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8/3/2019 Hilton HHonors

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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 itscost?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 tothird party managers in the United States, 16 managed by HHC in the United Stateson behalf of third-party owners, 10 managed internationally under HHCs ConradInternational 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 hadexceeded 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 bottomline. 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 roomper year. The company was already making a profit, it reached break even at68% of occupancy. I.e. revenue at higher occupancy levels will generate profits forHilton. HHW program helps Hilton to run at higher occupancy level and hencerevenues 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 or3,8222,800 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 nights180,000 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%.


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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 aboveoccupancy levels do not bear fixed costs which are costs to build hotel facilities). Inother 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 couldnot claim free travel during the very height of seasonal demand and when localevents guaranteed a hotel full occupancy. Starwood was saying that if there was aroom 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 freestays. Starwood was telling hotels that all unreserved rooms should be available toguests paying with points.

3.Paperless rewards:Guests had had previously to exchange points for a certificate and then use the


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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 attractivevacation destination, might have to contend with many more points-paying guests

than before. Starwood therefore raised the rate at which it reimbursed hotels forthese stays. To meet the cost, it charged participating hotels 20%100% more thanits competitors on paid stays.Starwood was pledging to invest $50 million in advertising to publicize the

programsignificantly more than HHW had historically spent on programcommunications. Which was an extremely aggressive strategy.

The following table shows the comparison between various leading loyaltyprograms in the offering:


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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 fromStarwood and other competitors? were the big questions Jeff Duskin and Hilton

hotels were facing.But if frequent-guest programs were a good idea, perhaps biggerprograms were an even better idea. The industry was quite competitive enough. Theresult 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 thelong run and would not be able to sustain such loyalty programs in the long run as thewould not only add on to the cost but hamper the brands perception as if done over along period of time may attract value seeking customers but not customers who arelooking for the intangibles that are associated with the brand, the question in that casewould be was Hilton associated with luxury and had exclusivity associated to it orwas a brand that was generic meant for the masses, it would lead to repositioning ofthe brand nonetheless. Loyalty programs are in fact price concessions. By offeringloyalty programs, Hilton implicitly trains its customers to expect lower prices.

Based on the above arguments, I would suggest that Hilton should avoid such loyaltywar 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 somethingthat cannot be programmed or bought by rewards. The rationale reason whycustomers use loyalty program is that they want to make profits out of loyalty

programs. If Hilton stops offering generous rewards through its loyalty programs, itsrepeating customers might go to other hotel chains. Brand loyalty is long term. Brandloyal 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 thefollowing stand pointsAns.)

a) Member properties: Hilton had an advantage of tie- up with airlines butagain 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 thirdparty.

b) Guests: They kept a record of the customer profile to offer them betterservice 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 customersand 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- upswith other corporate travels and they provide quality service to their guests

and special care was taken of the businesspersons. Customization was


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

this group.

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