Hilton Hhonors Worlwide

Abstract / Problem Recognition:

Hilton group of hotels is facing a serious threat from the Starwood Hotels and Resorts because of
their newly launched program – “Frequent Guest Program”. This particular launch along with a $50
million promotion budget has taken Jeff Diskin, Hilton Hhonor’s head, by surprise. Some of the key
questions at hand:

- What should Diskin do: Should he diversify Hilton’s program or use the wait and watch
policy
- Are the programs strengths and weaknesses in sync with Hilton Group’s policy
- Is the budget allocation viable
- How to anticipate the market movement after this announcement

Company Background:

The company was started by Mr. Conrad Hilton in year 1919. In 1954 he went on to buy Statler Hotel
which was one of the largest real estate property at that point in time. This was followed by an IPO
in 1964 and the listing of the company on the NYSE ticker. 1984 market the opening of Embassy
suites in Kansas state and Hampton Inns in Memphis. In the year 2005 HHC reacquires Hilton
International.

Hilton Hotels form one of the major competitive brand in the US hotel industry, having a market
share of around 6.2 Percent in terms of number of properties (Exhibit 1). Also Hilton caters to the
upper segment of the society, going as far as Mid-market without Food and Beverages. The prices it
charged to its customers varied from $45 - $125 depending on the type of apartment they book.

For Hilton Hhonors, all the revenues were based out of loyalty points. They acted as an intermediary,
a revenue manager, designing and designing strategy for upscaling the current market share. Exhibit
4 mentions the average revenue to be $158 per room per night amounting to a $399000 amount
which is a very decent figure.

The Loyalty bonus transference cycle:

A franchisee Hotel HHC and HI

Franchisee Fee

Patronage Volume
Discount

Compliance
Guest Employer
Options at hand for Diskin:

1. Work in tandem with the industry and match the spendings of Starwood
2. Wait and let Hyatt and Marriott take the first steps
3. Withdraw ourselves from the Loyalty program

Types of Customers:

1. Business : two third component negotiated whilst remaining had the free will to choose
between the options
2. Convention: Meeting and Conference room bookings
3. Leisure: Extremely price sensitive people. Main criteria is to look at the package quality

Mapping of competitors and industry:

Analysis:

Question 1: Would the addition of the new loyalty program add to the profits of the Hilton brand or
would everything fall back to being a market laggard??

Answer: Loyalty Programs are a means to value a customer and start a new and productive
relationship with a customer. With company of the size of Hilton, if the Program succeeds it will only
exponentially improve company revenues. From Table B we can see that Hilton Hotel has a major
chunk of the Blue Tier members, however the Silver Tier group accounted for the highest number of
reward nights claimed which gives a sign that the customers in this category are loyal towards the
brand or its promotions.

From Page 5 and 6, if we do the profit pool analysis:

 Total nights pent at Hilton Hotels: 7015000 + 180000 + 712000 = 7907000

  22.5% of x = 7907000 , this implies that total nights sold in 1998 were: x = 39535000
 With full occupancy, they could have sold ~ (91060+62941)*365 = 56210000
 Current Occupancy Rates: 39535000 / 56210000 = 70.33%
 So Hilton group is running just ahead of its break even occupancy rate of 68%
 Total revenue generated: 1108 + 327 = $1435 million
 Revenue earned per unit of nigh stay = $ 37.23
 Without the loyalty program, the occupancy rates would have been: 66% (reduction of 4
percent from 70%). This is being accounted to the fact that “ one in five stays were
attributed to the program” and each such event brought in a revenue of 20%.
 Since the Hhonors paid prices above the incremental cost to the company when left vacant
and below the highest general ask price, there is a high chance that anything below 72%
would break even.
 Hence we see clear profits in utilising the loyalty program

Benefit to the Consumers/ Other Dealers and franchisees:

Taking the base scenario in which each customer is liable to get a free night on every fifth stay :

 Incremental rooms sold out due to the program : 1.4 million (table B)
 Accumulated Profits: 1420000*0.8*158 = 179488000
 Cost incurred to the franchisees for getting such a customer= 4.5 cents a dollar:
0.045*7015000*158 = $49900000
 Net gain = 179488000-49900000 = $129,588,000
 Thus even during blackout days, when the rooms are difficult to allocate at lower prices, its
much more sensible to give away the rooms at nominal prices and upholding the terms of
the program.

Benefit for the customers:

This new schema of promotions presents a very lucrative option for the customers since they have
multi-fold parapets opened in front of them:

 They have access to company sponsored freebies like gifts and free nights
 They have the option to club the reward points with the air travel
 They maintain loyalty with about 3.5 programs at one particular point in time thereby
increasing their chances of getting the best offer
 The points also represent tax free benefits

Four main features of the Starwood Plan:

No blackout Hotel No capacity Paperless

days reimbursement Control Rewards
Conclusion:

 The loyalty program to induce greater customer experience can be leveraged to increase the
customer base of Hilton which is running at a low of 154000 rooms
 The frequent customer program is able to increase the revenue by a big margin of $158 per
night per room and hence is a great option to seek for
 However, the Hilton group of hotels is currently improving its margin over the years and
does not see any mammoth issues with the current policy of promotions. This facet would
keep Hilton group from following the four new leads that the starwood company has given
 Lastly, these reforms would require IT infrastructure which have not been accounted for in
the costs and hence will certainly hamper the company’s short term revenues and brand
image.