Hilton Hhonors Worldwide. Loyalty Wars

Table of contents

1 Table of figures

2 Introduction

3 Research question

4 Theoretical Background

5 Summary

6 Guiding questions
6.1 How can a loyalty program help the property operator and brand owner manage customer´s benefits?
6.2 Can you quantify the value of the Hhonors program to Hilton? How does the value generated by the program compare to the program´s cost?
6.3 A look at the program from the perspective of a franchisee – if the franchisee had the choice of putting the Hilton brand or one of the Starwood brands onto its property, how would they assess the value of doing so?
6.4 Diskin points out that properties pay 10% of room rates to travel agents. Image that a franchisee paid Hhonors 10 Cents per dollar instead of the 4,5 Cents. How would you recommend that Hhonors should spend the additional revenue? Would the franchisee get value from the expenditure?
6.5 Recommendations: What should Hilton do in response to Starwoods, and what did they actually do?

7 Implications/Findings: Learning objectives/Managerial implications

8 Reference list

1 Table of figures

Figure 1: Process Model of Loyalty Program Installation

Figure 2: Hilton HHonors Worldwide: 1998 Income Statement

2 Introduction

The following case “Hilton Hhonors Worldwide: Loyalty Wars” was published by the Havard Business School Professor John Deighton and Professor of Hotel Administration Stowe Shoemaker teaching at the William F. Harrah College on 8th of November 2005 (Deighton, J., 2005, p. 1). Primarily it deals with the general loyalty marketing program of the Hilton Hotels Worldwide and the competitive market situation in which they found themselves in January 1999. Marketing strategies in terms of loyalty programs are very often launched by corporations that employ a specialized team of project managers and data analysts who lead the complex program. The loyalty programs are typically driven by bigger companies due to the technical costs related to the implementation. In fact it is a very popular market for corporations in order to achieve a competitive advantage whether it is highly competitive by virtue of changing conditions in price and customer loyalty (Robinson, 2011, p. 1-2). For many large corporations like Hilton exhibits, it has there are a lot of opportunities to invest in its loyalty program for the purpose of having a broader network of partners to be able to offer a greater amount of products and services that members can select from.

The following paper exhibits the Hhonors loyalty program in which the Hilton Group tried to achieve a competitive advantage while concentrating on its “double dipping” strategy which other competitors lacked at this time. Therefore the paper starts with a brief explanation of the research question which is related to the strengths Hhonors loyalty program displays. In the following the general marketing strategy of Hilton is declared and evaluated. According to this the main guiding questions are based on the theoretical background and analysed by a service marketing approach. Subsequently the most important issues of the case are stated and summarized. Furthermore, recommendations on the loyalty program have been made. These programs can support the property operator and the brand owner to manage their customers in a better manner. Then there is a calculated comparison that exemplifies the value of the Hhonors loyalty program due to the consideration of costs. Afterwards it is also evaluated which choice a franchisee would prefer if he has the possibility to select between a Starwood and a Hilton property. Considering this there are several options for the franchisee to spend his revenue in a reasonable manner, these possible alternatives are presented and weighted on the best possible return of investment. At the end there are also some recommendations on how Hilton has to compete according to the announcement of the Starwood loyalty program which was established in 1999. Finally there is an overall statement and evaluation of the main success factors of the Hhonors loyalty program.

3 Research question

The following research question emphasizes the methods Hilton used to differentiate themselves from its competitors in 1999. At this time there were many operational aspects which Hilton had to rethink, also in terms of its Hhonors loyalty program in order to avoid a brand dilution with all the other competitors. Therefore it was important that the hotel chain needs to be aware of its own strategy just to create a benefit through a unique brand where customers can identify themselves. The research question

“How does the loyalty program of Hilton create a competitive advantage?”

refers to the arguments that are linked with the strengths of the Hhonors loyalty program. In the following analysis the new marketing strategy of Hilton is explained and evaluated in detail.

4 Theoretical Background

The highly competitive market, in which the Hilton group operates, requests a sustainable strategy to remain between the strong competitors. Due to the Hhonors loyalty program they were able to structure the customer connection on a new level.

A loyalty program tries to generate more business through loyal customers. Such relationships are more sustainable and more profitable. The goal is to find profitable customers which consume products and services, so it is necessary to develop an effective marketing campaign. Even if the customer has been motivated by benefits, in the end the success or failure of a loyalty program depends on his profitability. Very important for the understanding of the various loyalty programs is to distinguish between behavioural and attitudinal loyalty. Usually this two types should have a correlation in the minds of the customers. Behavioural loyalty mentions the actions that customers have determine to a certain product or service, while attitudinal loyalty shows an interest in customer´s perceptions and attitudes toward a particular product or service.

A typical loyalty program is divided and defined into four key objectives. Any company tries to seek all or some of this goals. First companies try to build true loyalty, like mentioned before, with behavioural and attitudinal loyalty. True loyalty emerges if real value is provided to customers and not just simple bonuses or rewards. Factors like degree of involvement in the product or service category or the visibility of product usage clarify the degree of loyalty. Furthermore the efficiency and effectiveness is a fundamental part of the success or fail in a program. Efficiency profits are the net of loyalty program cost and are measureable due to basket size, purchase frequency acceleration or price sensitivity. The loyalty program attempt to develop switching costs for the customers through the collecting of assets and be more efficient. The customer bonding due to the effectiveness of a loyalty program is a long-term process. It depends on the knowledge the company gains about customer´s data and needs. Effectiveness profits are able to achieve sustainable competitive advantage and through this high profits in the long run. The last factor value alignment attempts to bring the cost a certain customer bear in accordance with the profit he makes for the loyalty program. The differentiation in customers allows a company to define distinguish customer groups to provide more loyal customers more benefits.

An Example is the Star Alliance Frequent Flyer program with about 28 airlines where the customers can benefit from the big amount of services the group offers and from the member´s frequent flyer program the Star Alliance airline offers.

Loyalty programs can differentiate e.g. in characteristics of structure, requirements or functions. In this assignment we characterize loyalty programs along the following figure 1, which includes the design characteristics.

Figure 1: Process Model of Loyalty Program Installation.

Abbildung in dieser Leseprobe nicht enthalten

Source: Own image in the style of Prof. Dr. Schallehn by Kumar & Reinartz.

1. Reward Structure

The benefits and rewards are of different kinds. One way of expressing one´s gratitude to a loyal customer is to give incentives to make them feel valued. This reward structure could include many levels. The customer can reach a higher incentive level while consuming more. This levels could be described e.g. in rate of rewards. The rate of rewards importantly supports the enrolment and active usage of the loyalty program, but also reward redemptions are key cost factor for companies. The reward structure expresses itself also through hard (financial) and soft (emotional) rewards, The proposition support in case of firm´s own products or products completely unrelated to the company and the tiering of rewards, if the customer receives a higher amount of rewards, if he spends more money.

2. Participation Structure

In some cases the entry in a loyalty program turns out as failure, to avoid situation like this, it is necessary to fulfil the requirements. Voluntary or Automatic Enrolment and open versus closed loyalty programs are the participation requirements. In voluntary programs, consumer are free to choose if they want to join and in automatic programs every customer get accepted by the company without differentiation. In addition as the name says, open loyalty programs are available for anyone and closed one´s are conscious selected customers.

3. Partnership Structure

A loyalty program can be set up for one particular firm like a sandwich company to reflect only transactions with the customer to the one company. Another approach is the multi-firm loyalty program that includes a few companies with a broader focus like Miles & More of Lufthansa. In a multi-company loyalty program the owner is an essential factor for joining the program.

4. Extra service

Besides the mentioned points, a loyalty program knows how to increase the customer statistics and the redemption costs in the way to provide a payment method via credit card. The cards are loyalty cards and credit cards at the same time. An extra service is also the gamification, how companies attempt to endow loyalty cards with a gaming function. The success of a project is testable due to key facts. It is necessary to test from the consumer perspective. Are the rewards attainable and relevant from the firm´s perspective? Is the loyalty program design in aligning with desired goals? This are points that are relevant, because the customer needs to get sufficient value. Furthermore the loyalty program is designed to profit the company. The firm should be able to collect as much information about the customer as possible

Customer, firm and market characteristics are the three main points in the loyalty program design. The skewness of the customer’s value distribution is mainly appropriate to the customer characteristics to achieve value alignment in an environment where customers exhibit high value heterogeneity. The hotel industry is a good example for heterogeneity, while financial services widely vary..

From the view of firm characteristics, perishability of a product and breadth and depth of the firm offering the product at the store are relevant. The loyalty program depends on the product a firm sells and if it is perishable, therefore it is very popular in the hospitality industry. The figure 1 shows how the design characteristics influences the effectiveness of the loyalty program and to achieve competitive advantage. (Kumar, 2012, p. 183-201)

5 Summary

The following Case “Hilton Hhonors Worldwide: Loyalty Wars” was published by the Havard Business School Professor John Deighton and Professor Stowe Shoemaker of the William F. Harrah College of Hotel Administration on 8th November 2005. Primarily it deals with the general loyalty marketing program of the Hilton Hotels Worldwide and the market and competitive situation in which Hilton Hotels operated in January 1999. Jeff Diskin, who is the Senior Vice President of global customer marketing at Hilton Hotels & Resorts, lead the Hilton Hhonors guest reward program at this time. The starting point of the Hilton Hhonors loyalty program was the reunification of the two legally independent working Hilton Hotels Corporation (HHC) and the Hilton International (HIC) in 1997. The main idea of the Hilton Hhonors loyalty program was to create customer loyalty through a membership at Hilton Hotels that enabled customers to obtain special services or products according to their membership tier. There are generally four types of membership tiers that are divided into different VIP status categories containing a blue, silver, gold and diamond membership. Customers with more frequent stays than ordinary customers are getting rewarded for their loyalty in terms of better conditions like an upgrade to the best available room in the hotel after every fifth stay or a free stay in one of the participating hotels of Hilton. Business, leisure and convention segment´s distinguish the customer base, where the business traveller market is one-third of Hilton’s overall guests. The reward program operates with a point system that allows members to accumulate point on their Hilton Hhonors account. In exchange they can redeem these points either by a partner airline of Hilton Hotels in order to collect miles or in one of the hotels of the Hilton hotel chain. This possibility to earn points from two different services for the same stay is called “Double Dipping” and is a reward program that Hilton´s competitors lack. Hilton expanded its loyalty program using its partner network to car rental companies or to FTD Florists and Mrs. Field´s Cookies that were also involved in the reward program and were given cash by the Hilton Hhonors Worldwide. Besides the other partners, the Hhonors program had great influences to win Hilton franchisees or give Hilton a management contract to run their property. Also, they focussed on travel managers to gain compliance with third companies. In general the Hilton Hhonors system has been highly successful for the hotel chain in regard to a total spending of $ 4,6 billion of Hhonors members per year. This is why Hilton deployed yield managers for every property in order to enhance and to improve the information process which helped them to determine the individual booking preferences of the customers. Thanks to this knowledge the yield managers were able to estimate which accommodation would suit best for the customer according to their reservation and buying behaviour and to offer recommendations based on the algorithms results of the data models. From 1997 to 1998 there was an overall increase of member utilization of Hilton hotels which have been involved in the Hhonors reward program but nevertheless there has been a high fluctuation of more than a half of Hhonors members due to a comparatively smaller size of network.

Regarding the business-class hotel market the main competitors of Hilton Hotels were three major hotel chains including Mariott International, Starwood Hotels and Resorts and Hyatt Hotels. All of them were competing in several price segments based on the fact that each chain had several hotel brands focusing different pricing strategies. In reaction to the Hilton Hhonors loyalty program, one of the main competitors of Hilton, Starwood Hotels and Resorts, launched its own loyalty program, called Starwood Preferred Guest Program, in February 1999. The hotel chain announced to invest $ 50 million for their promotion campaign which led to a totally new level of expenditures for a customer loyalty program that set the competition under pressure. New features, like no blackout dates and no capacity control should help Starwood to gain new loyal customers. At this point Diskin uttered his concerns about raising the costs and was considering if it is sensible to follow Starwood´s strategy and to compete in a price sensitive market or if Hilton should rethink its loyalty program and try to differentiate it from the competition.

6 Guiding questions

6.1 How can a loyalty program help the property operator and brand owner manage customer´s benefits?

Property operator and brand owner benefit from the standardization and centralization processes to manage the customer´s experience. It is difficult to align the whole hotel chain, with franchisees all over the world with different managements and different requirements. The difficulties can be supervised by focusing on customer and to offer a very specific product. Due to the marketing plan the brand manager attempt to calculate the costs of marketing and services, because actual expectations of the customer that could vary on preferences and needs. On the one hand, a service over performance lead to a satisfied customer up to a certain point and after this point the costs increase significantly without any performance. On the other hand, a service underperformance lead to an unsatisfied customer and increase of costs for customer´s fluctuation. The brand owner is able to manage the capabilities in a more efficient way, due to distribute the company´s expenses in terms of marketing and services. The Hhonors loyalty program is designed to achieve value alignment and the property owner can easy exhibit customers’ needs in a high value heterogeneity.

Another assistance for the property operator is the analysis of the customer´s behaviour, regarding the satisfaction and dissatisfaction, expenses and preferences. The received information enable a very new approach to prepare the next visit of the customer to satisfy him even more. Furthermore the reward program is increasing the causes for that the customer to join the hotel chain again.

Hence the brand manager is able to understand which customer is more loyal to the other customer, because of he know his needs to satisfy him and retain. Regarding to the participation structure above, the loyalty manager is able to choose the customer for the reputation of the hotel and the efficiency in a closed loyalty program

6.2 Can you quantify the value of the Hhonors program to Hilton? How does the value generated by the program compare to the program´s cost?

The value of the loyalty program increased by many factors. Due to many partnerships with franchisees the overall costs of the program kept low in comparison with the value of the related marketing. Every franchisee has to participate the program and benefits much more. The ability to analyse customer’s data is one of the biggest opportunities of the program, because Hilton knows the personal data and also the likes of the customer. Through this, the marketing strategy can be optimized for each customer. This also leads to building long term relationships with the customer and loyalty which is the biggest value of the program. The program already achieved a net income by $339,000 in 1998. Hereinafter we show the capacity calculation from 1998.

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