i

Table of Contents

1.0 Overview………………………………………………………………………………….1

2.0 Analysis…………………………………………………………………………………...2

2.1 Question 1…………………………………………………………………………2

2.1.1 Question 1 (a)…………………………………………………………....2

2.1.2 Question 1 (b)……………………………………………………………5

2.1.3 Question 1 (c)……………………………………………………………6

2.1.4 Question 1 (d)……………………………………………………………8

2.2 Question 2………………………………………………………………………….9

2.3 Question 3………………………………………………………………………...10

3.0 Conclusion……………………………………………………………………………….12

4.0 References………………………………………………………………………………..13

2

1.0 Overview

Hilton HHonors refers to Hilton’s guest reward program which aims to build loyalty to the

Hilton brand worldwide. Head of Hilton HHonors, Jeff Diskin, stated that loyalty marketing

programs are the lodging industry’s most important marketing tool. However, concern arises

when Starwood Hotels and Resorts Worldwide Inc. decided to introduce an aggressive

frequent-guest program, known as the Starwood Preferred Guest Program. Coupled with a 50

million advertising budget, the program increases the stakes for the loyalty-program

competition between four large global brands, namely Marriott, Hyatt, Hilton, and Starwood

itself. The key features of Starwood’s new program include no blackout dates, no capacity

control, paperless rewards, and hotel reimbursement – all of which are reducing the cost-

effectiveness of the other brands’ loyalty programs. The case looks into how Diskin should

respond to Starwood’s loyalty program.

3

2.0 Analysis

2.1 Question 1

2.1.1 Question 1 (a)

From the standpoint of Hilton Hotels Corp. and Hilton International, one of the strengths of the

Hilton HHonors program is the ability to manage relationship with customers. With the use of

a systematic customer relationship management system, the program ensures that the

company’s profitable customers are recognized and valued at all times. The company is able

to develop connections with customers at a more personal level, which indirectly, provides

Hilton with the means to retain loyal customers.

The customer service team makes certain that members are comfortable with their stay

in any of the hotels under the Hilton brand. Guests could even contact the team to inform them

about any problem with the service. More often than these, outbound after-visit calls are made

to these guests to gauge their feedback and experience regarding their stay at the hotel. The

fact that Hilton values the opinion of its Hilton HHonors members has led to the formation of

a large group of evangelists who care about the brand.

The Hilton HHonors Worldwide (HHW) makes the effort to customize the experience

of Hilton HHonors members according to each of their preferences. According to Diskin, the

company has built guest profiles in order to keep track of their preferences and special requests.

For example, a guest may always want a room that has a double bed. With this information

stored in the system, Hilton will be able to provide this room to that particular guest, before it

is even requested.

Another strength of the program is that it provides HHW with the opportunity to

collaborate with partners and franchisees. As of now, HHW has partnered with 25 airlines,

three car rental firms, and a few other firms. This allows the company to access the customer

base of partners and potentially expand the segment of customers served. Apart from that, it is

easier for members to acquire rewards, since Hilton offers double dipping – whereby joint

customers would be able to earn both currencies. For instance, the customer could earn both

membership points and airline miles for the same stay.

In addition, Hilton would be able to work with franchisees through the Hilton HHonors

program. This particular program has been successful in persuading hotel owners to become a

Hilton franchisee, or allow Hilton to control its property. As such, Hilton will be able to target

4

a different group of customers. Besides, the HHW program is less costly compared to other

hotel brands in the market, which makes it even more appealing to hotel owners. The fact that

franchisees would be able to use Hilton’s well-known brand to their advantage further induced

these collaborations.

The third strength in relation to the loyalty program is a more precise revenue and yield

management. This form of management basically involves overseeing day-to-day decisions

that impacts hotel revenue. Specific algorithms or models aid revenue managers set

reservations policy for guests. By storing information about Hilton HHonors members in the

system, the manager would be able to observe each member’s booking patterns, and determine

the price to offer for each guest. As stated in the case, a good yield management model could

potentially increase the company’s revenue by 20 percent.

Through related models, HHW is able to push sales to customers who tend to spend

more and stay longer in Hilton hotels. Only with a loyalty program like the Hilton HHonors

would the company be able to make distinctions between customers. The historical information

of each member provides HHW with the means to effectively utilize variable pricing, which

means charging a room based factors such as, size, day of booking, length of stay, and customer

characteristics.

The fourth strength of the Hilton HHonors program is its ability to generate greater

volume of sales. With various membership perks, business travellers are will likely be attracted

to the program. The fact that the program offers several tiers of membership, namely Blue,

Silver, Gold, and Diamond would not only pull the business segment, consisting of customers

who travel frequently, but also those who are less frequent travellers, categorized under the

leisure segment.

The double dipping feature offered by the program would undoubtedly attract more

members, and encourage brand switching. This is especially true since Hilton is the only hotel

chain to offer double dipping to its members, whereby guest could earn mileage in partner

airline frequent-flyer programs and HHonors points at the same time. Hilton HHonors members

also have the privilege to exchange hotel points for airline miles, and vice versa, which is an

extremely attractive feature for a loyalty program. With increased sales, revenue, and

customers switching to the HHW’s program, Hilton will ultimately be able to build brand

loyalty, which is vital in the lodging industry.

5

When it comes to weaknesses, one of Hilton’s greatest weakness is its low share of

wallet. According to Magi (2003), share of wallet refers to the share of a customer’s business

that is acquired by a particular company competing in a specific category. In simpler terms, in

refers to the amount that customers spend on the Hilton brand as compared to other brands in

the same industry. Hilton’s share of wallet could be calculated by dividing the amount that

Hilton HHonors members spend at the Hilton with the total amount that Hilton HHonors

members spend in the industry. According to a similar case analysis carried out by Lieu,

Cheong, Chan, and Camilleri (2012), Hilton’s wallet share is 24.1 percent, which is

considerably low.

Loyalty programs are created to encourage brand switching, which allows the company

to increase its share of wallet. However, with Hilton’s limited size and distribution, with only

a total of 154,001 rooms available in its operating countries, it is difficult for Hilton members

to remain loyal. Other hotel brands, like Starwood for example, have more rooms (212,950

rooms) available for guests in over 72 countries all over the world. Even if Starwood does not

provide as good of a service as Hilton, they could still acquire greater share of wallet due to

higher geographical coverage, which allows Starwood to attract a higher volume of travellers.

This indicates limited network size and distribution is another weakness of the Hilton HHonors

program from the standpoint of Hilton itself.

Another weakness is its low standardization of operations. Although HHW operates

and monitors the Hilton HHonors program, there is no denying that there is less standardization

of operations in hotel chains, simply because the lodging industry is related to delivering the

perfect customer experience, which varies from one person to another. As such, different hotels

under the same brand may utilize different methods of control to reach their goals. For example,

as stated in the case, a branded hotel might be owned and managed by the chain, or it could be

owned by the chain but managed by the franchisee. Thus, different managements, although

both under supervision of the HHW, would likely result in different operations.

2.1.2 Question 1 (b)

There are a number of strengths of the Hilton HHonors program from the standpoint of member

properties, or franchised hotels. For one, running the Hilton HHonors program would enable

them to increase their reputation in the industry. The company could leverage off of Hilton’s

successful and well-known name. This is extremely beneficial as people are more likely to stay

at hotels with credible collaborations and loyalty programs, especially for business travellers.

6

Besides that, franchised hotels would be able to increase sales volume significantly by

implementing HHW’s program. As mentioned earlier, the hotel will attract more customers if

it has an established brand. With the Hilton’s name, franchisees indirectly increase their

visibility in the market, which then increases their appeal to the target market segment. When

this happens, these franchised hotels will be able to pull in more customers yearly, ergo leading

to greater profit and revenue.

Apart from that, franchisees would be able to acquire support from Hilton by

implementing the HHonors program in their hotels. As with other franchises, the franchisor

would normally provide support to the franchisee in terms of employee training, management,

operations and financial needs. For example, costs would be shared between the two parties,

as long the franchisee runs the HHonors program in their hotels.

In addition, member properties would have access to new markets. Hilton is associated

with affluent consumers, since it targets the luxury to mid-market segments. By implementing

the Hilton HHonors program, these franchised hotels will be able to expand their consumer

segments and target ones which were once out of their reach. For example, hotels that once

only targeted the budget or middle class segments, would be able to expand to luxury market

segments through the Hilton’s loyalty program.

On the other hand, there are several weaknesses of the implementing the Hilton

HHonors program from the perspective of Hilton’s member properties. Firstly, there would be

loss of control. While most of the operations and managerial activities will be handled by the

franchisee, there would be certain restrictions imposed by HHW. Moreover, carrying out the

loyalty program would come with specific standards set by Hilton.

Furthermore, franchisees would experience an increase in costs, which are associated

with managing the loyalty program. For instance, the company may have to hire more

employees to handle extended operations, and provide training to existing employees.

Franchisees would also have to pay royalty fees, which are on-going payments to the Hilton,

in order to run the HHonors program in their premises.

2.1.3 Question 1 (c)

From the standpoint of guests, there are several strengths of the Hilton HHonors program. For

one, guests could earn more rewards by being members of the loyalty program. Every time a

Hilton HHonors member stays at any Hilton hotel, the guest will be able to acquire points,

7

which could later be used to pay for stays. Take for instance the example given in the case -

customers could use 5,000 points to get 50 percent off the $128 weekend cost at the Hilton

Albuquerque, or even redeem up to 25,000 points for a free night at the Hilton Boston Back

Bay, which would normally cost $239 per night. The more customers stay at Hilton hotels, the

more points they could acquire, which consequently means, better service value.

Another strength of the loyalty program is that each member would receive

personalized experience. The fact that the program involves storing guest profiles into the

system enables Hilton to keep track of customer preferences. As such, HHonors members

would be provided customized services during their stay at the Hilton. For instance, if a

member makes a reservation at any Hilton hotel, the staff would provide him or her with a

personalized service based on prior requests during their stays, without even having to ask.

Besides that, prioritization of HHonors members is also one of the program’s strength

in the eyes of Hilton guests. Aside from free stays, members have a priority-reservation

telephone number. Members are often prioritized over non-members when it comes to late

checkouts as well. Moreover, Hilton makes it a necessity to ensure that each of its HHonors

members are satisfied with their stay. If they do feel dissatisfied, they would be given a room

upgrade, which further proves how members are given the priority.

Another strength of the Hilton HHonors program is the fact that it offers double dipping,

which is a practice whereby members could “earn mileage in partner airline frequent-flyer

programs for the same stay that earned them HHonors points,” as stated in the case. This is a

unique feature of Hilton’s loyalty program as other hotel chains would require guests to choose

between hotel points or airline mileage. Because of this, members could redeem stays at Hilton

hotels by using airline miles, or use hotel points earned to purchase products and services from

Hilton’s partner companies.

However, one of the weakness of this particular program from the standpoint of guests

is the fact that Hilton HHonor hotels have blackout dates. This indicates that members will not

be able to redeem points for free stays or free travels when seasonal demands are high. For

example, this might mean not being able to redeem their points for free stays during Christmas

seasons, or school breaks. In other words, their point redemption period is not applicable

throughout the year.

Apart from that, there is limited access of rooms at Hilton hotels. Because of this, hotel

properties have to limit the number of rooms that can be offered to guests who intend to redeem

8

their points for free stays. This is especially true for peak seasons when demands for hotel

rooms are high. When this happens, HHonors members are not provided with the assurance

that they will be guaranteed free stays any time of the year.

2.1.4 Question 1 (d)

From the perspective of corporate departments, there are several strengths of the Hilton

HHonors program. Firstly, corporations will be able to reduce costs by forming contracts with

Hilton through the loyalty program. This is because corporate travel departments, or basically,

the company itself would be offered discounted rates, provided that they deliver the number of

stays promised. This is a benefit to corporations with employees who frequently travel for

business.

Secondly, HHW’s loyalty program enables travel managers at corporate travel

departments to gain compliance. This is achieved by ensuring that employees comply with the

corporate travel policy. For example, travel managers would inform employees that in order to

be eligible for reimbursement, the employee would have to stay at Hilton hotels, the preferred

vendor. For employees who are loyal to other hotel brands, Hilton provides a myriad of

offerings as an incentive for employees to stay at the Hilton, ergo providing travel managers

with the means to gain compliance with their travel policy.

However, there are also a number of weaknesses of the Hilton HHonors program from

the standpoint of corporate travel departments. One of them is in terms of Hilton’s limited

capacity and accessibility, which is related to its network size and distribution. Hotels that

implement the HHonors program are not widely available all over the world, as compared to

other global brands. In fact, these hotels could only be found in 61 countries. This is less than

Starwood’s accessibility in 72 countries, and far less than Bass Hotels and Resorts’ 90

countries. As such, there may be times when employees will not be able to utilize the loyalty

program simply because there are no Hilton HHonors hotel in the country they travel to.

Apart from that, HHW only offers discounted rates if the corporation delivered enough

stays. The problem lies in the fact that not all employees of the corporation will want to stay at

the Hilton. This is especially true for employees who are already loyal to other hotel brands.

This makes it harder for corporations to achieve its quota on volume of stays. In the event that

the number of stays promised is not delivered, the company would most likely not be entitled

to receive the discounted rate, thus would have to pay full price for their employees’ stays at

the Hilton.

9

2.2 Question 2

In this case, value basically refers to perceived benefit, which is obtained by deducting cost

from revenue. Hilton estimates that it earns a revenue of $158 per night for each guest. Since

its occupancy often exceeds the breakeven point, which is the point at which cost and income

are equal (“Breakeven,” n.d.), the company is consistently able to acquire profits. It is

mentioned in the case that the fixed costs associated with the HHW is covered at 68 percent

occupancy. This means that occupancies higher than 68 percent would lead to profit.

The breakeven point for the HHW program is 38,223,049 nights (68% ×154,001 rooms

×365 nights) or a revenue of approximately $6,039,241,742 (38,223,049 nights × $158 revenue

per room). The number of nights paid by members is 8,543,800 nights [7,015,000 nights +

(712,000 stays × 2.4 nights) – 180,000 claimed nights). The total revenue from members is

$1,435 million ($1,108,000,000 + $327,000,000). The percentage of nights paid by members

over nights at breakeven is 22.4 percent (8,543,800/38,223,049), while the percentage of

revenues acquired from members over revenues at breakeven is 23.8 percent

(1,435,000,000/6,039,241,742). This means that incomparing the percentage of revenues

contributed by members over revenues at breakeven, the Hilton HHonors program is capable

of increasing revenues by 23.8 percent. Since the Hilton is already operating above its

breakeven point, it could be said that the 23.8 percent is profit generated from the loyalty

program.

Other non-financial value related to the Hilton HHonors program is in terms of its high-

quality service towards customers, especially members. The personalized experience provided

to each of its members has allowed the company to gain a large number of loyalists and even

evangelists. These people are not only loyal to the Hilton brand, but also actively spread

positive word of mouth about the program and Hilton itself. This is extremely valuable in the

service industry as service is intangible. By continuously ensuring the best possible service to

its members, Hilton will ultimately be able to further improve its customer-based brand equity

(CBBE), in which customers react positively to the brand and its marketing efforts (Keller,

2008).

Since HHW operates the program, it could be said that the expenses incurred by HHW

relates to the costs to run the Hilton HHonors program. As shown in the case, under Exhibit 4,

the total cost of the program is $69,438,000. Other relevant cost in the program would most

likely be training of employees. The company has to train stay about specific policies and

10

procedures related to the program, in order to increase efficiency and effectiveness. For these

trainings to be made possible, HHW would need a specific budget to cover the expenses

involved. Apart from that, there is also walking cost, which is the cost of turning a customer

away. Moreover, the operations as a whole would also incur costs to cover certain aspects, such

as maintenance of the information technology (IT) systems used to manage its operations

worldwide.

From the income statement of HHW shown under Exhibit 4, it is noted that its revenues

is $69,837,000. This means that HHW’s revenues is greater than its costs by $399,000. As

such, it could be simplified that the value generated by the Hilton HHonors program is greater

than its cost.

2.3 Question 3

One of the things that Starwood is attempting to do is develop the Starwood brand. The

company is trying to increase its brand equity in the market in the hopes of acquiring a larger

number of loyal customers. This would provide Starwood with the means to increase its share

of wallet, and market share. Over the years, the company has never been consistent with its

loyalty program, making it less effective and appealing to guests. As such, Starwood is trying

to increase awareness on the brand’s Preferred Guest Program, especially for the Sheraton and

Westin chains.

Apart from that, Starwood is attempting to target individual business travellers, which

are considered the most lucrative part of the business. Although Starwood is one of the four

large global brands targeting the business-class hotel market, the Sheraton and Westin chains’

loyalty program has never been as successful as the ones offered by Marriot, Hyatt, and Hilton.

This is mainly due to inconsistency in the program over the years.

In addition, Starwood is trying to differentiate itself from competitors, and ultimately,

stand out from the competition. This is shown through its introduction of four new features in

its Preferred Guest Program. The fact that the loyalty program would not have blackout dates

indicates that members could claim free travel or stays anytime throughout the year, even

during peak seasons. Besides that, the hotels running the program would not have limits on the

number of room available for free stays. This two features, coupled with its paperless rewards

shows that Starwood is trying to pull people to join its loyalty program.

11

Through its new loyalty program, Starwood is also indirectly encouraging brand

switching. The company is trying to make its brand seem far more advantageous than other

hotel brands in the industry. By convincing people that its Preferred Guest Program is better

than other loyalty programs available, Starwood would be able to increase its number of loyal

customers. This would then allow the company to increase its revenues and profits annually,

as well as build positive customer-based brand equity.

However, all of these would also mean that Starwood would have to shoulder more

costs, ergo increasing its expenses. For example, the company would have to develop new

revenue and yield management models due to its feature of not having blackout dates, and no

capacity control. Moreover, Starwood would need to upgrade its IT systems in order to manage

its paperless rewards efficiently. The most notable increase in Starwood’s expenses would

come from its $50 million investment in marketing activities to publicize the program.

There are several ways in which Jeff Diskin could respond to Starwood’s attempt. For

one, it would best for Diskin to improve on its current loyalty programs, and pass, or not match

Starwood’s strategy. If Diskin pursues a strategy that matches the strategy utilized by

Starwood, it will significantly affect Hilton’s expenses, whereby costs related to the Hilton

HHonors program will substantially increase. This reduces cost-effectiveness of the loyalty

program.

Take for instance Starwood’s $50 million investment in advertising to market the

program. This one time budget itself is greater than HHW’s spending on program

communications ever since the Hilton HHonors program was introduced. Hilton does not need

to spend the extra cost on marketing because it already has a well-known name in the industry.

Besides, Hilton has successfully developed clear brand positioning in the market, unlike

Starwood. As such, it is unnecessary for the company to hike up its advertising budget, simply

because Starwood has done it.

Although Starwood’s Preferred Guest Program has no blackout dates and capacity

control, it has to be realized that the implementation of these two features would lead to greater

investments in operations and IT systems. While they seem attractive, the risks attached to

Starwood’s features are hard to dismiss. The fact that Starwood charges participating hotels 20

percent to 100 percent more on paid stays as compared to its competitors could potentially lead

to decrease in collaboration. This would decrease Starwood’s opportunity to collaborate and

work with partners and franchisees.

12

Diskin should concentrate on improving the Hilton’s current loyalty program. For

example, HHW could increase the number of points rewarded to members who stay at any of

the hotels running the Hilton HHonors program. This will encourage current and new members

to increase their number of stays at Hilton hotels. Indirectly, this will strengthen Hilton’s

relationship with customers and build customer loyalty. Diskin should also find ways to

advertise its double dipping feature for Hilton HHonors members, especially since the program

is the only one that offers this feature to its members.

Other than that, Diskin ought to increase the network size and distribution of Hilton

hotels. This could be done by expanding its number of partners, or even by sponsoring

conferences at its many hotels. Acquisition is also possible to increase network size and

distribution, whereby Hilton would acquire other hotels to expand its brand in various locations

all around the world.

Diskin could also increase its marketing efforts for the Hilton HHonors program. The

company could leverage on Hilton’s existing brand equity to promote the loyalty program

among consumers. One type of promotional tool that Diskin could utilize is reminder

advertising, which aims to remind the target market segment about the loyalty program. The

advertisement could stress on Hilton’s long heritage and expertise in the lodging industry, apart

from emphasizing the program’s various strengths, such as its key double dipping feature.

Most importantly, Diskin could find ways to improve its customer relationship

management (CRM), which basically involves managing the Hilton’s relationship with Hilton

HHonors members. It is necessary to ensure that customers realize they are valued and

prioritized to induce customer satisfaction. This is because customers are less likely to change

their spending habits when they are satisfied. In other words, they are more likely to stick with

the HHonors program when they are satisfied with the service received. Members could be

encouraged to provide their feedback on their stays at Hilton hotels to enable the company to

gauge its performance. If done properly, CRM could lead to numerous beneficial outcomes,

such as the spread of positive WOM and achieving brand resonance.

3.0 Conclusion

The hotel industry is an extremely competitive industry, in which a large number of hotel chains

constantly compete for consumers’ attention. One of the most important marketing tools to

garner consumer attention in this industry is a loyalty marketing program.

13

When businesses compete in the same industry, and target the same market segment,

one of the most significant differentiating factors that affect consumers’ choice is the loyalty

programs they offer. Starwood itself realizes the importance of this marketing tool when it

decided to introduce the Preferred Guest Program in its line of hotels. Other global brands,

namely Hilton, Hyatt, and Marriot offer loyalty programs to their guests, too, knowing how

this particular program substantially contributes to their annual revenues.

Although loyalty marketing programs are aimed at increasing the brand’s loyal

customer base, there are several other reasons why they are important. For one, loyalty

programs open doors for collaboration with partners and franchisees. This does not just allow

the hotel to provide broader range of rewards to its members, but would enable the company

to increase its network size and distribution as well.

While there are many loyalty programs in the industry, it is crucial that each company

realizes the importance of being different and standing out from the competition. This means

that a hotel’s loyalty program should offer features that are unique compared to its competitors.

A simple example for this is the Hilton HHonors program’s double dipping practice which

allows members to earn points at partner firms and the hotel itself, at the same time.

Overall, it could be said that loyalty marketing programs are imperative to compete in

the hotel industry. As such, hotel brands should continuously improve their respective loyalty

programs to ensure success for many years to come.

4.0 References

Breakeven. (n.d.). In Merriam-Webster. Retrieved from http://www.merriam-

webster.com/dictionary/breakeven

Keller, K. L. (2008). Strategic brand management: Building, measuring, and managing

brand equity (3rd ed.). Upper Saddle River, NJ: Pearson Education, Inc.

Lieu, J., Cheong, M. P., Chan, M., & Camilleri, S. (2012). Hilton HHonors [PowerPoint

slides]. Retrieved from https://prezi.com/w2qfjdo-ct-t/hilton-hhonors/

Magi, A.W. (2003). Share of wallet in retailing: The effects of customer satisfaction, loyalty

cards and shopper characteristics. Journal of Retailing 79(2), 97–106.