Customer loyalty clubs and profitability’ analysis. The Sherriton Hotels chain embarked on a new customer loyalty program in 2007. The 2007 year-end data have been collected, and it is now time for you to determine whether the loyalty program should be continued, discon¬

tinued, or perhaps altered to improve loyalty and profitability levels at Sherriton.

Sherriton’s loyalty program consists of three different customer loyalty levels. All newr customers can sign up for the Sherriton Bronze Card—this card provides guests with a compli¬

mentary bottle ofwine (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 ofthe chain’s locations worldwide, he orshe is upgraded to Silver Customer status. Silver benefits include the bottle ofwine (cost to the chain is $5 per bottle), $30 in restaurant coupons (cost to the chain is $15), and 20% off ever)7 night from the 21st night on. A customer who reaches the 50-night level is upgraded to Gold Customer status. Gold status increases the nighdy discount to 30% and replaces die $5 bottle ofwine 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 loyalty7 program characteristics:

Loyalty7 Program Number of Customers Average Number of Nights per Customer Gold 2,673 60 Silver 9,174 35 Bronze 88,330 10 No program 240,900 1 Note that a Gold Customer would have received the 10% discount for his or 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 die chain’s hotels. Also, assume the restaurants are managed by a 100%-owned subsidiary of Sherriton.

Required 1. Calculate the program contribution margin for each ofthe three programs, as well as for die group of customers not subscribing to the loyalty program. Which of die programs 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, 2007.

3. What is the average room rate per night? What are average variable costs per night inclusive ofthe loyalty program?

4. Explain what drives the profitability (or lack thereof) of the most and least profitable loyalty program (again, one of these may he the “no program” option).