Jyotsna Girhotra Girhotra Shawn Crumpton Pamela Basche
Hilton HHonors Worldwide LOYALTY WAS
Ta!le o" Contents #$ecuti%e Summary&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& ' Bac()round and Timeline&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&' *uestion +&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& , *uestion '&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& *uestion ,&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& . e"erences&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& /
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#$ecuti%e Summary Hilton Hotels Corp and Hilton 0nternational are !oth unrelated entities that controlled Hilton !rand& Hilton Hotels Corp mar(et consisted o" three types o" )uests1 the !usiness tra%eler1 and the con%ention and leisure se)ments& 0n +//.1 HHC and H0C a)reed to mer)e1 cooperatin) on sales1 mar(etin)1 standardi2in) operations1 "ormulatin) the Hilton HHonors loyalty pro)ram& Hilton HHonors loyalty pro)ram consisted o" "our tiers o" mem!ership3 !lue1 sil%er1 )old and diamond& Hilton4s )uest reward pro)ram was open to anyone "ree o" char)e and allowed mem!ers to earn points "or "ree ni)hts1 !uy products1 ser%ices "rom partner companies or con%ert points into miles in airline "re5uent67yer pro)rams& HHW also allowed their loyalty mem!ers to dou!le dip1 which meant mem!ers could use points "or airline miles& This was pro8ta!le to !oth Hilton and the '96partnered airlines !ecause they were not competin) "or customers and it allowed mem!ers to earn :oint currencies& Tiered mem!ers4 le%el could increase dependent upon the num!er o" times or ni)hts they stayed at a HHonors Hotel& At the time o" the "ormulation o" the HHonors pro)ram1 Hilton4s competiti%e ad%anta)e was its name reco)nition& 0n +/// Starwood Hotels ; esorts Worldwide1 introduced its Starwood Pre"erred Guest Pro)ram1 which co%ered 99< properties& The "eatures o" Starwood4s Pro)ram1 which was in competition with HHW was there were no !lac(out dates1 no capacity control1 paperless rewards1 and hotel reim!ursement& Starwood Hotels ; esorts Worldwide was also pled)in) 9< million to ad%ertise its newly "ormulated rewards pro)ram& Starwood at point ran hotels under the Hilton !rand as a Hilton "ranchisee and was a!le to o!tain in"ormation a!out a competitors4 operatin) procedure& Starwood was now =tar)etin) the most lucrati%e part o" the !usiness1 the indi%idual !usiness tra%eler& The 5uestion posed to HHW is do they ha%e to compete with their competitors& The 5uandary HHW has1 is do they continue to di>erentiate themsel%es "rom their competitors& Yet continue to retain their loyal customers while impro%in) the reward pro)rams to newly ac5uired Sheraton and Westin chains&
Bac()round and Timeline Hilton is a well6reco)ni2ed !rand name& The hotels were controlled !y HHC ?Hilton Hotels Corporation@ and H0C ?Cali"ornia and Hilton 0nternational@ which was uni8ed to Hilton worldwide in +//.& any o" the Hilton properties are "ranchised to independent operators and companies& Hampton 0nn is %irtually +<< "ranchised&
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Je> is(in1 Head o" Hilton HHonors )uest rewards pro)ram e$pressed his concerns a!out the a))ressi%e "re5uent )uest reward pro)ram introduced !y Starwood& Some o" his concerns were3 6 6 6
aised Costs educin) cost e>ecti%eness o" the mar(etin) tool o Loyalty pro)rams are as cost e>ecti%e as our competitors let them !e They are de8cit spendin) a)ainst their pro)ram
e8nin) Customers3 Hilton has , se)ments o" customers 6 6 6
Business Customers Con%ention se)ment Leisure se)ment
One6Thirds o" o%erall Hilton )uests are !usiness tra%elers1 two6thirds are !usiness to !usiness and one6thirds are indi%idual tra%elers&
*uestion + How can a loyalty program help the property owner and brand owner better manager its customers? Answer3 A di>erentiated loyalty pro)ram will attract and retain customers "rom ot her pro)rams on the mar(et& Loyalty Pro)rams increase the li(elihood property owners will want to !ecome "ranchisee o" Hilton or ha%e a mana)ement contract with them& This was due to smaller hotels !ein) more dependent on the =road warrior= !usiness tra%elerD it was !ene8cial to ha%e this type o" "re5uent )uest as mem!ers&
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Loyalty pro)rams allow "or the collection o" data on its customers i&e& times o" year they "re5uent hotels1 locations1 len)th o" stay1 usa)e o" accrued points& The collection o" data allows !rand mana)ers to mar(et to customers !ased on their patterns& em!ers also recei%e direct mail re)ardin) ser%ices such as %acation ownership and )oin) to casinos& Throu)h the sharin) o" data o" mem!er data it increases colla!orati%e relationships& With Hilton HHonors Pro)ram ha%in) colla!oratin) with rental car ser%ices1 airlines1 ET Elorists1 rs& Eield Coo(ies& 0ncreased a!ility !y !rand mana)ers to mar(et HHW partnered products to customers& Alon) with a customer4s a!ility to draw on accrued points to purchase di>erent products1 increases the possi!ility a mem!er will spend1 throu)h up sellin) past accrued points& em!ers within the loyalty pro)ram ha%e an increased relationship the properties they "re5uent& ue to the a!ility to contact customer ser%ice where there are pro!lems& 0n addition1 these mem!ers ha%e a ha%e the most e$perience with Hilton !ecause o" their "re5uency o" %isits& HHW en5uires a!out these mem!ers4 opinions1 "urther "osterin) the relationship with HHW& The a!ility to trac( "re5uent mem!ers4 pre"erences pro%ides mem!ers with a customi2ed e$perience without ha%in) to as(& Loyalty pro)rams also increased the historical data on a mem!er1 increasin) the (nowled)e o" mem!ers !oo(in) patterns and thus increasin) re%enue& The data HHW collected alon) with the model utili2ed would !e !etter a!le to estimate which mem!er which customer would )et the room& =The person payin) F'< more "or that you may ne%er see a)ain1 or the )uy spendin) thousands o" dollars in the system&= O!tainin) customer data also allowed property owners and !rand mana)ers determine price points and the mem!er that would wal( away and the cost o" turnin) a customer away& Throu)h simulation studies that was )uided throu)h a =)ood yield mana)ement model a company4s re%enue increased !y '<=
*uestion ' Quantify the value of the HHonors program to Hilton. Compute its cost to the incremental income generated. Answer3 What is %alue alue is nothin) !ut percei%ed !ene8t Percei%ed Bene8t I e%enue Costs Kon6Einancial alue HHonors pro)ram pro%ided the "ollowin) non68nancial %alue3 6 6 6 6
A!ility to analy2e customer data 0mpro%ement aids li(e 6 0nteraction and "eed!ac( Lon) term customer relationships and loyalties A!ility to calculate Customer Li"etime alue ?CL@
Einancial alue
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Hilton runs a!o%e !rea(e%en point at M occupancy which means that Hilton already passes the 2ero6pro8t point and ma(es pro8ts& There"ore1 re%enue at hi)her occupancy le%els will )enerate pro8ts "or Hilton&
Brea(6e%en point
M
N +9-1<<< rooms
N ,9 ni)hts
I ,M1'''1M<< ni)hts
oom rate
F+9M
N
,M1'''1M<< ni)hts
I F <1<,/&' millions
N '&- ni)hts
inus +M<1<<< claimed ni)hts
I M19-,1M<< ni)hts
F,'. million
I F+1-,9 million
Kum!er o" ni)hts actually paid !y mem!ers .1<+91<<< ni)hts
.+'1<<< stays
Total re%enues "rom mem!ers F+1+
Percenta)e o" ni)hts !y mem!ers o%er ni)hts at !rea(e%en M19-,1M<<
,1M''1M<<
I<&''-
O ''&-
Percenta)e o" ni)hts !y mem!ers o%er re%enue at !rea(e%en F+1-,9
F1<,/&'
I<& ',.
O ',&.
Compare re%enue )enerated !y the pro)ram with re%enue at !rea(e%en Program increases revenue by 23.76% which is greater than 20% revenue increase
1998 Figures Cost o" HHonors
F/1-,M1<<<
e%enue "rom HHonors
F/1M,.1<<<
Ket 0ncome
F,,/1<<
As the %alue is F+1-,9 million and the costs is F/1-,M1<<<1 we can see that the pro)ram )enerate hu)e %alue %s& costs& The %alue is )reater than costs more than +/ times& Also1 as per the income statement !elow1 most o" the HHonors hi)her e$penses are in 6
6
Administration e$penses Since administration costs are not 7e$i!le and we donQt (now e$actly o how their administration structure wor(s1 we can assume that they are necessary costs and cannot !e analy2ed "or decrease& Airline miles purchase Since this is the total cost "or a ser%ice that a pro)ram decided to o pro%ide1 it is 7e$i!le "or ad:ustments& The pro)ram cost should
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decrease the e$penses "or airline miles purchases in order to !alance it with the num!er o" tar)eted customer&
There are - ma:or cate)ories o" the HHonors reward pro)ram 6 6 6 6
Blue Sil%er Gold iamond o 0)nore these since they ha%e lowest impact on the pro8t !ecause they are "ew in num!er& o They ha%e hi)h rate "or claimed rewards !ut less spendin) on points earned&
Considerin) the Blue1 Sil%er and Gold mem!er1 they are a total o" '&' ?+//M@1 !ut we (now that o" this total customer1 :ust a percenta)e is completely loyal to Hilton& Hilton should aim to retain these& The pro)ram cost should decrease the e$penses "or airline miles purchases in order to !alance it with the num!er o" tar)eted customer& 0n this way1 the HHonor e$penses should remain lower to the costs1 prospectin) in the short6term an increase in customerQs loyalty& This will !e shown in the customer stays and in stays that they paid1 as well as the spendin) per earned point& HiltonQs share o" the wallet is '- and i" the retention model o" the pro)ram will wor( well1 Hilton could )ain %alue1 increasin) re%enues up to '<& Also1 i" this strate)y will wor( "or chain si2e o" Hilton1 then itQs e%en !etter "or a lar)er chain& There"ore1 it is worth to continue the pro)ram&
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*uestion , What should Hilton do in response to Starwood? Answer3 A"ter Starwood Hotels and esorts Worldwide1 0nc& announced plans to chan)e its loyalty pro)ram in +///1 Hilton HHonors World wideQs leader had an important decision to ma(e& The most e>ecti%e way to com!at Starwood would !e to impress e$istin) HHonors mem!ers !y impro%in) upon the rewards already !ein) o>ered to them which would solidi"y their loyalty to Hilton& 0nstead o" simply matchin) the competitorQs pro)ram incenti%e !y incenti%e1 we e$plain why this strate)y would !e the most e>ecti%e route to ta(e& While the Starwood pro)ram o>ers many attracti%e !ene8ts1 Hilton HHonors does not ha%e to match the e>ecti%e price war that has !een initiated in order to remain competiti%e& oin) so would result in lar)e cost increases and additional processes to mana)e& Their LLC is relati%ely small and the current pro)ram is not only success"ul1 !ut 5uite mana)ea!le& The leaders want to !e inno%ati%e1 not imitati%e with their rewards pro)ram& When we loo( at the %arious aspect o" StarwoodQs re%ised pro)ram1 we can compare ad%anta)es and disad%anta)es o" each& The "our main components o" the Starwood pro)ram include3 Ko !lac(out dates1 no capacity control1 paperless rewards1 and hotel reim!ursement& When comparin) the 8rst pro)ram incenti%e1 !lac(out dates1 sand se%eral ad%anta)es can !e )ained !y the hotel companies& 0" there are dates that are more desira!le "or tra%el1 the hotel pro)ram simply does not allow "re5uent )uests to use their points on those dates& This ensures there are enou)h hotel rooms a%aila!le "or )uest who will pay the "ull room rate durin) those hi)hly desira!le tra%el times& Blac(out dates )enerate re%enues "or hotels !y allowin) only new pro8ts to !e made1 rather than )i%in) the same room to a loyalty mem!er1 essentially "or "ree& The disad%anta)es o" !lac(out dates are not merely opposite o" the ad%anta)es& The main disad%anta)e o" pro%idin) !lac(out dates is the re%enue stream& Pro%idin) Rno !lac(out dates to the top tier HHonors mem!ers would stren)then their current relationships with those customers& iamond mem!ers are the top + o" customers and could !e rewarded with this une$pected incenti%e& Since their model with !lac(out dates "or other mem!ers is already pro8ta!le1 the need to "ocus on this particular mar(et se)ment is o" )reat importance& StarwoodQs plans "or no !lac(out dates includes all o" their loyalty pro)ram mem!ers& Hilton could minimi2e costs i" they o>ered this as an added incenti%e to their iamond mem!ers only& StarwoodQs second chan)e to their pro)ram includes capacity control& Hotels are allowed to ma(e a%aila!le only limited amounts o" rooms "or "re5uent )uests& This would !e an ad%anta)e since the hotel could limit the num!er o" "ree rooms o>ered so they could meet their !rea(6e%en point "or re%enues each ni)ht& The disad%anta)e o" no capacity control is that a hotel may ha%e more customers redeemin) points "or "ree rooms than customers who are payin) with new re%enues "or that hotel& HHonors diamond mem!ers could !ene8t "rom this no capacity control edict& As the %ery !est clients to Hilton1 they would !e allowed to reser%e rooms at any hotel that
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had a%aila!le rooms& This would !e %iewed as a reward !y the customers and would stren)then the !rand loyalty& With re)ard to paperless rewards1 the third up)rade to StarwoodQs pro)ram1 there are no disad%anta)es& sin) points to !oo( hotel rooms directly cuts costs !y eliminatin) the paper certi8cate& #%en electronically1 a certi8cate is another step in the redemption process& By streamlinin) the process1 there is less to mana)e& HHonors does not use certi8cates& The last up)rade to StarwoodQs pro)ram descri!es hotel reim!ursement& They would pay a hi)her reim!ursement rate to hotels with desira!le locations to o>set the ratio o" points payin) mem!ers to other )uests& The thou)ht process is that more mem!ers would want to redeem points at a %acation hotel rather than a con%ention hotel1 perhaps& HHonors would not ha%e to chan)e their methods o" reim!ursement to hotels i" only + o" its mem!ers were allowed to stay anywhere on any dates& Those limited amounts o" customers should not a>ect the o%erall cost structure o" daily operations at %acation resorts& These "our up)rades to StarwoodQs loyalty pro)ram were !asically used to !uild !rand reco)nition "or their newly ac5uired chains& Hilton does not ha%e the same pro!lem so matchin) the pro)ram incenti%e !y incenti%e would not !e necessary& To maintain its pro8ta!ility and to continue with inno%ati%e ideas1 Hilton HHonors Worldwide must loo( to impro%e upon its already e$istin) pro)ram to maintain mem!er loyalty and to increase the amount o" top tier customers& Since Hilton is comprised o" three distinct se)ments o" customers1 it is important to hi)hli)ht the di>erences and ma(e decisions !ased on those di>erences& The !usiness se)ment included tra%elers that would stay in hotels !ased on ne)otiated rates done corporately& The con%ention se)ment is the second portion o" customers which included primarily those who stayed at a particular hotel !ased on where the con"erence or)ani2er would arran)e ahead o" time& The last se)ment1 leisure1 made up the 8nal third o" HiltonQs !usiness& These customers were price6conscious and mostly made their hotel decisions !ased on the %acation pac(a)es that were most cost e>ecti%e and rele%ant to their needs& The (ey is to tar)et the decision ma(ers "rom each o" these se)ments to ensure that Hilton is their top choice "or hotels& Considerin) that most loyalty pro)ram mem!ers could also !e mem!ers o" their competitors1 it is important "or Hilton to address the mo%e that Starwood has made with its announcement& As mentioned already1 the iamond mem!ers should )et the !ene8ts o" !lac(out dates and no capacity control& But how can Hilton communicate e>ecti%ely to its customer !ase in response to StarwoodQs announcement i" it is not )oin) to match the pro)ram Rdollar6"or6dollar HHonors should tar)et the three distinct customer se)ments to retain those customers& iamond mem!ership should !e the )oal "or customers as well as "or Hilton& Hilton HHonors Worldwide should communicate with its current loyalty mem!ers to e$plain its pro)ram !ene8ts& The three le%els o" Blue1 Sil%er1 Gold1 and iamond should !e di>erentiated and cele!rated& The diamond status which had not !een
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mentioned in any promotional materials !e"ore must !e hi)hli)hted& Promotional materials must !e updated to include this le%el to )i%e customers somethin) to stri%e "or& #$plainin) the %arious rewards "or achie%in) the ultimate status will continue to ma(e customers en)a)ed in the pro)ram and wantin) to earn those rewards& #m!racin) technolo)y and usin) apps alon) with the we!site to communicate with consumers is the !est way to proceed& 0t should !e easy "or customers to !ecome mem!ers and to 8nd out in"ormation a!out their accounts and what they need to do to earn a hi)her rewards status with the company& 0" customers can earn points "aster than with any other hotel rewards pro)ram1 then that should !e prominently mentioned in their ad%ertisin)& All o" the rewards that ma(e the pro)ram more di>erentiated in the mar(et need to !e presented& This will ensure not only customer loyalty to the HHonors pro)ram1 !ut will e%en help !uild new relationships with customers who are not currently part o" the pro)ram& When new customers and current mem!ers learn a!out all o" the ad%anta)es o" the pro)ram1 they can easily compare the rewards with those o" their competitors& By o>erin) rewards that are uni5ue and at a 5uic(er pace1 the !etter company will pre%ail&
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e"erences
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