Hilton Hotels Corp and Hilton International are both unrelated entities that controlled
Hilton brand. Hilton Hotels Corp market consisted of three types of guests, the
business traveler, and the convention and leisure segments. In 1997, HHC and HIC
agreed to merge, cooperating on sales, marketing, standardizing operations,
formulating the Hilton HHonors loyalty program. Hilton HHonors loyalty program
consisted of four tiers of membership: blue, silver, gold and diamond. Hilton's guest
reward program was open to anyone free of charge and allowed members to earn
points for free nights, buy products, services from partner companies or convert
points into miles in airline frequent-flyer programs. HHW also allowed their loyalty
members to double dip, which meant members could use points for airline miles. This
was profitable to both Hilton and the 25-partnered airlines because they were not
competing for customers and it allowed members to earn joint currencies. Tiered
members' level could increase dependent upon the number of times or nights they
stayed at a HHonors Hotel. At the time of the formulation of the HHonors program,
Hilton's competitive advantage was its name recognition.
In 1999 Starwood Hotels & Resorts Worldwide, introduced its Starwood
Preferred Guest Program, which covered 550 properties. The features of Starwood's
Program, which was in competition with HHW was there were no blackout dates, no
capacity control, paperless rewards, and hotel reimbursement. Starwood Hotels &
Resorts Worldwide was also pledging 50 million to advertise its newly formulated
rewards program. Starwood at point ran hotels under the Hilton brand as a Hilton
franchisee and was able to obtain information about a competitors' operating
procedure. Starwood was now "targeting the most lucrative part of the business, the
individual business traveler.
The question posed to HHW is do they have to compete with their
competitors. The quandary HHW has, is do they continue to differentiate themselves
from their competitors. Yet continue to retain their loyal customers while improving
the reward programs to newly acquired Sheraton and Westin chains.
Background and Timeline
Hilton is a well-recognized brand name. The hotels were controlled by HHC (Hilton
Hotels Corporation) and HIC (California and Hilton International) which was unified to
Hilton worldwide in 1997. Many of the Hilton properties are franchised to independent
operators and companies. Hampton Inn is virtually 100% franchised.
Jeff Diskin, Head of Hilton HHonors guest rewards program expressed his concerns
about the aggressive frequent guest reward program introduced by Starwood. Some
of his concerns were:
Reducing cost effectiveness of the marketing tool
o Loyalty programs are as cost effective as our competitors let them be
They are deficit spending against their program
Defining Customers: Hilton has 3 segments of customers
One-Thirds of overall Hilton guests are business travelers, two-thirds are business to
business and one-thirds are individual travelers.
How can a loyalty program help the property owner and brand owner better manager
Answer: A differentiated loyalty program will attract and retain customers from other
programs on the market. Loyalty Programs increase the likelihood property owners
will want to become franchisee of Hilton or have a management contract with them.
This was due to smaller hotels being more dependent on the "road warrior" business
traveler; it was beneficial to have this type of frequent guest as members.
Loyalty programs allow for the collection of data on its customers i.e. times of
year they frequent hotels, locations, length of stay, usage of accrued points. The
collection of data allows brand managers to market to customers based on their
patterns. Members also receive direct mail regarding services such as vacation
ownership and going to casinos. Through the sharing of data of member data it
increases collaborative relationships. With Hilton HHonors Program having
collaborating with rental car services, airlines, FTD Florists, Mrs. Field Cookies.
Increased ability by brand managers to market HHW partnered products to
customers. Along with a customer's ability to draw on accrued points to purchase
different products, increases the possibility a member will spend, through up selling
past accrued points.
Members within the loyalty program have an increased relationship the
properties they frequent. Due to the ability to contact customer service where there
are problems. In addition, these members have a have the most experience with
Hilton because of their frequency of visits. HHW enquires about these members'
opinions, further fostering the relationship with HHW. The ability to track frequent
members' preferences provides members with a customized experience without
having to ask.
Loyalty programs also increased the historical data on a member, increasing
the knowledge of members booking patterns and thus increasing revenue. The data
HHW collected along with the model utilized would be better able to estimate which
member which customer would get the room. "The person paying $20 more for that
you may never see again, or the guy spending thousands of dollars in the system."
Obtaining customer data also allowed property owners and brand managers
determine price points and the member that would walk away and the cost of turning
a customer away. Through simulation studies that was guided through a "good yield
management model a company's revenue increased by 20%"
Quantify the value of the HHonors program to Hilton. Compute its cost to the
incremental income generated.
What is value? Value is nothing but perceived benefit
Perceived Benefit = Revenue – Costs
Non-Financial Value – HHonors program provided the following non-financial value:
Ability to analyze customer data
Improvement aids like - Interaction and feedback
Long term customer relationships and loyalties
Ability to calculate Customer Lifetime Value (CLV)
Hilton runs above breakeven point at 68% occupancy which means that Hilton
already passes the zero-profit point and makes profits. Therefore, revenue at
higher occupancy levels will generate profits for Hilton.
X 365 nights
= $ 60,039.2
X 2.4 nights
Minus 180,000 claimed
= 8,543,800 nights
= $1,435 million
Number of nights actually paid by members
Total revenues from members
Percentage of nights by members over nights at breakeven
Percentage of nights by members over revenue at breakeven
Compare revenue generated by the program with revenue at breakeven
Program increases revenue by 23.76% which is greater than 20%
Cost of HHonors
Revenue from HHonors
As the value is $1,435 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
Also, as per the income statement below, most of the HHonors higher expenses are
o Since administration costs are not flexible and we don’t know exactly
how their administration structure works, we can assume that they are
necessary costs and cannot be analyzed for decrease.
Airline miles purchase
o Since this is the total cost for a service that a program decided to
provide, it is flexible for adjustments. The program cost should
decrease the expenses for airline miles purchases in order to balance it
with the number of targeted customer.
There are 4 major categories of the HHonors reward program
o Ignore these since they have lowest impact on the profit because they
are few in number.
o They have high rate for claimed rewards but less spending on points
Considering the Blue, Silver and Gold member, they are a total of 2.626 (1998), but
we know that of this total customer, just a percentage is completely loyal to Hilton.
Hilton should aim to retain these. The program cost should decrease the expenses for
airline miles purchases in order to balance it with the number of targeted customer.
In this way, the HHonor expenses should remain lower to the costs, prospecting in
the short-term an increase in customer’s loyalty. This will be shown in the customer
stays and in stays that they paid, as well as the spending per earned point.
Hilton’s share of the wallet is 24% and if the retention model of the program will work
well, Hilton could gain value, increasing revenues up to 20%. Also, if this strategy will
work for chain size of Hilton, then it’s even better for a larger chain.
Therefore, it is worth to continue the program.
What should Hilton do in response to Starwood?
Answer: After Starwood Hotels and Resorts Worldwide, Inc. announced plans to
change its loyalty program in 1999, Hilton HHonors World wide’s leader had an
important decision to make. The most effective way to combat Starwood would be to
impress existing HHonors members by improving upon the rewards already being
offered to them which would solidify their loyalty to Hilton. Instead of simply
matching the competitor’s program incentive by incentive, we explain why this
strategy would be the most effective route to take.
While the Starwood program offers many attractive benefits, Hilton HHonors does not
have to match the effective price war that has been initiated in order to remain
competitive. Doing so would result in large cost increases and additional processes to
manage. Their LLC is relatively small and the current program is not only successful,
but quite manageable.
The leaders want to be innovative, not imitative with their rewards program. When
we look at the various aspect of Starwood’s revised program, we can compare
advantages and disadvantages of each. The four main components of the Starwood
program include: No blackout dates, no capacity control, paperless rewards, and
When comparing the first program incentive, blackout dates, sand several
advantages can be gained by the hotel companies. If there are dates that are more
desirable for travel, the hotel program simply does not allow frequent guests to use
their points on those dates. This ensures there are enough hotel rooms available for
guest who will pay the full room rate during those highly desirable travel times.
Blackout dates generate revenues for hotels by allowing only new profits to be made,
rather than giving the same room to a loyalty member, essentially for free. The
disadvantages of blackout dates are not merely opposite of the advantages. The
main disadvantage of providing blackout dates is the revenue stream.
Providing “no blackout dates” to the top tier HHonors members would strengthen
their current relationships with those customers. Diamond members are the top 1%
of customers and could be rewarded with this unexpected incentive. Since their
model with blackout dates for other members is already profitable, the need to focus
on this particular market segment is of great importance. Starwood’s plans for no
blackout dates includes all of their loyalty program members. Hilton could minimize
costs if they offered this as an added incentive to their Diamond members only.
Starwood’s second change to their program includes capacity control. Hotels are
allowed to make available only limited amounts of rooms for frequent guests. This
would be an advantage since the hotel could limit the number of free rooms offered
so they could meet their break-even point for revenues each night. The disadvantage
of no capacity control is that a hotel may have more customers redeeming points for
free rooms than customers who are paying with new revenues for that hotel.
HHonors diamond members could benefit from this no capacity control edict. As the
very best clients to Hilton, they would be allowed to reserve rooms at any hotel that
had available rooms. This would be viewed as a reward by the customers and would
strengthen the brand loyalty.
With regard to paperless rewards, the third upgrade to Starwood’s program, there are
no disadvantages. Using points to book hotel rooms directly cuts costs by eliminating
the paper certificate. Even electronically, a certificate is another step in the
redemption process. By streamlining the process, there is less to manage.
HHonors does not use certificates.
The last upgrade to Starwood’s program describes hotel reimbursement. They would
pay a higher reimbursement rate to hotels with desirable locations to offset the ratio
of points paying members to other guests. The thought process is that more
members would want to redeem points at a vacation hotel rather than a convention
HHonors would not have to change their methods of reimbursement to hotels if only
1% of its members were allowed to stay anywhere on any dates. Those limited
amounts of customers should not affect the overall cost structure of daily operations
at vacation resorts.
These four upgrades to Starwood’s loyalty program were basically used to build
brand recognition for their newly acquired chains. Hilton does not have the same
problem so matching the program incentive by incentive would not be necessary. To
maintain its profitability and to continue with innovative ideas, Hilton HHonors
Worldwide must look to improve upon its already existing program to maintain
member loyalty and to increase the amount of top tier customers.
Since Hilton is comprised of three distinct segments of customers, it is important to
highlight the differences and make decisions based on those differences. The
business segment included travelers that would stay in hotels based on negotiated
rates done corporately. The convention segment is the second portion of customers
which included primarily those who stayed at a particular hotel based on where the
conference organizer would arrange ahead of time. The last segment, leisure, made
up the final third of Hilton’s business. These customers were price-conscious and
mostly made their hotel decisions based on the vacation packages that were most
cost effective and relevant to their needs. The key is to target the decision makers
from each of these segments to ensure that Hilton is their top choice for hotels.
Considering that most loyalty program members could also be members of their
competitors, it is important for Hilton to address the move that Starwood has made
with its announcement. As mentioned already, the Diamond members should get the
benefits of blackout dates and no capacity control. But how can Hilton communicate
effectively to its customer base in response to Starwood’s announcement if it is not
going to match the program “dollar-for-dollar”? HHonors should target the three
distinct customer segments to retain those customers. Diamond membership should
be the goal for customers as well as for Hilton.
Hilton HHonors Worldwide should communicate with its current loyalty members to
explain its program benefits. The three levels of Blue, Silver, Gold, and Diamond
should be differentiated and celebrated. The diamond status which had not been
mentioned in any promotional materials before must be highlighted. Promotional
materials must be updated to include this level to give customers something to strive
for. Explaining the various rewards for achieving the ultimate status will continue to
make customers engaged in the program and wanting to earn those rewards.
Embracing technology and using apps along with the website to communicate with
consumers is the best way to proceed. It should be easy for customers to become
members and to find out information about their accounts and what they need to do
to earn a higher rewards status with the company. If customers can earn points faster
than with any other hotel rewards program, then that should be prominently
mentioned in their advertising. All of the rewards that make the program more
differentiated in the market need to be presented. This will ensure not only customer
loyalty to the HHonors program, but will even help build new relationships with
customers who are not currently part of the program. When new customers and
current members learn about all of the advantages of the program, they can easily
compare the rewards with those of their competitors. By offering rewards that are
unique and at a quicker pace, the better company will prevail.