Question

The Sherriton Hotels chain embarked on a new customer loyalty programe in 2017. The 2017 year-end data have been collected, and it is now time for you to determine whether the loyalty program should be continued, discontinued, or perhaps altered to improve loyalty and profitability levels at Sherriton.

Sherriton’s loyalty programme consists of three different customer loyalty levels. All new customers can sign up for the Sherriton Bronze Card, which provides guests with a complimentary bottle of wine per night (at a cost to the chain of $5 per bottle) and $20 in restaurant coupons each night (at a cost to the chain of $10). Bronze customers also receive a 10% discount on the nightly rate. The programme enables the chain to track a member’s stays and activities. Once customers have stayed and paid for 20 nights at any of the chain’s locations worldwide, they are upgraded to Silver Customer status. Silver benefits include

the bottle of wine (costing the chain $5 per bottle per night), $30 in restaurant coupons per night (costing the chain $15), and 20% off every night from the 21st night onwards. A customer who reaches the 50-night level is upgraded to Gold Customer status. Gold status increases the nightly discount to 30% and replaces the $5 bottle of wine with a bottle

of champagne per night (costing the chain is $20 per bottle). Also, $40 in restaurant coupons per night are granted (costing the chain $20). Assume all bottles and coupons offered are used.

The average full price for one night’s stay is $200. The chain incurs variable costs of $65 per night, exclusive of loyalty programme costs. The total fixed costs for the chain are $140,580,000. Sherriton operates 10 hotels, with, on average, 500 rooms each. All hotels are open for business 365 days a year, and approximate an average occupancy rate of around 80%. The following are some loyalty programme characteristics:

Loyalty Number of      Average number of

Programme           customers       nights per customer

Gold 2,430 60

Silver 8,340 35

Bronze 80,300          10

No program 219,000          1

Note that a Gold Customer would have received the 10% discount for his or her first 20 stays, the 20% discount for the next 30 stay s, and the 30% discount only for the last 10 nights. Assume that all programme members signed on to the programme the first time they stayed with one of the chain’s hotels. Also, assume the restaurants are managed by a 100%-owned subsidiary of Sherriton.

Required:

a Calculate the programme’s contribution margin for each of the three programmes, as well as for the customers not subscribing to the loyalty programme. Which of the programmes is the most profitable? Which is the least profitable? Do not allocate fixed costs to individual rooms or specific loyalty programmes.

b Prepare an income statement for Sherriton for the year ended December 31, 201

c What is the average room rate per night? What are average variable costs per night inclusive of the loyalty programme? (

d Explain what drives the profitability (or lack thereof) of Sherriton’s loyalty programme.

Answer 1