Question: The Sherriton Hotels chain embarked on a new customer loyalty

The Sherriton Hotels chain embarked on a new customer loyalty program in 2013. The 2013 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 program consists of three different customer loyalty levels. All new customers can sign up for the Sherriton Bronze Card—this card provides guests with a complimentary bottle of wine (cost to the chain is $5 per bottle) and $20 in restaurant coupons each night (cost to the chain is $10). Bronze customers also receive a 10% discount off the nightly rate. The program enables the chain to track a member’s stays and activities. Once a customer has stayed and paid for 20 nights at any of the chain’s locations worldwide, he or she is upgraded to Silver Customer status. Silver benefits include the bottle of wine (cost to the chain is $5 per bottle), $30 in restaurant coupons (cost to the chain is $15), and 20% off every night from the twenty-first night on. 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 (cost to the chain is $20 per bottle). As well, $40 in restaurant coupons are granted (cost to the chain is $20).
The average full price for one night’s stay is $200. The chain incurs variable costs of $65 per night, exclusive of loyalty program costs. Total fixed costs for the chain are $140,580,000. Sherriton operates ten hotels with, on average, 500 rooms each. All hotels are open for business 365 days a year, and approximate average occupancy rates are around 80%. Following are some loyalty program characteristics:
An average Gold Customer would have received the 10% discount for his or her first 20 stays, received the 20% discount for the next 30 stays, and the 30% discount only for the last ten nights. Assume that all program members signed on to the program 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.
1. Calculate the program contribution margin for each of the three programs, as well as for the group of customers not subscribing to the loyalty program. Which program is the most profitable? Which is the least profitable? Do not allocate fixed costs to individual rooms or specific loyalty programs.
2. Develop an income statement for Sherriton for the year ended December 31, 2013.
3. What is the average room rate per night? What are average variable costs per night inclusive of the loyalty program?
4. Explain what drives the profitability (or lack thereof) of the most and least profitable loyalty programs (again, one of these may be the “no program” option).

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  • CreatedJuly 31, 2015
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