F. Jallat - CFVG - 2011

Hilton HHonors Worldwide:

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 customer needs.

. To appreciate how loyalty programs allow the practice of one-to-one marketing.

. To understand how loyalty programs create incentives for increased spending.

. To demonstrate how loyalty programs may cover some of the expenses of building a brand.

. To appreciate how frequency programs track the purchase of a guest across multiple outlets (B2B2C).

. To appreciate how frequency programs take the ownership of the customer away from the outlet where the service is purchased and give it to the owner of the brand (‘Go Downstream’).

I- Global Distribution Systems

FINAL CUSTOMER

OTHER AIRLINES COMPANIES AIRLINES COMPANY

TOUR-OPERATORS

FINANCIAL PARTNERS

HOTELS CAR RENTAL COMPANIES OTHER SERVICE PROVIDERS

OTHER AIRLINES COMPANIES

TRAVEL AGENCIES / OTHER INTERMEDIARIES

III- Alliances

II- Partnerships

IV- Relationship Marketing

Questions of the case

1. What should Diskin do?

2. What are the strengths and weaknesses of the Hilton HHonors program?

3. What is the optimum level of spending on the program?

4. What should Hilton do in response to Starwood?

What should Diskin do?

1. Match Starwood’s spending. (The company will be spending $50 million to promote awareness of the program and inform members of the Westin, 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 by Diskin’s position that the loyalty programs are the industry’s most important marketing tool.

What are the strengths and weaknesses of the Hilton HHonors program?

1. From the Hilton Brand’s Perspective

2. To the Member Properties (Franchisees)

3. To the Guests

4. To the Employers (of the Guests)

Figure : The Loyalty Program’s Virtuous Cycle

A franchised hotelHHC

and HI

HiltonHhonors

EmployerGuest Compliance

Franchise fee

Volum

e discount

Patronage

From the Hilton Brand’s Perspective

1. Hilton’s share of wallet is 24%. But if loyalty programs are a good idea for a chain the size of Hilton, they are a better idea (and probably exponentially better) for a larger chain.

2. Loyalty programs simultaneously classifies customers according to whether they spend a lot or not and supplies the means to appeal to them.

3. Hilton sold 39,535,000 nights last year with an occupancy rate of 70%, just over the 68% occupancy at which fixed costs are covered (incremental revenue of 80%). And 4% (20% of 20%) of those nights are directly due 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 at

Hilton 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 fixed costs are covered, we are intitled to use a gross margin on incremental revenue of 80%.

Does the program pay out (2)?1. To decide whether HH makes money for its two parents, we can attach

great legitimacy to the suggestion that 20% of all member stays are due to the program (page 9).

2. There is some support for the number in the finding (page 7) that a good Yield Management program, which depends critically on identifying individual customers, can improve revenue by 20%.

3. As a consequence, 20% of 20% of the nights –or 4% of nights- are directly 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 profit of the group would have been a loss.

5. Since HH operates at no cost to the group, the cost of inflating the occupancy rate by that crucial 4% is effectively a costless –yet efficient- marketing tool.

The Defection Curve

•Profits are highly responsive to changes in defection rates.

•A small movements in defection rate can produce very large swings in profits.

« We still only deliver 92% of customers who are satisfied (…) Why not celebrate? Only 8% are not satisfied. Of those, 2% to 3% want things we cannot do, or things that, if we did them, would dissatisfy all of the other customers. But 5% represent satisfaction that we want. Those 5% are dissatisfied because of stupid, pathetic defects that are repeating (…) That 5% translates into 200,000 dissatisfied customers. That is an army –attacking us- saying that we are not good. If we satisfied this 5%, within three years we’d run at 88% occupancy. What does 88% mean in dollars? Three hundred million to the bottom line. We are leaving $300 million on the table because of 5% defects. »

Horst Schulze, CEOThe Ritz-Carlton Hotel Company

To the Member Properties

1. HH membership induces patrons to favor Hilton with an incremental 1 stay in 5 that would otherwise have gone to a competitor.

2. Without the program, the properties frequented by business travelers would have earned $177 million less in contribution for a cost of $49.9 million only.

Does the program pay out (3)?1. HH membership induces patrons to favor Hilton

properties with an incremental 1 stay in 5 (page 9).

2. If the member properties had not sold these 1.4 million incremental rooms, and had not earned the 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 of member folio or $158 x 7.015 x 0.045 = $49.9 million.

To the Member Properties

1. HH membership induces patrons to favor Hilton with an incremental 1 stay in 5 that would otherwise have gone to a competitor.

2. Without the program, the properties frequented by business travelers would have earned $177 million less in contribution for a cost of $49.9 million only.

3. Resort hotels bear the brunt of the redemptions but get paid more than the incremental costs for the room. Hence, the importance of blackout dates which offer some assurance that redemptions will fill rooms that otherwise would have been empty.

To the Guests

1. The large majority of them get rewarded for a room that they don’t pay!

2. If the guest is self-employed, points represent tax-free advantages.

3. The hotel can customize the guest’s experience better with the benefit of guest-specific information (as such, associated benefits justify a slight price premium).

4. Loyalty programs are taking advantage of situational dimensions without costing anything to the hotel.

To the Employers

• Loyalty programs encourage compliance with negotiated agreements.

• Travel departments prefer to make compliance seem like the employee’s idea, not a command…

• … And offer free gifts to highly-involved business people or top management executives.

What is the optimum level of spending on the program?

1. The facts in the case cannot supply a definite answer because it doesn’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 to travel agents.

3. Guests find the program highly motivating and show no signs of saturation.

4. Partners pay $18 million to use the program to do their own, and a bigger program would be an even more effective marketing vehicle for them.

5. The data are used to run the Yield Management program and more data might mean better Yield Management.

What should Hilton do in response to Starwood (1)?

The four components of the new Starwood program

1. No blackout dates (earned points are as good as money).

2. Hotel reimbursement (Starwood has raised the daily rate at which it reimburses hotels for stays paid for with points. To meet the cost, it is charging participating hotels 20-100% more than its competitors for the points they award for paid stays).

3. No capacity control (all unreserved rooms should be available to guests paying with points).

4. Paperless rewards (no need for advance notice from the guest. He can present points at the time of checkout and they will be accepted as cash).

What should Hilton do in response to Starwood (2)?

Starwood has significantly enhanced the appeal of its program relative to all competitors, but at substantially higher 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 rewards redeemed at the hotel’s computer terminal) will require information technology system upgrades before they can be emulated.

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’s innovations.

2. However, being well aware that the program was under scale, Hilton has acquired the Promus chain, which has more than trebled the number of rooms carrying its flag.

3. Although not all are business class hotels, the frequency program now extends over Promus brands like Doubletree and Embassy Suites.