROTHER AIRLINESCOMPANIES AIRLINES COMPANYTOUR-OPERATORSFINANCIALPARTNERSHOTELSCAR RENTAL COMPANIESOTHER SERVICE PROVIDERSOTHER AIRLINESCOMPANIESTRAVEL AGENCIES / OTHER INTERMEDIARIESIII- AlliancesII- PartnershipsIV- Relationship Marketing
Questions of the case1. What should Diskin do?2. What are the strengths and weaknesses of theHilton HHonors program?3. What is the optimum level of spending on theprogram?4. What should Hilton do in response to Starwood?
What should Diskin do?1. Match Starwood’s spending. (The company will be spending $50million to promote awareness of the program and inform members of theWestin, Sheraton and other brands of the Starwood group).2. Do nothing and hope Starwood will see its error.3. Withdraw from the loyalty program game.In fact, the spectrum is anchored at one extreme byDiskin’s position that the loyalty programs are theindustry’s most important marketing tool.
What are the strengths and weaknessesof the Hilton HHonors program?1. From the Hilton Brand’s Perspective2. To the Member Properties (Franchisees)3. To the Guests4. To the Employers (of the Guests)
From the Hilton Brand’s Perspective1. Hilton’s share of wallet is 24%. But if loyalty programsare a good idea for a chain the size of Hilton, they are abetter idea (and probably exponentially better) for alarger chain.2. Loyalty programs simultaneously classifies customersaccording to whether they spend a lot or not and suppliesthe means to appeal to them.3. Hilton sold 39,535,000 nights last year with anoccupancy rate of 70%, just over the 68% occupancy atwhich fixed costs are covered (incremental revenue of80%). And 4% (20% of 20%) of those nights are directlydue to the program. Are those added 4% a big deal?
Does the program pay out (1)?1. Guests spent : 7,015,000 + 180,000 + 712,000 = 7,907,000 nights atHilton properties in 1998 (Table B).2. This is 22,5% of all nights that year (page 6).3. As a consequence, Hilton sold 39,535,000 nights in 1998.4. With full occupancy, they would have sold: (91,060 + 62,900) x 365= 56.2 million nights (Exhibit 1).5. The occupancy rate is therefore: 39,535,000 / 56,200,000 = 70%.6. This percentage being just over the 68% occupancy at which fixedcosts are covered, we are intitled to use a gross margin onincremental revenue of 80%.
Does the program pay out (2)?1. To decide whether HH makes money for its two parents, we canattach great legitimacy to the suggestion that 20% of all memberstays are due to the program (page 9).2. There is some support for the number in the finding (page 7) that agood Yield Management program, which depends critically onidentifying individual customers, can improve revenue by 20%.3. As a consequence, 20% of 20% of the nights –or 4% of nights- aredirectly due to the program.4. With a break-even occupancy of 68%, the actual occupancy of 70%would have been 66% without the program, and the operating profitof the group would have been a loss.5. Since HH operates at no cost to the group, the cost of inflating theoccupancy rate by that crucial 4% is effectively a costless –yetefficient- marketing tool.
The Defection Curve•Profits are highlyresponsive tochanges in defectionrates.•A small movementsin defection rate canproduce very largeswings in profits.
« We still only deliver 92% of customers who are satisfied (…) Why notcelebrate? Only 8% are not satisfied. Of those, 2% to 3% want things wecannot do, or things that, if we did them, would dissatisfy all of the othercustomers.But 5% represent satisfaction that we want. Those 5% are dissatisfiedbecause of stupid, pathetic defects that are repeating (…) That 5%translates into 200,000 dissatisfied customers. That is an army –attackingus- saying that we are not good. If we satisfied this 5%, within three yearswe’d run at 88% occupancy. What does 88% mean in dollars? Threehundred million to the bottom line. We are leaving $300 million on thetable because of 5% defects. »Horst Schulze, CEOThe Ritz-Carlton Hotel Company
To the Member Properties1. HH membership induces patrons to favor Hilton with anincremental 1 stay in 5 that would otherwise have goneto a competitor.2. Without the program, the properties frequented bybusiness travelers would have earned $177 million lessin contribution for a cost of $49.9 million only.
Does the program pay out (3)?1. HH membership induces patrons to favor Hiltonproperties with an incremental 1 stay in 5 (page9).2. If the member properties had not sold these 1.4million incremental rooms, and had not earnedthe 80% margin on revenue of $158 per night,they would have lost $158 x 1.4 million x 0.8 =$177 million in contribution.3. The cost to members is 4.5 cent per dollar ofmember folio or $158 x 7.015 x 0.045 = $49.9million.
To the Member Properties1. HH membership induces patrons to favor Hilton with anincremental 1 stay in 5 that would otherwise have goneto a competitor.2. Without the program, the properties frequented bybusiness travelers would have earned $177 million lessin contribution for a cost of $49.9 million only.3. Resort hotels bear the brunt of the redemptions but getpaid more than the incremental costs for the room.Hence, the importance of blackout dates which offersome assurance that redemptions will fill rooms thatotherwise would have been empty.
To the Guests1. The large majority of them get rewarded for a room thatthey don’t pay!2. If the guest is self-employed, points represent tax-freeadvantages.3. The hotel can customize the guest’s experience betterwith the benefit of guest-specific information (as such,associated benefits justify a slight price premium).4. Loyalty programs are taking advantage of situationaldimensions without costing anything to the hotel.
To the Employers• Loyalty programs encourage compliance with negotiatedagreements.• Travel departments prefer to make compliance seem likethe employee’s idea, not a command…• … And offer free gifts to highly-involved businesspeople or top management executives.
What is the optimum level ofspending on the program?1. The facts in the case cannot supply a definite answer because itdoesn’t give empirical basis for estimating consumer’s sensitivity,but:2. The business-related properties get a lot of patronage for their$49.9 million, and pay less for that patronage than they do totravel agents.3. Guests find the program highly motivating and show no signs ofsaturation.4. Partners pay $18 million to use the program to do their own, and abigger program would be an even more effective marketingvehicle for them.5. The data are used to run the Yield Management program and moredata might mean better Yield Management.
What should Hilton do in response toStarwood (1)?The four components of the new Starwood program1. No blackout dates (earned points are as good as money).2. Hotel reimbursement (Starwood has raised the daily rate atwhich it reimburses hotels for stays paid for with points. To meetthe cost, it is charging participating hotels 20-100% more than itscompetitors for the points they award for paid stays).3. No capacity control (all unreserved rooms should be available toguests paying with points).4. Paperless rewards (no need for advance notice from the guest. Hecan present points at the time of checkout and they will be acceptedas cash).
What should Hilton do in response toStarwood (2)?Starwood has significantly enhanced the appeal of itsprogram relative to all competitors, but at substantiallyhigher cost.1. Need for new Yield Management process and algorithms(no blackout dates, no capacity control).2. Some of the new features of the program (paperless rewardsredeemed at the hotel’s computer terminal) will requireinformation technology system upgrades before they can beemulated.3. In addition to the program itself, the group will be spending$50 million to promote it.4. Hilton suffers from a natural lack of ‘network externalities’when compared to Starwood (154,000 vs. 212,900 rooms).
What happened?1. Hilton did not emulate any of the Starwood’sinnovations.2. However, being well aware that the program was underscale, Hilton has acquired the Promus chain, which hasmore than trebled the number of rooms carrying its flag.3. Although not all are business class hotels, the frequencyprogram now extends over Promus brands likeDoubletree and Embassy Suites.