2. Teaching Objectives
. To understand the forces that shape a service firm’s profitability.
. To understand how frequency programs are used to deliver on customer
needs.
. To appreciate how loyalty programs allow the practice of one-to-one
marketing.
. To understand how loyalty programs create incentives for increased
spending.
. To demonstrate how loyalty programs may cover some of the expenses
of building a brand.
. To appreciate how frequency programs track the purchase of a guest
across multiple outlets (B2B2C).
. To appreciate how frequency programs take the ownership of the
customer away from the outlet where the service is purchased and give
it to the owner of the brand (‘Go Downstream’).
3. I- Global Distribution Systems
FINAL CUSTOMER
OTHER AIRLINES
COMPANIES AIRLINES COMPANY
TOUR-OPERATORS
FINANCIAL
PARTNERS
HOTELS
CAR RENTAL COMPANIES
OTHER SERVICE PROVIDERS
OTHER AIRLINES
COMPANIES
TRAVEL AGENCIES / OTHER INTERMEDIARIES
III- Alliances
II- Partnerships
IV- Relationship Marketing
4. Questions of the case
1. What should Diskin do?
2. What are the strengths and weaknesses of the
Hilton HHonors program?
3. What is the optimum level of spending on the
program?
4. What should Hilton do in response to Starwood?
5. What should Diskin do?
1. Match Starwood’s spending. (The company will be spending $50
million to promote awareness of the program and inform members of the
Westin, Sheraton and other brands of the Starwood group).
2. Do nothing and hope Starwood will see its error.
3. Withdraw from the loyalty program game.
In fact, the spectrum is anchored at one extreme by
Diskin’s position that the loyalty programs are the
industry’s most important marketing tool.
6. What are the strengths and weaknesses
of the Hilton HHonors program?
1. From the Hilton Brand’s Perspective
2. To the Member Properties (Franchisees)
3. To the Guests
4. To the Employers (of the Guests)
7. Figure : The Loyalty Program’s Virtuous Cycle
A franchised hotel
HHC
and HI
Hilton
Hhonors
EmployerGuest Compliance
Franchise fee
Volumediscount
Patronage
8. From the Hilton Brand’s Perspective
1. Hilton’s share of wallet is 24%. But if loyalty programs
are a good idea for a chain the size of Hilton, they are a
better idea (and probably exponentially better) for a
larger chain.
2. Loyalty programs simultaneously classifies customers
according to whether they spend a lot or not and supplies
the means to appeal to them.
3. Hilton sold 39,535,000 nights last year with an
occupancy rate of 70%, just over the 68% occupancy at
which fixed costs are covered (incremental revenue of
80%). And 4% (20% of 20%) of those nights are directly
due to the program. Are those added 4% a big deal?
9. Does the program pay out (1)?
1. Guests spent : 7,015,000 + 180,000 + 712,000 = 7,907,000 nights at
Hilton properties in 1998 (Table B).
2. This is 22,5% of all nights that year (page 6).
3. As a consequence, Hilton sold 39,535,000 nights in 1998.
4. With full occupancy, they would have sold: (91,060 + 62,900) x 365
= 56.2 million nights (Exhibit 1).
5. The occupancy rate is therefore: 39,535,000 / 56,200,000 = 70%.
6. This percentage being just over the 68% occupancy at which fixed
costs are covered, we are intitled to use a gross margin on
incremental revenue of 80%.
10. Does the program pay out (2)?
1. To decide whether HH makes money for its two parents, we can
attach great legitimacy to the suggestion that 20% of all member
stays are due to the program (page 9).
2. There is some support for the number in the finding (page 7) that a
good Yield Management program, which depends critically on
identifying individual customers, can improve revenue by 20%.
3. As a consequence, 20% of 20% of the nights –or 4% of nights- are
directly due to the program.
4. With a break-even occupancy of 68%, the actual occupancy of 70%
would have been 66% without the program, and the operating profit
of the group would have been a loss.
5. Since HH operates at no cost to the group, the cost of inflating the
occupancy rate by that crucial 4% is effectively a costless –yet
efficient- marketing tool.
11. The Defection Curve
•Profits are highly
responsive to
changes in defection
rates.
•A small movements
in defection rate can
produce very large
swings in profits.
12. « We still only deliver 92% of customers who are satisfied (…) Why not
celebrate? Only 8% are not satisfied. Of those, 2% to 3% want things we
cannot do, or things that, if we did them, would dissatisfy all of the other
customers.
But 5% represent satisfaction that we want. Those 5% are dissatisfied
because of stupid, pathetic defects that are repeating (…) That 5%
translates into 200,000 dissatisfied customers. That is an army –attacking
us- saying that we are not good. If we satisfied this 5%, within three years
we’d run at 88% occupancy. What does 88% mean in dollars? Three
hundred million to the bottom line. We are leaving $300 million on the
table because of 5% defects. »
Horst Schulze, CEO
The Ritz-Carlton Hotel Company
13. To the Member Properties
1. HH membership induces patrons to favor Hilton with an
incremental 1 stay in 5 that would otherwise have gone
to a competitor.
2. Without the program, the properties frequented by
business travelers would have earned $177 million less
in contribution for a cost of $49.9 million only.
14. Does the program pay out (3)?
1. HH membership induces patrons to favor Hilton
properties with an incremental 1 stay in 5 (page
9).
2. If the member properties had not sold these 1.4
million incremental rooms, and had not earned
the 80% margin on revenue of $158 per night,
they would have lost $158 x 1.4 million x 0.8 =
$177 million in contribution.
3. The cost to members is 4.5 cent per dollar of
member folio or $158 x 7.015 x 0.045 = $49.9
million.
15. To the Member Properties
1. HH membership induces patrons to favor Hilton with an
incremental 1 stay in 5 that would otherwise have gone
to a competitor.
2. Without the program, the properties frequented by
business travelers would have earned $177 million less
in contribution for a cost of $49.9 million only.
3. Resort hotels bear the brunt of the redemptions but get
paid more than the incremental costs for the room.
Hence, the importance of blackout dates which offer
some assurance that redemptions will fill rooms that
otherwise would have been empty.
16. To the Guests
1. The large majority of them get rewarded for a room that
they don’t pay!
2. If the guest is self-employed, points represent tax-free
advantages.
3. The hotel can customize the guest’s experience better
with the benefit of guest-specific information (as such,
associated benefits justify a slight price premium).
4. Loyalty programs are taking advantage of situational
dimensions without costing anything to the hotel.
17. To the Employers
• Loyalty programs encourage compliance with negotiated
agreements.
• Travel departments prefer to make compliance seem like
the employee’s idea, not a command…
• … And offer free gifts to highly-involved business
people or top management executives.
18. What is the optimum level of
spending on the program?
1. The facts in the case cannot supply a definite answer because it
doesn’t give empirical basis for estimating consumer’s sensitivity,
but:
2. The business-related properties get a lot of patronage for their
$49.9 million, and pay less for that patronage than they do to
travel agents.
3. Guests find the program highly motivating and show no signs of
saturation.
4. Partners pay $18 million to use the program to do their own, and a
bigger program would be an even more effective marketing
vehicle for them.
5. The data are used to run the Yield Management program and more
data might mean better Yield Management.
19. What should Hilton do in response to
Starwood (1)?
The four components of the new Starwood program
1. No blackout dates (earned points are as good as money).
2. Hotel reimbursement (Starwood has raised the daily rate at
which it reimburses hotels for stays paid for with points. To meet
the cost, it is charging participating hotels 20-100% more than its
competitors for the points they award for paid stays).
3. No capacity control (all unreserved rooms should be available to
guests paying with points).
4. Paperless rewards (no need for advance notice from the guest. He
can present points at the time of checkout and they will be accepted
as cash).
20. What should Hilton do in response to
Starwood (2)?
Starwood has significantly enhanced the appeal of its
program relative to all competitors, but at substantially
higher cost.
1. Need for new Yield Management process and algorithms
(no blackout dates, no capacity control).
2. Some of the new features of the program (paperless rewards
redeemed at the hotel’s computer terminal) will require
information technology system upgrades before they can be
emulated.
3. In addition to the program itself, the group will be spending
$50 million to promote it.
4. Hilton suffers from a natural lack of ‘network externalities’
when compared to Starwood (154,000 vs. 212,900 rooms).
21. What happened?
1. Hilton did not emulate any of the Starwood’s
innovations.
2. However, being well aware that the program was under
scale, Hilton has acquired the Promus chain, which has
more than trebled the number of rooms carrying its flag.
3. Although not all are business class hotels, the frequency
program now extends over Promus brands like
Doubletree and Embassy Suites.
