Customer Relationship Management

Internal Assessment – Class Assignment

Name: Vishal Marhatta
PRN: 20020241107
SIIB – Marketing (2020-2022)

Q1. a. Was this Loyalty program really working for the company? Was the
CFO right or wrong? Justify your answer with figures.

Ans. Looking at the figures and considering only the total Lifetime value we can conclude that the
Loyalty program was working against the company and the CFO was right.

The Total Lifetime value (TLV) for customers at Hilton Hotels is more without a loyalty Program in
place. The total lifetime value of customers with loyalty program is $ 2,81,28,691 whereas the Total
lifetime value of customers without Loyalty program is $2,91,23,216. The difference between the
Total Lifetime value with loyalty program and without loyalty program is $ 9,94,525 which is a huge
value & cannot be ignored.

Total Lifetime Value

29,123,216.00

29,200,000.00
29,000,000.00
28,800,000.00
28,600,000.00
28,128,691.00
28,400,000.00
28,200,000.00
28,000,000.00
27,800,000.00
27,600,000.00
With Loyalty Program Without Loyalty Program
With Loyalty Program:

No. of Gross Margins Loyalty Program

Segments Customers Per Customer Cost per Customer Retention Rate
         
Gold 2000 2500 300 60%
Silver 6000 1000 200 40%
Bronze 40000 300 50 20%
Past Customers 30000 0 10 5%

GOLD Year 1 Year 2 Year 3 Year 4

Gross Margin Per Customer 2500 2500 2500 2500
Loyalty Program Cost Per Customer 300 300 300 300
DCF (Loyalty Program Cost Per
Customer) 300 273 247.93 225.39
Retention Rate 100% 60.0% 36.0% 21.6%
No. of Customers 2000 1200 720 432
Profit Per Customer 2200 1320 792 475.2
DCF (Profit Per Customer) 2200 1200 654.55 357.02
LTV Per Customer $4,412
Total LTV for all customers $8,823,140
Total Loyalty Program Cost $1,203,156

SILVER Year 1 Year 2 Year 3 Year 4

Gross Margin Per Customer 1000 1000 1000 1000
Loyalty Program Cost Per Customer 200 200 200 200
DCF (Loyalty Program Cost Per
Customer) 200 181.82 165.29 150.26
Retention Rate 100% 40.0% 16.0% 6.4%
No. of Customers 6000 2400 960 384
Profit Per Customer 800 320 128 51.2
DCF (Profit Per Customer) 800 290.91 105.79 38.47
LTV Per Customer $1,235
Total LTV for all customers $7,410,969
Total Loyalty Program Cost $1,852,742

BRONZE Year 1 Year 2 Year 3 Year 4

 Gross Margin Per Customer 300 300 300 300
Loyalty Program Cost Per Customer 50 50 50 50
DCF (Loyalty Program Cost Per
Customer) 50 45.45 41.32 37.57
Retention Rate 100% 20.0% 4.0% 0.8%
No. of Customers 40000 8000 1600 320
Profit Per Customer 250 50 10 2
DCF (Profit Per Customer) 250 45.45 8.26 1.5
LTV Per Customer $305
Total LTV for all customers $12,208,866
Total Loyalty Program Cost $2,441,773

PAST CUSTOMERS Year 1 Year 2 Year 3 Year 4

Gross Margin Per Customer 0 0 0 0
Loyalty Program Cost Per Customer 10 10 10 10
DCF (Loyalty Program Cost Per
Customer) 10 9 8.26 7.51
Retention Rate 100% 5.0% 0.25% 0.01%
No. of Customers 30000 1500 75 3.75
Profit Per Customer -10 -0.5 -0.03 0
DCF (Profit Per Customer) -10 -0.45 -0.02 0
LTV Per Customer -$10
Total LTV for all customers -$314,284
Total Loyalty Program Cost $314,284

Without Loyalty Program:

 No. of Gross Margins Loyalty Program
Segments Customers Per Customer Cost per Customer Retention Rate
Gold 2000 2500 0 40%
Silver 6000 1000 0 30%
Bronze 40000 300 0 10%
Past Customers 30000 0 0 0%

GOLD Year 1 Year 2 Year 3 Year 4

Gross Margin Per Customer 2500 2500 2500 2500
Loyalty Program Cost Per Customer 0 0 0 0
DCF (Loyalty Program Cost Per
Customer) 0 0 0 0
Retention Rate 100% 40.0% 16.0% 6.4%
No. of Customers 2000 800 320 128
Profit Per Customer 2500 1000 400 160
DCF (Profit Per Customer) 2500 909.09 330.58 120.21
LTV Per Customer $3,860
Total LTV for all customers $7,719,760
Total Loyalty Program Cost $0

SILVER Year 1 Year 2 Year 3 Year 4

Gross Margin Per Customer 1000 1000 1000 1000
Loyalty Program Cost Per Customer 0 0 0 0
DCF (Loyalty Program Cost Per
Customer) 0 0 0 0
Retention Rate 100% 30.0% 9.0% 2.7%
No. of Customers 6000 1800 540 162
Profit Per Customer 1000 300 90 27
DCF (Profit Per Customer) 1000 272.73 74.38 20.29
LTV Per Customer $1,367
Total LTV for all customers $8,204,358
Total Loyalty Program Cost $0

BRONZE Year 1 Year 2 Year 3 Year 4

Gross Margin Per Customer 300 300 300 300
Loyalty Program Cost Per Customer 0 0 0 0
DCF (Loyalty Program Cost Per
Customer) 0 0 0 0
Retention Rate 100% 10.0% 1.0% 0.1%
No. of Customers 40000 4000 400 40
Profit Per Customer 300 30 3 0.3
DCF (Profit Per Customer) 300 27.27 2.48 0.23
LTV Per Customer $330
Total LTV for all customers $13,199,098
Total Loyalty Program Cost $0

PAST CUSTOMERS Year 1 Year 2 Year 3 Year 4

Gross Margin Per Customer 0 0 0 0
Loyalty Program Cost Per Customer 0 0 0 0
DCF (Loyalty Program Cost Per
Customer) 0 0 0 0
Retention Rate 100% 0% 0% 0%
No. of Customers 30000 0 0 0
Profit Per Customer 0 0 0 0
DCF (Profit Per Customer) 0 0 0 0
LTV Per Customer $0
Total LTV for all customers $0
Total Loyalty Program Cost $0

Total Lifetime values of all the segments

 WITH LOYALTY PROGRAM
Segments No. of Gross Loyalty Retention Rate LTV Per Total LTV Total
Customers Margins Per Program Customer for all Loyalty
Customer Cost customers Program
Per Cost
Customer
Gold 2000 2500 300 60% 4412 8823140 1203156
Silver 6000 1000 200 40% 1235 7410969 1852742
Bronze 40000 300 50 20% 305 12208866 2441773
Past 30000 0 10 5% -10 -314284 314284
Customer
s
          TOTAL 28128691 5811955

WITHOUT LOYALTY PROGRAM

Segments No. of Gross Loyalty Retention LTV Per Total LTV for Total
Customers Margins Per Program Rate Customer all Loyalty
Customer Cost customers Program
Per Cost
Custome
r
Gold 2000 2500 0 40% 3860 7719759.57 0
9
Silver 6000 1000 0 30% 1367 8204357.62 0
6
Bronze 40000 300 0 10% 330 13199098.4 0
2
Past 30000 0 0 0% 0 0 0
Customer
s
          TOTAL 29123216 0

But also, the Customer Retention rate falls drastically without a Loyalty program which leads to
reduction in the revenue for the hotel. This can also result in underutilisation of the fixed inventories
like Rooms, staff, etc. Restructuring of loyalty program is to be required to increase the Total lifetime
value and revenue at the same time.
 Q1. b. What would you suggest to better the loyalty programme or revamp it
to show improvement?

WITH LOYALTY PROGRAM

Segments No. of Gross Loyalty Retention Rate LTV Per Total LTV Total
Customers Margins Per Program Customer for all Loyalty
Customer Cost customers Program
Per Cost
Customer
Gold 2000 2500 300 60% 4412 8823140 1203156
Silver 6000 1000 200 40% 1235 7410969 1852742
Bronze 40000 300 50 20% 305 12208866 2441773
Past 30000 0 10 5% -10 -314284 314284
Customers
          TOTAL 28128691 5811955

WITHOUT LOYALTY PROGRAM

Segments No. of Gross Loyalty Retention LTV Per Total LTV for Total
Customers Margins Program Rate Customer all Loyalty
Per Cost customers Program
Customer Per Cost
Customer
Gold 2000 2500 0 40% 3860 7719759.579 0
Silver 6000 1000 0 30% 1367 8204357.626 0
Bronze 40000 300 0 10% 330 13199098.42 0
Past 30000 0 0 0% 0 0 0
Customers
          TOTAL 29123216 0

To improve the loyalty programme, we can make minor adjustments to improve its effectiveness.
We can derive the following from the observations: The LTV for a loyalty programme in the "Gold"
category is 8.8 million, whereas the LTV without a loyalty programme is 7.7 million. As a result, a
loyalty programme is appropriate and beneficial for this market. While the LTV for a loyalty
programme is 12.2 million in the "Bronze" category, the LTV without a loyalty programme is 13
million. As a result, the one without a loyalty programme is the better option. We can make a few
changes to the retention percentage and gross margins to make the reward programme better
suitable for this segment of clients. Similarly, the LTV for a loyalty programme is 7.2 million in the
"Silver " category, the LTV without a loyalty programme is 8.2 million. As a result, the one without a
loyalty programme is the better option. Here, also we need to make some changes i.e., increase in
the retention rate by 5% and check if the LTV increases or not.

Bronze -> 5 % Increase in retention rate to improve LTV

 Silver -> 5 % Increase in retention rate to improve LTV

We increase the Gross margin figure to 350 & the retention rate by 5% for “Bronze” category and
find out if this works or improves the existing loyalty programme.

BRONZE Year 1 Year 2 Year 3 Year 4

Gross Margin Per Customer 350 350 350 350
Loyalty Program Cost Per Customer 50 50 50 50
DCF (Loyalty Program Cost Per Customer) 50 45.45 41.32 37.57
Retention Rate 100% 25.0% 6.3% 1.6%
No. of Customers 40000 10000 2500 625
Profit Per Customer 300 75 18.75 4.69
DCF (Profit Per Customer) 300 68.18 15.5 3.52
LTV Per Customer $387
Total LTV for all customers $15,487,979
Total Loyalty Program Cost $2,581,330

Let’s compare the two circumstances again with new values with loyalty program in place:

WITH LOYALTY PROGRAM

Segments No. of Gross Loyalty Retention LTV Per Total LTV Total
Customers Margins Program Rate Customer for all Loyalty
Per Cost customers Program
Customer Per Cost
Customer
Gold 2000 2500 300 60% 4412 8823140 1203156
Silver 6000 1000 200 40% 1235 7410969 1852742
Bronze 40000 350 50 25% 387 15487979 2581330
Past 30000 0 10 5% -10 -314284 314284
Customers
          TOTAL 31407804 5951512

WITHOUT LOYALTY PROGRAM

Segments No. of Gross Loyalty Retention Rate LTV Per Total LTV for Total
Customers Margins Per Program Customer all Loyalty
Customer Cost customers Program
Per Cost
Customer
Gold 2000 2500 0 40% 3860 7719759.579 0
Silver 6000 1000 0 30% 1367 8204357.626 0
Bronze 40000 300 0 10% 330 13199098.42 0
Past 30000 0 0 0% 0 0 0
Customers
          TOTAL 29123216 0
Because the LTV for the "Bronze" category has increased, so has the overall Lifetime Value (31.4
million), which is higher than the 29.12 million for the programme without Loyalty. As a result, this
is a smart technique to instigate adjustments inside the loyalty programme that will benefit both the
company's earnings and the customers' increasing desirability.

Other significant steps which can be taken to increase the TLV for loyalty programs when
compared to TLV without loyalty programs are:
The present Loyalty Program is based on customer frequency and recency rather than monetary
value, which can distort the Loyalty Program's effect. Customers who stay for 20 days in a 3-star
hotel will receive the same loyalty programme as those who stay for 20 days in a 5-star hotel. The
revenue and earnings generated by a customer staying in a 5-star hotel are significantly more than
those generated by a customer staying in a 3-star hotel. As a result, more money is spent on a loyalty
programme for someone who isn't bringing in much money for the hotel, creating an imbalance.
First of all, the Loyalty program should be segmented on the basis of combination of all three
components that is Frequency, Recency and Monetary value. The segmentation can be restructured
as:

Platinum: The customers who stay for more than 10 nights and generate a revenue of more than
$7000 in previous 12 months.

Gold: The customers who stay for more than 15 nights and generate revenue more than $5000 in
previous 12 months.

Silver: The Customers who stay for more than 10 nights and generate revenue more than $2500 in
previous 12 months.

Bronze: The customers who stay for less than 10 nights in previous 12 months.

Past customers: The customers who were previous Hilton customers but have not stayed in previous
12 months.

Adding a Platinum segment will provide clients who spend more even after fewer stays a sense of
exclusivity. Additionally, the Hotel's profit and income will improve as a result of this. As noted in the
case study, the number of consumers in the platinum section was taken as a percentage of those in
the gold and silver segments. Although many clients may remain for less than 10 nights, the
monetary value paid will be significant. Similarly, certain clients from the silver section would be
eligible for the bronze sector due to the lower monetary value. Because the criteria are the same,
the number of previous clients will be the same.

Assumptions for Calculation:

1. The Discount rate is assumed to be 10%

2. Average life time of a customer for all segments is assumed to be 4 years.
3. It is assumed that the number of customers remains same as mentioned in the case study.
A few other suggestions could be incorporated by the Hotel to revamp the existing loyalty
programme are:

 Provide rigorous training and boost client motivation with small but heartfelt prizes and
gestures.
 Direct ways of connecting with customer via emails on special occasions like birthdays or
festivals
 Hotel spas can be availed but at a nominal rate
 More in-room services can be pushed, citing client comfort as a benefit; this will generate more
revenue for the company than sitting in a restaurant.
 Customers' interest in receiving a discount from another brand of their choosing when they visit
the hotel can be boosted by relevant agreements.
 While providing free airport pick-ups and drop-offs, electric vehicles can be used to be more
environmentally friendly and sustainable.