Here’s The Real Reason Hilton Is Changing Their Award Pricing

Yesterday I shared all the details of the new Hilton Honors program, which will be implemented this year. Perhaps the most significant change is that Hilton is completely reinventing their award pricing. Rather than having a fixed award chart, Hilton will have variable award pricing. The absolute maximum award price for a hotel won’t be increasing, while there will be more flexible low season pricing.

Hilton

Hilton has a handy calculator that lets you compare the cost of redemptions before and after the change. Understandably a lot of people are skeptical, because we’re used to loyalty program changes being negative nowadays.

Hilton-3

Personally I don’t view these changes quite as negatively. Vineet emailed to explain his perspective on these changes, and I think he’s spot on, so I’d like to share his explanation, which is definitely worth a read:

Was reading the coverage of the new Hilton P+M and other changes online and I feel its still an incomplete narrative, no one has quite got to the bottom of why these changes came about and what are the mechanics behind the changes.

I think a lot of the people have an us vs. them equation in their head regarding program enhancements and automatically assume that no change would be made unless it benefitted the program and hence every change is worse for the guest.

The real reasons these changes are coming about are to clear the Hilton balance sheet of points (liability for accounting purposes) by utilizing unused inventory.

It’s important to understand that hospitality isn’t a 2 stakeholder game, its a 3 stakeholder game. There is Hilton, the guests, and the property owners. The P+M revision doesn’t really change things between guests and Hilton, but really changes things between property owners and Hilton.

Redemptions are compensated by the chain to the property with an amount that just about covers the cost to the property. Usually properties don’t mind this since those rooms would have gone unsold anyway. However, the problem with assigning categories using average daily rates is that you can either track the high season or low season (averaging both will create fantastic redemption values for guests during peak season, which is bad for the chain and owner, and overpriced awards during low season, which is bad for the chain/property again since no one will redeem).

Removing the lower limit on the redemptions and pushing down the dynamic prices is all about facilitating cheaper redemptions during off peak times. This doesn’t harm Hilton since they get to write off points (liability on balance sheet) that could potentially have been converted into much more valuable redemptions later.

It isn’t truly terrible for the property owner since the lower rates are only applicable at times of lower occupancy so it would still cover their costs and not have any associated opportunity costs of losing high revenue rooms.

So to sum up, this is largely good for guests in short term (long term the ramifications of the opaqueness of categories might be terrible). It is great for Hilton to be able to incentivize redemptions and get rid of the billions of points on the balance sheet at very low compensation rates. This is a zero sum game and so it can’t be good for everyone, so the slack is taken up by the owners, and even there it isn’t terrible for them.

The whole scheme will just increase the utilization rates of the empty low occupancy rooms and thereby reduce inefficiency and dead space.

It’s actually a very well conceived change with the opaqueness of categories slipped in as a Trojan.

I think Vineet is spot on, and explained this much better than I could have. To simplify this even more:

  • The major global hotel chains don’t own most of their hotels, but rather just have management contracts for them
  • When someone redeems points at a hotel, the hotel is compensated by the loyalty program at slightly above the hotel’s marginal cost
  • The exception is when the hotel is full, in which case the loyalty program compensates the hotel at (or close to) the average daily rate, which can be expensive
  • With this new system, Hilton has the ability to get points off their books, and is encouraging people to redeem off peak when hotels aren’t actually full, and therefore the reimbursement rates will be low as well; this can be a win-win

Sure, there will likely be some cases where hotels are more expensive under the new system than the old system. However, I think when you understand that the hotel industry is different than the airline industry when it comes to reimbursement for award redemptions, it becomes clear that this change doesn’t have to be negative — it could be a win-win for both consumers and Hilton Honors.

Comments

  1. I agree with all of this. It would be interesting to see if you could go back to Aaron Glick and get his take on this, Lucky.

    That said, I have a question: if we currently have points stays booked for post Feb 1st, and by using the tool we suspect the point redemption rate has become lower due to off-peak pricing levels, should we call, price it online, then cancel and rebook? If we call, can they change the redemption reservations over the phone?

  2. Have to say that you seem to be insisting on viewing this change with rose colored glasses. Even Vineet points out twice (but briefly) that the long term impact is likely to be terrible.

    “…(long term the ramifications of the opaqueness of categories might be terrible).”
    “…with the opaqueness of categories slipped in as a Trojan.”

    The fact is that Hilton can now move hotels up in max point cost without even the very limited notification of category change that they used to provide. All you can do is check their tracking website showing the max cost for each hotel one at a time, and this website has come and gone before depending on their wish for opacity.

  3. Let’s say it’s just Loyalty Econ-101…

    Recycling from earlier threads

    (a) on this site…

    “[T]he primary determinant of how awards are now priced is actually the classic supply vs. demand principle of Econ-101. High supply of rooms but low demand (i.e. high availability) results in awards that are priced toward the lower end of a hotel’s category to encourage redemption. High demand for available number of rooms (i.e., limited supply) results in awards that are priced toward the upper end of their category to discourage redemption. It’s the essence of the revenue-based system and I believe that the same principle will determine how awards will be priced under the new system, maybe even more so…”

    (b) over at VFTW in response to someone who suggested that Hilton Honors had gotten even closer to being fully revenue-based:

    “Absolutely. It is now completely revenue based, with supply and demand being the determinants of how award are priced.

    — High demand, low supply => high award prices.
    — Low demand, high supply => low award prices.
    — High demand, high supply or low demand, low supply => whatever award prices a property believes it can get people to go for.”

    (c) Lastly, over at VFTW on a possible reason for the change:

    “The goal could be to simplify the system so that there is an almost direct relationship between the reward program and the revenue that it generates, with the intention of enhancing the former to more effectively drive the latter.”

    Bottom: Contrary to what the usual suspects have claimed, this is NOT a ploy that will end up sticking it to Honors members. It is simply sound, trend-setting loyalty economics that I suspect other programs will not wait too long to copy.

  4. “Sure, there will likely be some cases where hotels are more expensive under the new system than the old system.”

    Given that Hilton themselves has said that only about 30 percent of the hotels chainwide will have a decrease in points required under the new system, I would disagree with your statement here, Ben, and instead suggest that the number of properties where there will not be a net increase in the cash+points price under the new system will be in the minority, simply due to the mathematics involved.

  5. @DCS: “The goal could be to simplify the system so that there is an almost direct relationship between the reward program and the revenue that it generates, with the intention of enhancing the former to more effectively drive the latter.”

    It’s a little disingenuous to provide this quote here with the implication that Gary wrote it, when you are merely quoting what you wrote in your comments defending Hilton, don’t you think?

  6. @Mike sez: “It’s a little disingenuous to provide this quote here with the implication that Gary wrote it, when you are merely quoting what you wrote in your comments defending Hilton, don’t you think?”

    Anyone who who can read simple English will see “Recycling from earlier threads” and understand that I was just recycling my own comments and not attributing them to anyone else. Besides, when did I get so altruistic I started attributing my stellar and erudite comments to others?

    In fact, the suggestion is so nonsensical and stupid, I am suspecting that it came from a known unhinged poster assuming a new identity.

    I am done with you “Mike”

  7. @DCS – Next time, then, be a little more clear about your attributions, and you won’t get these comments.

    In the meantime, you continue on your little path of denial about how these changes won’t harm consumers.

    (And no, whoever you think I am, I’m not that person.)

  8. Regarding the “Trojan Horse” claim, it is mostly paranoia that permeates travel blogosphere. Again recycling MY own post that completes a thought I recycled above:

    “I think that miles/points game players have been conditioned to expect the worst whenever there is a major loyalty program change. However, Hilton’s “economic philosophy” under their current visionary CEO, in which their loyalty program has been centrally integrated into the company’s “revenue driver engine” suggests to me that the purpose of this change is NOT to stick it to Hilton Honors members, who accounted for 52% of the occupancy for their hotels and drove 15 billion in revenue in 2015 (source: Hilton’s 2015 Form 10-K filing to the SEC). The goal could be to simplify the system so that there is an almost direct relationship between the reward program and the revenue that it generates, with the intention of enhancing the former to more effectively drive the latter.”

    I know, I know, “Just because you are paranoid does not mean that they are not out to get you.” 😉

    G’day!

  9. @DCS – And at the point that the new system proves you wrong, I hope you’ll be coming back here and admitting it.

  10. “Sure, there will likely be some cases where hotels are more expensive under the new system than the old system.”

    – Sure, like at the hotels I want to stay at, on the dates I want to stay there! I’ve never seen a points program change so that I get a better (or even as good)deal the new way vs. the old way. Hotels, airlines, retailers, even GM car points have always changed for the worse. But of course the corporate drones don’t tell us that. On Hilton, I was suspicious when they first extended their double (and then triple) points offer to all hotels, not just participating ones. I think this was all part of a sneaky long term plan to bait and switch their loyal customers.

  11. Sorry if it has been said,

    Wondering if they now have the IT capability to manage inventory by room on a specific night, kind of like a seat on a specific flight.

    Going from managing demand by off/peak months TO not only per night, but also per room per night at a given property.

    Would seem to rely upon better algorithms and/or more local control.

    Thoughts on how this might compare to revenue management at an airline?

  12. I promise, but suppose that the system proves me right, as I suspect it will because there will be very little noticeable difference except for, mainly, “reasonably priced” C+P awards galore, what then?

  13. Interesting to consider. Has anyone considers treat this is just a wider launch/application do the current HHonors Special points pricing already in place? I am staying at a 50k a night hotel this weekend for 22k a night that is to said special. I have been seeing these special redemption rates for months, but they can sometimes be hard to find with no rhyme or reason.

    I am remaining hopeful with these changes given the current hotel costs in large cities. Why would I pay 50-70k points a night for a hote retailing at ~$175 a night? These updates could make point redemptions better in that situation. Yes, there could potentially be downsides, but oven that they are not increasing current point maximums for now…I’ll hope for the best.

  14. @ Nick – there are plenty of high end software providers out there that can add dynamic pricing to a vendor’s web store and the prices can change according to demand. I don’t see how it would be much different to fluctuate point redemptions the same way revenue fluctuates on a site.

  15. I’m curious to know/see if the premium awards will become more expensive with these changes. There’s always a huge range in premium room award pricing, and they’re usually not “round” numbers (ex: 58476 points). I’m assuming that this is because they are based on a) actual paid rates at the hotel and b) currency exchange rates, since they can (and do) fluctuate slightly from one day to the next.

    Sometimes it makes sense to book a premium award instead of standard award, especially if they require fewer points. I’ve seen executive rooms and even suites for only a few thousand points more than a standard award. And as a lot of hotels only offer 1 category upgrades to Golds, it’s even better to either outright book a premium room. I’d hate to see this “feature” go away…

    Of course, on the other end of the spectrum, I’ve seen insanely high point requirements for premium awards, some at a few hundred thousand points for so-called “deluxe” rooms. 😮

  16. @Tennen — Very perceptive! I have used that “feature” or “sweet spot” you described rather extensively this past year. Award costs for “premium” rooms, including suites, would be so greatly marked down that they could require fewer points or a just a little more than for a standard award. When that happened, which was nearly every time I searched, I would book the premium room, especially if it was not suite, to greatly increase my chance to be upgraded to a suite because next upgrade in the pecking order from the premium room would be a suite.

    That “feature” could either go away because it was a “bug” that this change has been designed to “kill”, or it could become the norm because the reason it was popping up could be a consequence of going between cash and points “dynamically” but intermittently. However, now the “feature” may become permanent because the program is about to go fully revenue based…

  17. “This is a zero sum game and so it can’t be good for everyone, so the slack is taken up by the owners, and even there it isn’t terrible for them.”

    the more concrete #s likely have been played out by the owners & hilton to show how long the interim period will last and when the upper threshold is raised & by how many pts/$, that’s when hotels will reap their rewards for playing along

  18. Ben, as someone who has followed your blog for years, let’s just say this “analysis” is a radical departure from the common sense of an experienced loyalty blogger. I find it troubling, to say the least, that you are choosing to highlight the bone being thrown at us for the short term rather than the alarming long term dangers created by the new infrastructure being installed.

    Look at it this way. With this change, we don’t know if hotels will retain the same max rate a year from now. We don’t know if lower rates will in fact be implemented in a useful manner. We don’t know if the comparison page will remain operational. What we do know is that H *will* have an infrastructure that demotes transparency and allows them to easily make unannounced devaluations a la Delta. It doesn’t matter if they have good intention today. The danger is real.

  19. Hilton points redemptions have become so bloated for lower end properties (eg. Homewood Oyster Point CA 30k in January 2015 rose to 50k in 2017 for same room, same month, similar paid rates) that ANY change is welcome.

  20. Hilton Dishonors again!
    Award stays w/o an award chart! What a concept!
    That 3Million points Hilton Venice hotel room will now be what? 6Million in high season or their JavaScript calculator will not have that many digits?
    Thought 2013 massacre was bad.
    Hilton points is becoming like Zimbabwe currency!

  21. Anything that raises the price or lowers availability is bad. If you are a working stiff, you go on public national holidays to high tourist areas. If all the aspirational properties increase on days I want, its an instant lose. The whole reason I am redeeming points is because opportunity cost to pay cash is too great.

  22. I would like to add, they should just do sales. That is the easiest way to get rid of excess inventory without altering the original chart. You could have an annual black friday sale. If demand is too great do a smaller one for cyber monday. If it didn’t do to well, they can have a bigger cyber monday to tailor their needs.

  23. While I agree that most companies would want to get those liabilities of their balance sheet, there is one important difference here: Because the companies control the value of the points, they also control the size of the liabilities! A devaluation of points like Hilton did in 2013 is an easy way to reduce their liabilities. Reduce the value from 0.5ct/pt to 0.4pt/ct and 20% of your liabilities are gone, no fancy accounting or program changes needed!
    So, I’m not sure this is the only or even main driver for the change. I could also see Hilton trying to drive up the revenue-per-member for the many millions of members with low activity. If they can pool their points or use them for Amazon, they might be more willing to book their once-a-year vacation on hilton.com than on hotels.com or go back next year instead of staying at the next-cheapest/best hotel…
    With these program changes, they can drive up revenue-per-member without spending any real marketing $ or commissions!

  24. @Rupert — The answer is quite likely item (d): all of the above.

    Hilton wants to make their loyalty program a key, if not the key, driver of the company’s revenue, while simultaneously using the sound economics principle of supply and demand to control their financial liability due to all the points that will be issued and will be in play that will prevent them from claiming a portion of the associated sales (in $billion) as revenue until the points are redeemed, forfeited or just expire. Devaluation is the easiest way to decrease liability, but Hilton got a lot of flak in 2013 when they tried that on a massive scale, so now they are trying an imaginative and alternate approach to controlling their liability that I hope succeeds…

    Anyway, here’s a link to the OFFICIAL HILTON HONORS infographic (slick) I just got in an email announcing the changes, with their implementation TIMELINE: https://goo.gl/OH1ZdJ

  25. Costs are pretty much the same in high and low season. Since hotels are compensated at slightly above cost and costs are the same in high and low season, “This doesn’t harm Hilton since they get to write off points (liability on balance sheet) that could potentially have been converted into much more valuable redemptions later.” doesn’t make sense.

  26. @Mike – DCS will never, ever admit he is wrong / stupid / ill-informed…he is quite Trumpian in that way, despite plenty of evidence past and present to the contrary

  27. @UA-NYC sez: DCS will never, ever admit he is wrong / stupid / ill-informed…he is quite Trumpian in that way, despite plenty of evidence past and present to the contrary.”

    This clearly unhinged poster has brought to OMAAT his obsession with me and his nonsensical posts and comments that @Gary Leff over at VFTW can no longer tolerate and has started deleting.

    Because the poster has never made a single substantive contribution to any discussion that I can recall. is it not time OMAAT also made it clear to this poster that it’s time to find another object for his obsession (tacit admiration and envy, actualy) elsewhere, preferably far away from any travel blog?

  28. As long as DCS continues to spout lies (as in, any hotel program not named Hilton), and present his opinions as “alternative facts”, I will continue to call him out

  29. That’s what you said over at VFWT and then invited @Gary to delete your posts if he disagreed and he did! It’s been nice over there without your unhinged posts. @Lucky needs to do the same to literally clean up the comments section of his blog.

  30. I called out your lies and he did – that’s his call. You are an ocean of one with your beliefs and refuse to see any alternative to them – which is why everyone else calls you out too.

    Meanwhile, your statement that Hilton wants to make it’s loyalty program “the key driver of revenue” is about as stupid as it gets, given the trend in the opposite direction over the past 5+ years across virtually all airlines and hotels. I’d expect nothing less from you however.

  31. Please feel free to go on chasing your windmills. I will not respond to your unhinged comments here and I will definitely no longer to put up with them over at VFTW (hint: it means your comments are unhinged.)

    You believe you make sense but only to yourself. Really. Have you not noticed that no one joins you when you egged them on? It’s you applauding others when they disagree with me but seldom has anyone ever returned you the favor. Hint: they too consider you unhinged.

    Get the hint and go away. You are accomplishing nothing other confirming what everyone already knows about you: obsessed and unhinged, and creepy!

    Have a nice life.

  32. Geez…it’s just a travel blog. Not politics. @OMAAT, I hope you don’t feel half the stress this comment section has made me feel.

    Bottom line is that every is different. My work travel takes me to towns of all sizes (hello Hampton Inn), and I don’t save my Honors points for fine hotels. I look for value in my personal travels as well, and I never pay for personal stays. Sometimes I splurge, and sometimes I don’t. So for me, I love Hilton, and regardless of how this plays out, I am not going anywhere. I am pumped about the new Diamond extension as well!

    “Everyone is different.” This might be something good for your readers to remember… #JustBeKind

  33. @UA-NYC is right. When @DCS’s arguments don’t hold up, or when he is unable to defend them, he resorts to ad hominem attacks, and then says how he is “done with” them and will no longer respond… then can’t resist responding to sling more ad hominem attacks.

    How mature and “hinged”.

  34. It’s worth pointing out (perhaps, to most people) that there are some properties that will actually cost more for awards under this new program (regardless of the cash + points angle), at least based on the information that is presented on the Hilton website where you can compare the old and new rewards costs.

    The way that Hilton snuck this through? While they promised not to raise the top end of the reward level, they didn’t promise not to raise the bottom end of the reward level. So, for example, I found several instances, for example where a hotel previously ranging from 20,000 to 30,000 now has a higher minimum (to as high as one instance where the range is 26,000 to 30,000).

    Thus, while Hilton supposedly made their pitch that up to 30 percent of the hotels will go down in price, they were (obviously, not surprisingly) very quiet about the portion where the reward price actually will increase through this “enhancement.”

  35. I was searching hotels yesterday, places I’ve stayed before. The rates were the same as always. I was unaware a change was about to happen, and checked the rates again today (I’ve been dithering about where to stay and which rewards program will be the best to use on an upcoming trip and one in the summer). Yesterday, one property was 32,000 Hilton points for 4 nights combined with $160 cash. Another property (for a different trip) was 40,000 points for five nights, no cash needed. I’ve stayed at these places in the past and this is what I paid before. Today, the first place would cost $500 instead of $160 if I only used 32,000 points, and the second place is now 54,000 points instead of 40,000 for five nights! This is a huge increase! We’ve just begun trying out Marriott and finding how nice it is to transfer Starwood points, and I think that may end up replacing HHonors as our favorite rewards program. This is so disappointing.

  36. I agree with Shelley as I almost feel over at the point increase. I had a room booked in Santa barb for 12k points and $85 last week. This week it is 112000 points!! i think Hilton should increase everyone’s points in the same increments which seems to be 10 times!

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