HILTON HHONORS WORLDWIDE LOYALTY WARS CASE STUDY

Executive summary

Hilton is running a loyalty program to create and retain loyal customers as its competitors do. Given the severe competition in the lodging industry, all major players are competing by introducing more generous loyalty programs. Hilton should not compete on what its competitors are doing. Instead, it should customize and differentiate its current loyalty program and establish a compelling brand strategy to create brand passion and brand loyalty and to reposition the Hilton brand so that customers are truly loyal to the brand. In doing so, Hilton chain can attract and retain more business loyal customers and create long term customer loyalty.

1. Loyalty program and better customer management
Loyalty programs can help property operators and brand owners manage better their customers by the following points:
• Retain and reward profitable customers
• Tracking customer behavior patterns (spending, characteristics, preferences etc)
• Customize unique rewards to profitable customers
• Strengthen brand and improve brand loyalty
• Encourage customer spending
• Attract new customers
• Create and retain loyal customers
• Segment customers and formulate customized services to each segment

2. Loyalty program assessment
Value of the program
Now Hilton runs above breakeven point at 68% occupancy (p.4). It means that Hilton already passes the zero-profit point and makes profits. Therefore, 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.
From page 4, 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 page 8 and table B, number of nights actually paid by members is 7,015,000nights + 712,000 stays x 2.4nights – 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 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%. This revenue increase is greater than 20% revenue increase by management yield.
• As Hilton already runs above breakeven point, the revenue obtained from the program should be considered as profit generating revenue. 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.

Cost of the program
HHW executes the program as a non-profit center but a service for its parents companies HHC and HIC. Therefore, the expenses of HHW can be regarded as the expenses of the program. As shown in the exhibit 4, the cost of the program is $69,438,000.
Compare value and costs of the program
As the value is $1,328.5 million and the costs is $69,438,000, we can see that the program generate huge value vs. costs. The value is greater than costs more than 19 times. Therefore, it is worth to continue the program.

3. Loyalty program from franchisees’ view
Based on the above analysis, we saw that the frequent-stay program generates huge value to the hotel chain. Franchisees also see the lower program costs than that of competing chains and the high value and business opportunities the program may create for them. They are willing to run their properties under Hilton’s brand.
If franchisees had the choice of putting Hilton or one of Starwood brand on their properties, they can assess the value of doing so by comparing the value generated by the frequent-stay programs under both brands. To evaluate the value of each program, first they need to check whether they are running above or below breakeven levels, calculate the value of incremental occupancy generated by each program and associated costs, then compare values and costs of two programs.

4. What should Hilton do in response to Stawrwood?
Four major hotel chains are competing on frequent-stay programs at the same points: rewards or cash value to customers, redemption choices, convenience of program use. Competing by loyalty programs, all these hotel chains tend to increase reward value while they can not charge higher prices. As a result, their profit margins will decrease. Hilton, therefore, can not compete with other chains by offering more attractive loyalty program. Moreover, offering a very generous loyalty program has some risks:
• Customers tend to be variety-seeking customers so they want to have different experience with various hotel chains.
• 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.
• The more rewards Hilton gives to customers, the more expectation customers have. Rewards therefore tend to be ever-higher.
• Customers participateparticipate in the program for profits and they might not have to be loyal.
• Loyalty programs are in fact is discount programs. 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 further customizing redemption choices, convenience of program use. Further, Hilton should differentiate its brand by using brand loyalty to retain customers and improve customer loyalty. Here are some ways to do:
• Create a brand passion. When customers are passionate about the brand, they will stay and become truly loyal without participating in any loyalty program.
• Reposition the brand as a unique experience.
• Differentiate the brand from others by creating a unique experience that no other chains are offering or will be able to offer.
• Create brand loyalty and brand passion as competitive advantages.

5. How should Hilton spend the additional revenue?
First, Hilton should spend the additional revenue to customize and differentiate current loyalty program to attract more prospect, create and retain loyal customers. Second, Hilton can spend more money on the marketing efforts to reposition the brand, create brand passion and brand loyalty. By doing so, both Hilton and its franchisees can have benefits because:
• The loyalty program helps both Hilton and franchises build customers loyalty, lure more business customers and increase their spending.
• When customers are truly brand loyal, they will stay with the hotel chain and depend less on loyalty program to make hotel choices.
• The chain and franchisees can charge premium price because loyal customers are not price sensitive. When customers are passionate about the brand, what they want is experience and they will be willing to pay higher price to have such experience.
• Brand loyalty is long term. Brand loyal customers tend to stay longer with the chain and spend more. The loyalty program can encourage them to spend even more.
• Franchisees might not have to run their own marketing campaigns. When customers are brand loyal, they will come to any franchisees’ hotelshotels to have the experience promoted by the brand instead of considering where to come to accumulate many more points.