Jyotsna GirhotraShawn CrumptonPamela Basche

Hilton HHonors WorldwideLOYALTY WARS

Table of ContentsExecutive Summary.....................................................................................................2

Background and Timeline.............................................................................................2

Question 1...................................................................................................................3

Question 2...................................................................................................................4

Question 3...................................................................................................................7

References...................................................................................................................9

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Executive SummaryHilton Hotels Corp and Hilton International are both unrelated entities that controlledHilton brand. Hilton Hotels Corp market consisted of three types of guests, thebusiness traveler, and the convention and leisure segments. In 1997, HHC and HICagreed to merge, cooperating on sales, marketing, standardizing operations,formulating the Hilton HHonors loyalty program. Hilton HHonors loyalty programconsisted of four tiers of membership: blue, silver, gold and diamond. Hilton's guestreward program was open to anyone free of charge and allowed members to earnpoints for free nights, buy products, services from partner companies or convertpoints into miles in airline frequent-flyer programs. HHW also allowed their loyaltymembers to double dip, which meant members could use points for airline miles. Thiswas profitable to both Hilton and the 25-partnered airlines because they were notcompeting for customers and it allowed members to earn joint currencies. Tieredmembers' level could increase dependent upon the number of times or nights theystayed at a HHonors Hotel. At the time of the formulation of the HHonors program,Hilton's competitive advantage was its name recognition.

In 1999 Starwood Hotels & Resorts Worldwide, introduced its StarwoodPreferred Guest Program, which covered 550 properties. The features of Starwood'sProgram, which was in competition with HHW was there were no blackout dates, nocapacity control, paperless rewards, and hotel reimbursement. Starwood Hotels &Resorts Worldwide was also pledging 50 million to advertise its newly formulatedrewards program. Starwood at point ran hotels under the Hilton brand as a Hiltonfranchisee and was able to obtain information about a competitors' operatingprocedure. Starwood was now "targeting the most lucrative part of the business, theindividual business traveler.

The question posed to HHW is do they have to compete with theircompetitors. The quandary HHW has, is do they continue to differentiate themselvesfrom their competitors. Yet continue to retain their loyal customers while improvingthe reward programs to newly acquired Sheraton and Westin chains.

Background and TimelineHilton is a well-recognized brand name. The hotels were controlled by HHC (HiltonHotels Corporation) and HIC (California and Hilton International) which was unified toHilton worldwide in 1997. Many of the Hilton properties are franchised to independentoperators and companies. Hampton Inn is virtually 100% franchised.

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Jeff Diskin, Head of Hilton HHonors guest rewards program expressed his concernsabout the aggressive frequent guest reward program introduced by Starwood. Someof his concerns were:

- Raised Costs- Reducing cost effectiveness of the marketing tool

o Loyalty programs are as cost effective as our competitors let them be- They are deficit spending against their program

Defining Customers: Hilton has 3 segments of customers

- Business Customers- Convention segment- Leisure segment

One-Thirds of overall Hilton guests are business travelers, two-thirds are business tobusiness and one-thirds are individual travelers.

Question 1

How can a loyalty program help the property owner and brand owner better managerits customers?

Answer: A differentiated loyalty program will attract and retain customers from otherprograms on the market. Loyalty Programs increase the likelihood property ownerswill want to become franchisee of Hilton or have a management contract with them.This was due to smaller hotels being more dependent on the "road warrior" businesstraveler; it was beneficial to have this type of frequent guest as members.

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Loyalty programs allow for the collection of data on its customers i.e. times ofyear they frequent hotels, locations, length of stay, usage of accrued points. Thecollection of data allows brand managers to market to customers based on theirpatterns. Members also receive direct mail regarding services such as vacationownership and going to casinos. Through the sharing of data of member data itincreases collaborative relationships. With Hilton HHonors Program havingcollaborating with rental car services, airlines, FTD Florists, Mrs. Field Cookies.Increased ability by brand managers to market HHW partnered products tocustomers. Along with a customer's ability to draw on accrued points to purchasedifferent products, increases the possibility a member will spend, through up sellingpast accrued points.

Members within the loyalty program have an increased relationship theproperties they frequent. Due to the ability to contact customer service where thereare problems. In addition, these members have a have the most experience withHilton because of their frequency of visits. HHW enquires about these members'opinions, further fostering the relationship with HHW. The ability to track frequentmembers' preferences provides members with a customized experience withouthaving to ask.

Loyalty programs also increased the historical data on a member, increasingthe knowledge of members booking patterns and thus increasing revenue. The dataHHW collected along with the model utilized would be better able to estimate whichmember which customer would get the room. "The person paying $20 more for thatyou may never see again, or the guy spending thousands of dollars in the system."Obtaining customer data also allowed property owners and brand managersdetermine price points and the member that would walk away and the cost of turninga customer away. Through simulation studies that was guided through a "good yieldmanagement model a company's revenue increased by 20%"

Question 2

Quantify the value of the HHonors program to Hilton. Compute its cost to theincremental income generated.

Answer:

What is value? Value is nothing but perceived benefit

Perceived Benefit = Revenue – Costs

Non-Financial Value – HHonors program provided the following non-financial value:

- Ability to analyze customer data- Improvement aids like - Interaction and feedback - Long term customer relationships and loyalties- Ability to calculate Customer Lifetime Value (CLV)

Financial Value

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- Hilton runs above breakeven point at 68% occupancy which means that Hiltonalready passes the zero-profit point and makes profits. Therefore, revenue athigher occupancy levels will generate profits for Hilton.

Break-even point

68% X 154,000rooms

X 365 nights = 38,222,800nights

Room rate $158 X 38,222,800 nights = $ 60,039.2millions

Number of nights actually paid by members

7,015,000 nights

+ 712,000stays

X 2.4 nights Minus 180,000 claimednights

= 8,543,800 nights

Total revenues from members

$1,108million

+ $327 million = $1,435 million

Percentage of nights by members over nights at breakeven

8,543,800 / 3,822,800 =0.224 OR 22.4%

Percentage of nights by members over revenue at breakeven

$1,435 / $6,039.2 =0. 2376 OR 23.76%

Compare revenue generated by the program with revenue at breakeven

Program increases revenue by 23.76% which is greater than 20%revenue increase

1998 Figures

Cost of HHonors $69,438,000

Revenue from HHonors $69,837,000

Net Income $339,00

As the value is $1,435 million and the costs is $69,438,000, we can see that theprogram generate huge value vs. costs. The value is greater than costs more than 19times.

Also, as per the income statement below, most of the HHonors higher expenses arein

- Administration expenseso Since administration costs are not flexible and we don’t know exactly

how their administration structure works, we can assume that they arenecessary costs and cannot be analyzed for decrease.

- Airline miles purchaseo Since this is the total cost for a service that a program decided to

provide, it is flexible for adjustments. The program cost should

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decrease the expenses for airline miles purchases in order to balance itwith the number of targeted customer.

There are 4 major categories of the HHonors reward program

- Blue- Silver- Gold- Diamond

o Ignore these since they have lowest impact on the profit because theyare few in number.

o They have high rate for claimed rewards but less spending on pointsearned.

Considering the Blue, Silver and Gold member, they are a total of 2.626 (1998), butwe know that of this total customer, just a percentage is completely loyal to Hilton.Hilton should aim to retain these. The program cost should decrease the expenses forairline miles purchases in order to balance it with the number of targeted customer.In this way, the HHonor expenses should remain lower to the costs, prospecting inthe short-term an increase in customer’s loyalty. This will be shown in the customerstays and in stays that they paid, as well as the spending per earned point.

Hilton’s share of the wallet is 24% and if the retention model of the program will workwell, Hilton could gain value, increasing revenues up to 20%. Also, if this strategy willwork for chain size of Hilton, then it’s even better for a larger chain.

Therefore, it is worth to continue the program.

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Question 3

What should Hilton do in response to Starwood?

Answer: After Starwood Hotels and Resorts Worldwide, Inc. announced plans tochange its loyalty program in 1999, Hilton HHonors World wide’s leader had animportant decision to make. The most effective way to combat Starwood would be toimpress existing HHonors members by improving upon the rewards already beingoffered to them which would solidify their loyalty to Hilton. Instead of simplymatching the competitor’s program incentive by incentive, we explain why thisstrategy would be the most effective route to take.

While the Starwood program offers many attractive benefits, Hilton HHonors does nothave to match the effective price war that has been initiated in order to remaincompetitive. Doing so would result in large cost increases and additional processes tomanage. Their LLC is relatively small and the current program is not only successful,but quite manageable.

The leaders want to be innovative, not imitative with their rewards program. Whenwe look at the various aspect of Starwood’s revised program, we can compareadvantages and disadvantages of each. The four main components of the Starwoodprogram include: No blackout dates, no capacity control, paperless rewards, andhotel reimbursement.

When comparing the first program incentive, blackout dates, sand severaladvantages can be gained by the hotel companies. If there are dates that are moredesirable for travel, the hotel program simply does not allow frequent guests to usetheir points on those dates. This ensures there are enough hotel rooms available forguest who will pay the full room rate during those highly desirable travel times.Blackout dates generate revenues for hotels by allowing only new profits to be made,rather than giving the same room to a loyalty member, essentially for free. Thedisadvantages of blackout dates are not merely opposite of the advantages. Themain disadvantage of providing blackout dates is the revenue stream.

Providing “no blackout dates” to the top tier HHonors members would strengthentheir current relationships with those customers. Diamond members are the top 1%of customers and could be rewarded with this unexpected incentive. Since theirmodel with blackout dates for other members is already profitable, the need to focuson this particular market segment is of great importance. Starwood’s plans for noblackout dates includes all of their loyalty program members. Hilton could minimizecosts if they offered this as an added incentive to their Diamond members only.

Starwood’s second change to their program includes capacity control. Hotels areallowed to make available only limited amounts of rooms for frequent guests. Thiswould be an advantage since the hotel could limit the number of free rooms offeredso they could meet their break-even point for revenues each night. The disadvantageof no capacity control is that a hotel may have more customers redeeming points forfree rooms than customers who are paying with new revenues for that hotel.

HHonors diamond members could benefit from this no capacity control edict. As thevery best clients to Hilton, they would be allowed to reserve rooms at any hotel that

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had available rooms. This would be viewed as a reward by the customers and wouldstrengthen the brand loyalty.

With regard to paperless rewards, the third upgrade to Starwood’s program, there areno disadvantages. Using points to book hotel rooms directly cuts costs by eliminatingthe paper certificate. Even electronically, a certificate is another step in theredemption process. By streamlining the process, there is less to manage.

HHonors does not use certificates.

The last upgrade to Starwood’s program describes hotel reimbursement. They wouldpay a higher reimbursement rate to hotels with desirable locations to offset the ratioof points paying members to other guests. The thought process is that moremembers would want to redeem points at a vacation hotel rather than a conventionhotel, perhaps.

HHonors would not have to change their methods of reimbursement to hotels if only1% of its members were allowed to stay anywhere on any dates. Those limitedamounts of customers should not affect the overall cost structure of daily operationsat vacation resorts.

These four upgrades to Starwood’s loyalty program were basically used to buildbrand recognition for their newly acquired chains. Hilton does not have the sameproblem so matching the program incentive by incentive would not be necessary. Tomaintain its profitability and to continue with innovative ideas, Hilton HHonorsWorldwide must look to improve upon its already existing program to maintainmember loyalty and to increase the amount of top tier customers.

Since Hilton is comprised of three distinct segments of customers, it is important tohighlight the differences and make decisions based on those differences. Thebusiness segment included travelers that would stay in hotels based on negotiatedrates done corporately. The convention segment is the second portion of customerswhich included primarily those who stayed at a particular hotel based on where theconference organizer would arrange ahead of time. The last segment, leisure, madeup the final third of Hilton’s business. These customers were price-conscious andmostly made their hotel decisions based on the vacation packages that were mostcost effective and relevant to their needs. The key is to target the decision makersfrom each of these segments to ensure that Hilton is their top choice for hotels.

Considering that most loyalty program members could also be members of theircompetitors, it is important for Hilton to address the move that Starwood has madewith its announcement. As mentioned already, the Diamond members should get thebenefits of blackout dates and no capacity control. But how can Hilton communicateeffectively to its customer base in response to Starwood’s announcement if it is notgoing to match the program “dollar-for-dollar”? HHonors should target the threedistinct customer segments to retain those customers. Diamond membership shouldbe the goal for customers as well as for Hilton.

Hilton HHonors Worldwide should communicate with its current loyalty members toexplain its program benefits. The three levels of Blue, Silver, Gold, and Diamondshould be differentiated and celebrated. The diamond status which had not been

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mentioned in any promotional materials before must be highlighted. Promotionalmaterials must be updated to include this level to give customers something to strivefor. Explaining the various rewards for achieving the ultimate status will continue tomake customers engaged in the program and wanting to earn those rewards.

Embracing technology and using apps along with the website to communicate withconsumers is the best way to proceed. It should be easy for customers to becomemembers and to find out information about their accounts and what they need to doto earn a higher rewards status with the company. If customers can earn points fasterthan with any other hotel rewards program, then that should be prominentlymentioned in their advertising. All of the rewards that make the program moredifferentiated in the market need to be presented. This will ensure not only customerloyalty to the HHonors program, but will even help build new relationships withcustomers who are not currently part of the program. When new customers andcurrent members learn about all of the advantages of the program, they can easilycompare the rewards with those of their competitors. By offering rewards that areunique and at a quicker pace, the better company will prevail.

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References

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- http://www3.hilton.com/en/index.html- http://hhonors3.hilton.com/en/index.html?cid=OM,HH,defaultA1,HHonors

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