Hilton HHonors: Worldwide: Loyalty Wars

Submitted by: Arjun Kalra (03/2010) Ques 1.) How does the value generated to Hilton by the program compare to its cost? Ans.) In mid-1999, the properties branded as Hilton hotels comprised: 39 owned or partly owned by HHC in the United States, 207 franchised by HHC to third party managers in the United States, 16 managed by HHC in the United States on behalf of third-party owners, 10 managed internationally under HHCs Conrad International brand, 220 managed by HIC in over 50 countries excluding the U.S. Revenues had been in the region of $158 per night per guest, and occupancy had exceeded break-even. Hotels like Hiltons tended to cover fixed costs at about 68% occupancy, and 80% of all revenue at higher occupancy levels flowed to the bottom line. Advertising, selling, and other marketing costs (a component of fixed costs) for this group of hotels was not published, but industry norms ran at about $750 per room per year. The company was already making a profit, it reached break even at 68% of occupancy. I.e. revenue at higher occupancy levels will generate profits for Hilton. HHW program helps Hilton to run at higher occupancy level and hence revenues generated by the program will contribute to make profits for Hilton. The breakeven point is 68% x 154,000room x 365nights = 3,8222,800 nights or 3,8222,800 nights x $158 = $6,039.2 millions.

From the above table, number of nights actually paid by members is: 7,015,000nights + 712,000 stays x 2.5 nights 180,000 claimed nights = 8,543,800 nights. Total revenues from members is: $1,108million + $327million = $1,435million. Percentage of nights by members over nights required at breakeven is 8,543,800/3,8222,800 = 0.224 or 22.4%. Percentage of revenues by members over revenues at breakeven is: $1,435/$6,039.2 = 0.2376 or 23.76%. If we compare the revenue generated by the program with revenue at breakeven, we see that the program increases revenue by 23.76%.

Therefore, gross profit earned through the program should be ($158 per night $750per year/365days) x 8,543,800 nights = $1,328.5 million (these nights above occupancy levels do not bear fixed costs which are costs to build hotel facilities). In other words, $1,328.5 million is the value the program generated to Hilton.

As shown in the above table, the cost of the program is $69,438,000. Compare value and costs of the program. The value is $1,328.5 million and the cost is $69,438,000, we can see that the program generated huge value as compared to costs. The value is almost 20 times. Ques2.) What is starwood attempting to do? How should Jeff Deskin respond? Ans.) Four features rolled out by starwood, which were of concern to Hilton and were tough to match, were: 1. No blackout dates: All frequent guest and airline programs until now had ruled that members could not claim free travel during the very height of seasonal demand and when local events guaranteed a hotel full occupancy. Starwood was saying that if there was a room to rent, points were as good as money. 2. No capacity control: Programs until now had let hotel properties limit the number of rooms for free stays. Starwood was telling hotels that all unreserved rooms should be available to guests paying with points. 3. Paperless rewards: Guests had had previously to exchange points for a certificate and then use the

certificate to pay for an authorized stay. Under Starwoods system, individual properties would be able to accept points to pay for a stay. 4. Hotel reimbursement Now that blackout dates were abolished, a property, particularly an attractive vacation destination, might have to contend with many more points-paying guests than before. Starwood therefore raised the rate at which it reimbursed hotels for these stays. To meet the cost, it charged participating hotels 20%100% more than its competitors on paid stays. Starwood was pledging to invest $50 million in advertising to publicize the program significantly more than HHW had historically spent on program communications. Which was an extremely aggressive strategy. The following table shows the comparison between various leading loyalty programs in the offering:

Do we have to compete point for point? Or do we want to take a different positioning and hold on to our loyal members and differentiate HHonors from Starwood and other competitors? were the big questions Jeff Duskin and Hilton hotels were facing. But if frequent-guest programs were a good idea, perhaps bigger programs were an even better idea. The industry was quite competitive enough. The result of competing only on the basis of prices would result to a price wars with all the players in the industry suffering as they would not be able to meet their costs in the long run and would not be able to sustain such loyalty programs in the long run as the would not only add on to the cost but hamper the brands perception as if done over a long period of time may attract value seeking customers but not customers who are looking for the intangibles that are associated with the brand, the question in that case would be was Hilton associated with luxury and had exclusivity associated to it or was a brand that was generic meant for the masses, it would lead to repositioning of the brand nonetheless. Loyalty programs are in fact price concessions. By offering loyalty programs, Hilton implicitly trains its customers to expect lower prices. Based on the above arguments, I would suggest that Hilton should avoid such loyalty war by maintaining current rewards levels and spend more delivering greater value, such as better services, option of upgrades, souvenirs, complementary dinning, making the stay worthwhile. Further, Hilton should differentiate its brand by using brand loyalty to retain customers and improve customer loyalty. Loyalty is something that cannot be programmed or bought by rewards. The rationale reason why customers use loyalty program is that they want to make profits out of loyalty programs. If Hilton stops offering generous rewards through its loyalty programs, its repeating customers might go to other hotel chains. Brand loyalty is long term. Brand loyal customers tend to stay longer with the chain and spend more. The focus should be on delivering value and innovations; as price concessions do not suffice in the long run. Ques3.) What are the strengths and weaknesses of Hilton HHonors program from the following stand points Ans.) a) Member properties: Hilton had an advantage of tie- up with airlines but again the number of hotel properties were less in Hilton (154,000 rooms) as compared to 212500 rooms in Starwood. They had total of 492 hotels managed by them or in tie- up with other third party. b) Guests: They kept a record of the customer profile to offer them better service and offerings. They gave utmost importance to the customers. Special care was given to their problems. c) Corporate travel Depths: Customization was offered to the customers and they took care of their needs. They catered to lot no. of business travellers as they preferred Hilton as their destination. d) Hilton Hotels Corp & Hilton Intl: The whole Hilton group had tie- ups with other corporate travels and they provide quality service to their guests and special care was taken of the businesspersons. Customization was

provided to them. Increase in revenue and profit were seen increasing for this group.