Table of Contents 1.0 Overview………………………………………………………………………………….1 2.0 Analysis…………………………………………………………………………………...2 2.1 Question 1…………………………………………………………………………2 2.1.1 Question 1 (a)…………………………………………………………....2 2.1.2 Question 1 (b)……………………………………………………………5 2.1.3 Question 1 (c)……………………………………………………………6 2.1.4 Question 1 (d)……………………………………………………………8 2.2 Question 2………………………………………………………………………….9 2.3 Question 3………………………………………………………………………...10 3.0 Conclusion……………………………………………………………………………….12 4.0 References………………………………………………………………………………..13
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1.0 Overview Hilton HHonors refers to Hilton’s guest reward program which aims to build loyalty to the Hilton brand worldwide. Head of Hilton HHonors, Jeff Diskin, stated that loyalty marketing programs are the lodging industry’s most important marketing tool. However, concern arises when Starwood Hotels and Resorts Worldwide Inc. decided to introduce an aggressive frequent-guest program, known as the Starwood Preferred Guest Program. Coupled with a 50 million advertising budget, the program increases the stakes for the loyalty-program competition between four large global brands, namely Marriott, Hyatt, Hilton, and Starwood itself. The key features of Starwood’s new program include no blackout dates, no capacity control, paperless rewards, and hotel reimbursement – all of which are reducing the costeffectiveness of the other brands’ loyalty programs. The case looks into how Diskin should respond to Starwood’s loyalty program.
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2.0 Analysis 2.1 Question 1 2.1.1 Question 1 (a) From the standpoint of Hilton Hotels Corp. and Hilton International, one of the strengths of the Hilton HHonors program is the ability to manage relationship with customers. With the use of a systematic customer relationship management system, the program ensures that the company’s profitable customers are recognized and valued at all times. The company is able to develop connections with customers at a more personal level, which indirectly, provides Hilton with the means to retain loyal customers. The customer service team makes certain that members are comfortable with their stay in any of the hotels under the Hilton brand. Guests could even contact the team to inform them about any problem with the service. More often than these, outbound after-visit calls are made to these guests to gauge their feedback and experience regarding their stay at the hotel. The fact that Hilton values the opinion of its Hilton HHonors members has led to the formation of a large group of evangelists who care about the brand. The Hilton HHonors Worldwide (HHW) makes the effort to customize the experience of Hilton HHonors members according to each of their preferences. According to Diskin, the company has built guest profiles in order to keep track of their preferences and special requests. For example, a guest may always want a room that has a double bed. With this information stored in the system, Hilton will be able to provide this room to that particular guest, before it is even requested. Another strength of the program is that it provides HHW with the opportunity to collaborate with partners and franchisees. As of now, HHW has partnered with 25 airlines, three car rental firms, and a few other firms. This allows the company to access the customer base of partners and potentially expand the segment of customers served. Apart from that, it is easier for members to acquire rewards, since Hilton offers double dipping – whereby joint customers would be able to earn both currencies. For instance, the customer could earn both membership points and airline miles for the same stay. In addition, Hilton would be able to work with franchisees through the Hilton HHonors program. This particular program has been successful in persuading hotel owners to become a Hilton franchisee, or allow Hilton to control its property. As such, Hilton will be able to target 3
a different group of customers. Besides, the HHW program is less costly compared to other hotel brands in the market, which makes it even more appealing to hotel owners. The fact that franchisees would be able to use Hilton’s well-known brand to their advantage further induced these collaborations. The third strength in relation to the loyalty program is a more precise revenue and yield management. This form of management basically involves overseeing day-to-day decisions that impacts hotel revenue. Specific algorithms or models aid revenue managers set reservations policy for guests. By storing information about Hilton HHonors members in the system, the manager would be able to observe each member’s booking patterns, and determine the price to offer for each guest. As stated in the case, a good yield management model could potentially increase the company’s revenue by 20 percent. Through related models, HHW is able to push sales to customers who tend to spend more and stay longer in Hilton hotels. Only with a loyalty program like the Hilton HHonors would the company be able to make distinctions between customers. The historical information of each member provides HHW with the means to effectively utilize variable pricing, which means charging a room based factors such as, size, day of booking, length of stay, and customer characteristics. The fourth strength of the Hilton HHonors program is its ability to generate greater volume of sales. With various membership perks, business travellers are will likely be attracted to the program. The fact that the program offers several tiers of membership, namely Blue, Silver, Gold, and Diamond would not only pull the business segment, consisting of customers who travel frequently, but also those who are less frequent travellers, categorized under the leisure segment. The double dipping feature offered by the program would undoubtedly attract more members, and encourage brand switching. This is especially true since Hilton is the only hotel chain to offer double dipping to its members, whereby guest could earn mileage in partner airline frequent-flyer programs and HHonors points at the same time. Hilton HHonors members also have the privilege to exchange hotel points for airline miles, and vice versa, which is an extremely attractive feature for a loyalty program. With increased sales, revenue, and customers switching to the HHW’s program, Hilton will ultimately be able to build brand loyalty, which is vital in the lodging industry.
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When it comes to weaknesses, one of Hilton’s greatest weakness is its low share of wallet. According to Magi (2003), share of wallet refers to the share of a customer’s business that is acquired by a particular company competing in a specific category. In simpler terms, in refers to the amount that customers spend on the Hilton brand as compared to other brands in the same industry. Hilton’s share of wallet could be calculated by dividing the amount that Hilton HHonors members spend at the Hilton with the total amount that Hilton HHonors members spend in the industry. According to a similar case analysis carried out by Lieu, Cheong, Chan, and Camilleri (2012), Hilton’s wallet share is 24.1 percent, which is considerably low. Loyalty programs are created to encourage brand switching, which allows the company to increase its share of wallet. However, with Hilton’s limited size and distribution, with only a total of 154,001 rooms available in its operating countries, it is difficult for Hilton members to remain loyal. Other hotel brands, like Starwood for example, have more rooms (212,950 rooms) available for guests in over 72 countries all over the world. Even if Starwood does not provide as good of a service as Hilton, they could still acquire greater share of wallet due to higher geographical coverage, which allows Starwood to attract a higher volume of travellers. This indicates limited network size and distribution is another weakness of the Hilton HHonors program from the standpoint of Hilton itself. Another weakness is its low standardization of operations. Although HHW operates and monitors the Hilton HHonors program, there is no denying that there is less standardization of operations in hotel chains, simply because the lodging industry is related to delivering the perfect customer experience, which varies from one person to another. As such, different hotels under the same brand may utilize different methods of control to reach their goals. For example, as stated in the case, a branded hotel might be owned and managed by the chain, or it could be owned by the chain but managed by the franchisee. Thus, different managements, although both under supervision of the HHW, would likely result in different operations. 2.1.2 Question 1 (b) There are a number of strengths of the Hilton HHonors program from the standpoint of member properties, or franchised hotels. For one, running the Hilton HHonors program would enable them to increase their reputation in the industry. The company could leverage off of Hilton’s successful and well-known name. This is extremely beneficial as people are more likely to stay at hotels with credible collaborations and loyalty programs, especially for business travellers. 5
Besides that, franchised hotels would be able to increase sales volume significantly by implementing HHW’s program. As mentioned earlier, the hotel will attract more customers if it has an established brand. With the Hilton’s name, franchisees indirectly increase their visibility in the market, which then increases their appeal to the target market segment. When this happens, these franchised hotels will be able to pull in more customers yearly, ergo leading to greater profit and revenue. Apart from that, franchisees would be able to acquire support from Hilton by implementing the HHonors program in their hotels. As with other franchises, the franchisor would normally provide support to the franchisee in terms of employee training, management, operations and financial needs. For example, costs would be shared between the two parties, as long the franchisee runs the HHonors program in their hotels. In addition, member properties would have access to new markets. Hilton is associated with affluent consumers, since it targets the luxury to mid-market segments. By implementing the Hilton HHonors program, these franchised hotels will be able to expand their consumer segments and target ones which were once out of their reach. For example, hotels that once only targeted the budget or middle class segments, would be able to expand to luxury market segments through the Hilton’s loyalty program. On the other hand, there are several weaknesses of the implementing the Hilton HHonors program from the perspective of Hilton’s member properties. Firstly, there would be loss of control. While most of the operations and managerial activities will be handled by the franchisee, there would be certain restrictions imposed by HHW. Moreover, carrying out the loyalty program would come with specific standards set by Hilton. Furthermore, franchisees would experience an increase in costs, which are associated with managing the loyalty program. For instance, the company may have to hire more employees to handle extended operations, and provide training to existing employees. Franchisees would also have to pay royalty fees, which are on-going payments to the Hilton, in order to run the HHonors program in their premises. 2.1.3 Question 1 (c) From the standpoint of guests, there are several strengths of the Hilton HHonors program. For one, guests could earn more rewards by being members of the loyalty program. Every time a Hilton HHonors member stays at any Hilton hotel, the guest will be able to acquire points, 6
which could later be used to pay for stays. Take for instance the example given in the case customers could use 5,000 points to get 50 percent off the $128 weekend cost at the Hilton Albuquerque, or even redeem up to 25,000 points for a free night at the Hilton Boston Back Bay, which would normally cost $239 per night. The more customers stay at Hilton hotels, the more points they could acquire, which consequently means, better service value. Another strength of the loyalty program is that each member would receive personalized experience. The fact that the program involves storing guest profiles into the system enables Hilton to keep track of customer preferences. As such, HHonors members would be provided customized services during their stay at the Hilton. For instance, if a member makes a reservation at any Hilton hotel, the staff would provide him or her with a personalized service based on prior requests during their stays, without even having to ask. Besides that, prioritization of HHonors members is also one of the program’s strength in the eyes of Hilton guests. Aside from free stays, members have a priority-reservation telephone number. Members are often prioritized over non-members when it comes to late checkouts as well. Moreover, Hilton makes it a necessity to ensure that each of its HHonors members are satisfied with their stay. If they do feel dissatisfied, they would be given a room upgrade, which further proves how members are given the priority. Another strength of the Hilton HHonors program is the fact that it offers double dipping, which is a practice whereby members could “earn mileage in partner airline frequent-flyer programs for the same stay that earned them HHonors points,” as stated in the case. This is a unique feature of Hilton’s loyalty program as other hotel chains would require guests to choose between hotel points or airline mileage. Because of this, members could redeem stays at Hilton hotels by using airline miles, or use hotel points earned to purchase products and services from Hilton’s partner companies. However, one of the weakness of this particular program from the standpoint of guests is the fact that Hilton HHonor hotels have blackout dates. This indicates that members will not be able to redeem points for free stays or free travels when seasonal demands are high. For example, this might mean not being able to redeem their points for free stays during Christmas seasons, or school breaks. In other words, their point redemption period is not applicable throughout the year. Apart from that, there is limited access of rooms at Hilton hotels. Because of this, hotel properties have to limit the number of rooms that can be offered to guests who intend to redeem 7
their points for free stays. This is especially true for peak seasons when demands for hotel rooms are high. When this happens, HHonors members are not provided with the assurance that they will be guaranteed free stays any time of the year. 2.1.4 Question 1 (d) From the perspective of corporate departments, there are several strengths of the Hilton HHonors program. Firstly, corporations will be able to reduce costs by forming contracts with Hilton through the loyalty program. This is because corporate travel departments, or basically, the company itself would be offered discounted rates, provided that they deliver the number of stays promised. This is a benefit to corporations with employees who frequently travel for business. Secondly, HHW’s loyalty program enables travel managers at corporate travel departments to gain compliance. This is achieved by ensuring that employees comply with the corporate travel policy. For example, travel managers would inform employees that in order to be eligible for reimbursement, the employee would have to stay at Hilton hotels, the preferred vendor. For employees who are loyal to other hotel brands, Hilton provides a myriad of offerings as an incentive for employees to stay at the Hilton, ergo providing travel managers with the means to gain compliance with their travel policy. However, there are also a number of weaknesses of the Hilton HHonors program from the standpoint of corporate travel departments. One of them is in terms of Hilton’s limited capacity and accessibility, which is related to its network size and distribution. Hotels that implement the HHonors program are not widely available all over the world, as compared to other global brands. In fact, these hotels could only be found in 61 countries. This is less than Starwood’s accessibility in 72 countries, and far less than Bass Hotels and Resorts’ 90 countries. As such, there may be times when employees will not be able to utilize the loyalty program simply because there are no Hilton HHonors hotel in the country they travel to. Apart from that, HHW only offers discounted rates if the corporation delivered enough stays. The problem lies in the fact that not all employees of the corporation will want to stay at the Hilton. This is especially true for employees who are already loyal to other hotel brands. This makes it harder for corporations to achieve its quota on volume of stays. In the event that the number of stays promised is not delivered, the company would most likely not be entitled to receive the discounted rate, thus would have to pay full price for their employees’ stays at the Hilton. 8
2.2 Question 2 In this case, value basically refers to perceived benefit, which is obtained by deducting cost from revenue. Hilton estimates that it earns a revenue of $158 per night for each guest. Since its occupancy often exceeds the breakeven point, which is the point at which cost and income are equal (“Breakeven,” n.d.), the company is consistently able to acquire profits. It is mentioned in the case that the fixed costs associated with the HHW is covered at 68 percent occupancy. This means that occupancies higher than 68 percent would lead to profit. The breakeven point for the HHW program is 38,223,049 nights (68% ×154,001 rooms ×365 nights) or a revenue of approximately $6,039,241,742 (38,223,049 nights × $158 revenue per room). The number of nights paid by members is 8,543,800 nights [7,015,000 nights + (712,000 stays × 2.4 nights) – 180,000 claimed nights). The total revenue from members is $1,435 million ($1,108,000,000 + $327,000,000). The percentage of nights paid by members over nights at breakeven is 22.4 percent (8,543,800/38,223,049), while the percentage of revenues acquired from members over revenues at breakeven is 23.8 percent (1,435,000,000/6,039,241,742). This means that incomparing the percentage of revenues contributed by members over revenues at breakeven, the Hilton HHonors program is capable of increasing revenues by 23.8 percent. Since the Hilton is already operating above its breakeven point, it could be said that the 23.8 percent is profit generated from the loyalty program. Other non-financial value related to the Hilton HHonors program is in terms of its highquality service towards customers, especially members. The personalized experience provided to each of its members has allowed the company to gain a large number of loyalists and even evangelists. These people are not only loyal to the Hilton brand, but also actively spread positive word of mouth about the program and Hilton itself. This is extremely valuable in the service industry as service is intangible. By continuously ensuring the best possible service to its members, Hilton will ultimately be able to further improve its customer-based brand equity (CBBE), in which customers react positively to the brand and its marketing efforts (Keller, 2008). Since HHW operates the program, it could be said that the expenses incurred by HHW relates to the costs to run the Hilton HHonors program. As shown in the case, under Exhibit 4, the total cost of the program is $69,438,000. Other relevant cost in the program would most likely be training of employees. The company has to train stay about specific policies and 9
procedures related to the program, in order to increase efficiency and effectiveness. For these trainings to be made possible, HHW would need a specific budget to cover the expenses involved. Apart from that, there is also walking cost, which is the cost of turning a customer away. Moreover, the operations as a whole would also incur costs to cover certain aspects, such as maintenance of the information technology (IT) systems used to manage its operations worldwide. From the income statement of HHW shown under Exhibit 4, it is noted that its revenues is $69,837,000. This means that HHW’s revenues is greater than its costs by $399,000. As such, it could be simplified that the value generated by the Hilton HHonors program is greater than its cost. 2.3 Question 3 One of the things that Starwood is attempting to do is develop the Starwood brand. The company is trying to increase its brand equity in the market in the hopes of acquiring a larger number of loyal customers. This would provide Starwood with the means to increase its share of wallet, and market share. Over the years, the company has never been consistent with its loyalty program, making it less effective and appealing to guests. As such, Starwood is trying to increase awareness on the brand’s Preferred Guest Program, especially for the Sheraton and Westin chains. Apart from that, Starwood is attempting to target individual business travellers, which are considered the most lucrative part of the business. Although Starwood is one of the four large global brands targeting the business-class hotel market, the Sheraton and Westin chains’ loyalty program has never been as successful as the ones offered by Marriot, Hyatt, and Hilton. This is mainly due to inconsistency in the program over the years. In addition, Starwood is trying to differentiate itself from competitors, and ultimately, stand out from the competition. This is shown through its introduction of four new features in its Preferred Guest Program. The fact that the loyalty program would not have blackout dates indicates that members could claim free travel or stays anytime throughout the year, even during peak seasons. Besides that, the hotels running the program would not have limits on the number of room available for free stays. This two features, coupled with its paperless rewards shows that Starwood is trying to pull people to join its loyalty program.
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Through its new loyalty program, Starwood is also indirectly encouraging brand switching. The company is trying to make its brand seem far more advantageous than other hotel brands in the industry. By convincing people that its Preferred Guest Program is better than other loyalty programs available, Starwood would be able to increase its number of loyal customers. This would then allow the company to increase its revenues and profits annually, as well as build positive customer-based brand equity. However, all of these would also mean that Starwood would have to shoulder more costs, ergo increasing its expenses. For example, the company would have to develop new revenue and yield management models due to its feature of not having blackout dates, and no capacity control. Moreover, Starwood would need to upgrade its IT systems in order to manage its paperless rewards efficiently. The most notable increase in Starwood’s expenses would come from its $50 million investment in marketing activities to publicize the program. There are several ways in which Jeff Diskin could respond to Starwood’s attempt. For one, it would best for Diskin to improve on its current loyalty programs, and pass, or not match Starwood’s strategy. If Diskin pursues a strategy that matches the strategy utilized by Starwood, it will significantly affect Hilton’s expenses, whereby costs related to the Hilton HHonors program will substantially increase. This reduces cost-effectiveness of the loyalty program. Take for instance Starwood’s $50 million investment in advertising to market the program. This one time budget itself is greater than HHW’s spending on program communications ever since the Hilton HHonors program was introduced. Hilton does not need to spend the extra cost on marketing because it already has a well-known name in the industry. Besides, Hilton has successfully developed clear brand positioning in the market, unlike Starwood. As such, it is unnecessary for the company to hike up its advertising budget, simply because Starwood has done it. Although Starwood’s Preferred Guest Program has no blackout dates and capacity control, it has to be realized that the implementation of these two features would lead to greater investments in operations and IT systems. While they seem attractive, the risks attached to Starwood’s features are hard to dismiss. The fact that Starwood charges participating hotels 20 percent to 100 percent more on paid stays as compared to its competitors could potentially lead to decrease in collaboration. This would decrease Starwood’s opportunity to collaborate and work with partners and franchisees. 11
Diskin should concentrate on improving the Hilton’s current loyalty program. For example, HHW could increase the number of points rewarded to members who stay at any of the hotels running the Hilton HHonors program. This will encourage current and new members to increase their number of stays at Hilton hotels. Indirectly, this will strengthen Hilton’s relationship with customers and build customer loyalty. Diskin should also find ways to advertise its double dipping feature for Hilton HHonors members, especially since the program is the only one that offers this feature to its members. Other than that, Diskin ought to increase the network size and distribution of Hilton hotels. This could be done by expanding its number of partners, or even by sponsoring conferences at its many hotels. Acquisition is also possible to increase network size and distribution, whereby Hilton would acquire other hotels to expand its brand in various locations all around the world. Diskin could also increase its marketing efforts for the Hilton HHonors program. The company could leverage on Hilton’s existing brand equity to promote the loyalty program among consumers. One type of promotional tool that Diskin could utilize is reminder advertising, which aims to remind the target market segment about the loyalty program. The advertisement could stress on Hilton’s long heritage and expertise in the lodging industry, apart from emphasizing the program’s various strengths, such as its key double dipping feature. Most importantly, Diskin could find ways to improve its customer relationship management (CRM), which basically involves managing the Hilton’s relationship with Hilton HHonors members. It is necessary to ensure that customers realize they are valued and prioritized to induce customer satisfaction. This is because customers are less likely to change their spending habits when they are satisfied. In other words, they are more likely to stick with the HHonors program when they are satisfied with the service received. Members could be encouraged to provide their feedback on their stays at Hilton hotels to enable the company to gauge its performance. If done properly, CRM could lead to numerous beneficial outcomes, such as the spread of positive WOM and achieving brand resonance. 3.0 Conclusion The hotel industry is an extremely competitive industry, in which a large number of hotel chains constantly compete for consumers’ attention. One of the most important marketing tools to garner consumer attention in this industry is a loyalty marketing program.
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When businesses compete in the same industry, and target the same market segment, one of the most significant differentiating factors that affect consumers’ choice is the loyalty programs they offer. Starwood itself realizes the importance of this marketing tool when it decided to introduce the Preferred Guest Program in its line of hotels. Other global brands, namely Hilton, Hyatt, and Marriot offer loyalty programs to their guests, too, knowing how this particular program substantially contributes to their annual revenues. Although loyalty marketing programs are aimed at increasing the brand’s loyal customer base, there are several other reasons why they are important. For one, loyalty programs open doors for collaboration with partners and franchisees. This does not just allow the hotel to provide broader range of rewards to its members, but would enable the company to increase its network size and distribution as well. While there are many loyalty programs in the industry, it is crucial that each company realizes the importance of being different and standing out from the competition. This means that a hotel’s loyalty program should offer features that are unique compared to its competitors. A simple example for this is the Hilton HHonors program’s double dipping practice which allows members to earn points at partner firms and the hotel itself, at the same time. Overall, it could be said that loyalty marketing programs are imperative to compete in the hotel industry. As such, hotel brands should continuously improve their respective loyalty programs to ensure success for many years to come. 4.0 References Breakeven. (n.d.). In Merriam-Webster. Retrieved from http://www.merriamwebster.com/dictionary/breakeven Keller, K. L. (2008). Strategic brand management: Building, measuring, and managing brand equity (3rd ed.). Upper Saddle River, NJ: Pearson Education, Inc. Lieu, J., Cheong, M. P., Chan, M., & Camilleri, S. (2012). Hilton HHonors [PowerPoint slides]. Retrieved from https://prezi.com/w2qfjdo-ct-t/hilton-hhonors/ Magi, A.W. (2003). Share of wallet in retailing: The effects of customer satisfaction, loyalty cards and shopper characteristics. Journal of Retailing 79(2), 97–106.
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