Fluent Essays

1.What should Walkins do? What factors help explain Olympic’s performance? What market forces may impede it in the future?2.Assuming Olympic responds to Enterprise, how should it do so? What is the potential impact of emphasizing dollars spent versus days of rental? What is the potential impact of removing blackout dates?3.What is the cost of matching Enterprise? How much should Olympic be willing to spend for the Medalist program?4.What is the monetary value of a medalist to Olympic? olympic_rent_a_car.pdf Unformatted Attachment Preview 9-913-568 REV. DECEMBER 6, 2013 JOHN DEIGHTON JAMES T. KINDLEY Olympic Rent-A-Car U.S.: Customer Loyalty Battles Laura Walkins, vice president of marketing, and Andy Kim, manager of customer relations programs, stepped off the DFW Airport shuttle bus on a warm October afternoon and hurried inside to the Olympic rental area. They had come to Dallas to meet with Olympic’s district managers and top marketing staff to try to determine how to respond to Enterprise Rent-a-Car’s recent aggressive move with its EnterprisePlus customer loyalty rewards program. As they spotted their names on the Olympic Medalist board, indicating where to find their waiting car, Laura and Andy couldn’t help but notice the long lines at the Enterprise counter. Enterprise had changed its customer rewards program several months before. On July 5, 2012, it announced that its ‘‘regular’’ customers would receive free rental days on any car, with no blackouts. It also announced a perhaps more troubling aspect of its new program: a shift from rewarding days rented, the common practice in the industry, to dollars spent. Because frequent travelers typically spent more for daily rentals, they would earn free rentals faster------and more often. Laura slipped behind the wheel of a white Hyundai Sonata and drove toward the exit, listening as Andy talked about the main topics for the meeting. He pointed out that the Olympic Medalist Awards loyalty program was, in his view, the number-one reason for Olympic’s growth and profitability. He also stated that Enterprise was making inroads in its quest to capture more of the crucial business traveler market. ‘‘We have to do something. Enterprise is a well-run company and a formidable competitor. We can’t just let it take business from us,’’ he said. ‘‘I think our service and pricing are competitive. Our share of business-traveler bookings is holding up, but our Medalist Awards program may come to be perceived as inadequate compared to Enterprise’s.’’ Laura accelerated onto the highway toward their hotel. This is going to be an interesting meeting, she thought. Loyalty Marketing Programs Customer loyalty programs are direct efforts by companies to gain long-term business from their best customers. These programs also provide considerable information about customers that enable companies to maintain a more knowledgeable and ‘‘personal’’ relationship------ideally similar to those customers develop with many small, local businesses like dry cleaners and hair salons. ________________________________________________________________________________________________________________ HBS Professor John Deighton and College of Charleston professor James T. Kindley prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. Although based on real events and despite occasional references to actual companies, this case is fictitious and any resemblance to actual persons or entities is coincidental. Copyright © 2013 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. This document is authorized for use only by Essa Alkhudaysh (eank1989@gmail.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 913-568 | Olympic Rent-A-Car U.S.: Customer Loyalty Battles The idea of rewarding loyalty is not new. As self-service businesses began to grow in the early 1900s, mass loyalty programs, built around coupons and trading stamps, appeared. Retailers would give customers small adhesive stamps in proportion to the amount of their purchases, to be pasted into books and eventually redeemed for merchandise. The best-known provider had been the S&H Green Stamp Company. These first programs were popular until about 1930. They reemerged in the 1950s and ended in the 1960s as consumers tired of them. American Airlines created the first major travel loyalty marketing program in 1981 when it introduced the AAdvantage frequent-flyer program (FFP), giving ‘‘miles’’ redeemable for free travel based on paid miles traveled. The program succeeded because it had high perceived value for the frequent traveler and it cost American very little to provide a free seat that otherwise would not have been occupied. The heaviest travelers usually paid the most for their tickets------meaning that American also received the highest revenue for rewarded miles. American’s program administrators quickly realized they had a tool that did not only rewarded loyalty but also identified the individuals who accounted for most of aviation’s revenues. The technology facilitated a way to tailor programs and offerings to individual customers. Airline frequent flyer programs (FFPs) became so popular that credit card companies and other businesses began offering them as inducements to their customers, paying the airlines around one cent per mile toward a customer’s preferred FFP, thus yielding large additional profits to the airlines. FFP rewards, like other loyalty programs that followed, also received favorable tax treatment, as they were not counted as income. Companies mostly viewed the rewards as an affordable employee perk, even though they were paying for the airlines, hotels, and rental cars.1 This encouraged travelers to opt for their favorite providers even though it may have cost their company more. As the decade ended, computer-based customer loyalty programs were widespread in many industries, including hotels, department stores, video and book retailing, credit cards, movie theaters, and the car rental industry. The U.S. Car Rental Industry: From 10 cents a mile to a $24 billion industry The U.S. car rental industry was born in 1916 when Josiah Ellis Saunders, of Omaha, Nebraska, ran a seven-line classified ad offering ‘‘Automobiles for Hire.’’ Saunders’s fleet consisted of one Model T Ford that he rented for ten cents a mile. The industry Saunders created grew slowly at first, then took off with the boom in commercial air travel after World War II. The rental car business is closely tied to the state of the overall economy as business, and especially leisure, travel tends to be somewhat discretionary. In 2009, total market revenue fell 6.5\% from 2008, but revenue was up 2.5\% in 2010 as business and consumer confidence slowly returned. The growth rate was about 2---3\% per year in 2011---2012. While business travel had increased from its lows in 2009, the climb in customer spending on travel was due more to increased prices than to a rise in bookings. Unlike airline seats and hotel rooms, car rental fleets can be increased or decreased in response to demand factors. This takes time, but in 2012 there were 1.6 million rental cars in service, 0.5\% fewer than in 2009 but higher than in 2010. Car rental fleets seemed to have reached a level in balance with demand. Matching fleet size to demand is a key element in car rental profitability. 1 These programs did, however, often help companies steer their employees to preferred vendors with whom they had discounts. 2 BRIEFCASES | HARVARD BUSINESS SCHOOL This document is authorized for use only by Essa Alkhudaysh (eank1989@gmail.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Olympic Rent-A-Car U.S.: Customer Loyalty Battles | 913-568 The industry has two distinct markets with very different customer requirements: Airport rentals: Roughly half of industry revenue (about $12 billion) came from airport rentals, where most business and leisure travelers picked up their cars. Because costs are higher for operating at an airport (including, for example, running a shuttle service) most airport locations were dominated by the major brands. Even value-oriented major brands such as Budget (now owned by Avis) had a hard time competing profitably on-airport. Car rental firms paid airport operators concession fees of around 10\% of revenue, as well as fixed fees for their customer service counters. Staffing had to be in place from early morning to late at night. Local rentals: The other half of the car rental business originated in local offices, including car dealerships and repair shops. Car repairs or service for which a driver’s insurance covers the rental cost was the main business. In 2012, Enterprise and Hertz were the only significant brands serving this customer, although numerous small operators also played a part. Enterprise had more than 50\% of this market. Car Rental Consumers Approximately 27\% of U.S. adults rented a car for business or personal use in 2012. Industrywide, 80\% of the revenue on-airport derived from business rental and 20\% from leisure. (See Exhibit 1 for a summary of total U.S. business travel trips.) However, only 20\% of travelers who rented at airports were business travelers. This breakdown could be further segmented as shown in Table A. Table A Rental car customer segments \% of All Business Travelers ‘‘Heavy’’ Business Travelers ‘‘Medium’’ Business Travelers ‘‘Light’’ Business Travelers Leisure Travelers Other 37 45 18 \% of Industry Revenues 55 20 5 15 5 Consumers were more likely to rent a compact car than any other class of vehicle for both personal and business use------about 25\% of vehicles rented. Regional differences were important. Miami was more leisure oriented, for example, than Boston. The length of rental and miles driven per day for leisure and business averaged 4.6 days and 150 miles in Miami, as opposed to 2.3 days and 45 miles in Boston. This made a difference to franchisees with respect to loyalty program redemptions. Frequent renters tended to earn points where they did business and spend them in leisure locations. Leisure travelers tended to rent larger cars for longer periods, even though the per-day charges were generally less due to factors such as preplanned trips and lower revenue days (weekends). Business travelers generally paid more per day, although rates varied based on location and day of the week and whether the traveler worked for a company with a contract rate. Competition for the ‘‘Loyal Customer’’ Exhibit 2 presents a competitive comparison of major brands’ market shares. HARVARD BUSINESS SCHOOL | BRIEFCASES 3 This document is authorized for use only by Essa Alkhudaysh (eank1989@gmail.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 913-568 | Olympic Rent-A-Car U.S.: Customer Loyalty Battles With 870,000 cars in service and $12 billion in annual revenues, Enterprise had more than half of the entire rental car market. It dominated in off-airport rentals with 5,000 neighborhood locations within 15 miles of 90\% of the population. Of the 20\% of the market who were business renters, about one-fifth rented from Enterprise (4\% of total renters) and one-quarter from Hertz; the balance was spread among Avis, Olympic, and regional brands. Revenues from business travelers broke down as follows: 1. 2. 3. 4. Hertz: 30\% market share of revenues Avis: 26\% share Enterprise, which had recently acquired National and Alamo: 20\% share Olympic: 8\% share The tough competitive rental car landscape had forced out weaker, smaller companies, and the industry had been consolidating. In 2002 there were nine national car rental companies in the U.S.; by 2012 there were four. The U.S. Travel Booking Industry Travelers are increasingly driven to make travel bookings in the most budget-friendly, convenient way possible. Given their propensity to be online, travel providers have more incentive to push the Internet as the go-to source for booking, associating the tool with perks that are unavailable offline. ------ CEO of a major travel company As of 2012, 78.6\% of Americans were online and spending 2.5 hours more online each week than they did five years earlier. Online sales of leisure and personally booked business travel increased from $90 billion in 2009 to over $119 billion in 2012. Mobile devices were projected to account for 32\% of online travel bookings by 2016. Online booking allowed users to compare prices and availability, and provided immediacy, which was often needed in booking travel, especially for business. The rapid rise of third-party travel consolidators such as Expedia, Priceline, Travelocity, and Orbitz, and the equally rapid decline in the use of travel agents (used by fewer than one in ten travelers in 2012), was particularly significant for the leisure traveler who preferred the convenience of booking airlines, hotels, and car rentals from one provider. In fact, each of the third-party travel consolidators targeted women in higher-income households who were booking mostly for leisure. About half of all leisure travelers booked rental cars online. Approximately 46\% of all business renters booked through a rental car operator website (e.g., Hertz.com), while an additional 12\% rented online via a third party, such as Travelocity or Orbitz. Best price was the main reason for booking online through company websites, while convenience was cited as the main reason for using a third-party consolidator. Pricing and Profitability in the Car Rental Industry Variable pricing, or revenue management as it is known in service industries, was used extensively in the rental car business to optimize profit. Sophisticated data management indicated when demand was likely to be highest, allowing car rental companies to charge the most at those times and also allowed them to adjust prices as demand fluctuated. 4 BRIEFCASES | HARVARD BUSINESS SCHOOL This document is authorized for use only by Essa Alkhudaysh (eank1989@gmail.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Olympic Rent-A-Car U.S.: Customer Loyalty Battles | 913-568 Daily rental rates could range from $10 to $150 before fees and taxes. Approximately 80\% of corporations negotiated nationwide agreements with car rental companies that provided up to 30\% off standard car rental rates. A car rental company’s largest expense item was its fleet of vehicles, which represented approximately half of all operating expenses. Cars were generally purchased with a guaranteed repurchase price. These cars, in the industry called ‘‘program cars,’’ were returned four to sixteen months later, which relieved the company of the risk of used car prices. The average car was rented 208 days per year. Rental car companies tried to gain additional revenue by inducing travelers to take insurance, gas fill-ups, and upgrades to larger cars. For several years, GPS devices, satellite radio, and electronic toll payment were features for which some consumers were happy to pay an extra few dollars. However, growth in the use of smart phones, which gave consumers access to such items as GPS navigation at no charge, had diminished the revenue from these sources. By 2012 a number of other developments had put additional pressure on pricing and profitability. Online coupon vendors such as Groupon and comparative pricing sites such as rentalcarmomma.com distributed pricing discounts. Consumers could access availability of cars by location along with other data, giving them additional purchasing leverage. Consumers were increasingly comfortable transacting business online and while on the go, and they were becoming savvier at finding the lowest prices and best deals. Olympic Rent-A-Car Olympic Rent-A-Car was founded in 1976 by a former Olympic pole-vaulting champion, John Uelses, who was also a U.S. military officer. The company was almost totally a franchising operation, which allowed it to grow rapidly and profitably to its 2012 position of approximately 7\% market share. Its initial strategy was to price lower than Hertz in every market, no matter what. Olympic capitalized on its popular founder in its promotion and advertising. Uelses sold the business to a private equity firm in 1987, but continued on its board. The Olympic theme resonated with customers as the company stressed quality service and the slogan ‘‘go with the winners’’ in its ads and promotions. When Uelses launched Olympic there were five major car rental agencies and approximately 200 regional firms. Olympic’s rental operations were conducted primarily at major airports and at downtown locations in major cities. Olympic was able to gain critical airport distribution by helping its franchisees acquire a number of the smaller regional firms. Olympic franchisees were also able to gain airport space as major airports were enlarged in the early 2000s. By 2012, Olympic had approximately 464 rental car locations in the United States and operated a rental fleet of around 108,000 vehicles (see Exhibits 3 and 4). Olympic’s domestic fleet was made up of cars from many global auto manufacturers. Over the last few years, the company had added more fuel-efficient cars as customers had demanded. Olympic purchased new cars, rented them to customers for 15,000 to 30,000 miles (approximately eight months to a year and a half), then sold them to retail (60\%) or wholesale markets. Olympic’s fleet of 108,000 cars averaged daily rental income slightly below the industry average, and its typical car was rented about 232 days per year. HARVARD BUSINESS SCHOOL | BRIEFCASES 5 This document is authorized for use only by Essa Alkhudaysh (eank1989@gmail.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 913-568 | Olympic Rent-A-Car U.S.: Customer Loyalty Battles The Olympic Medalist Rewards Program The Olympic Medalist Award customer loyalty program was launched a few months after the first rental car loyalty programs------National’s Emerald Isle Program and Hertz’s #1 Loyalty program------were introduced in the late 1980s. It had been modified several times over the past twenty years in response to various competitive moves. Olympic had chosen to be a follower. Since it tried to provide lower overall pricing than the leading companies, management always felt it did not have to offer more in its loyalty program. Exhibit 5 shows loyalty members as percentage of customers for major rental firms, including Olympic. Most of Olympic’s Medalist members belonged to several other car rental loyalty programs. Andy Kim was charged with managing the program as a cost center and was expected to at least maintain the program’s cost at the same percentage of sales as the previous year. Kim oversaw the program’s marketing efforts and managed the loyalty customer database. Franchisees paid Olympic 3\% of a member’s rentals in addition to the standard franchise fee. Anyone could join Olympic Medalist at no charge. Members earned rewards by accumulating credits. When a member accumulated 16 credits he received an award of one free day. Each rental day under the program equaled one credit. A rental day was based on a 24-hour rental day starting at the time of the rental. Credits earned were valid for one year from the date of issue. Credits could also be redeemed for airline frequent flyer programs and other rewards such as rental car upgrades. The Medalist program had three tiers of membership: • Bronze: Member is credited as outlined above. • Silver: Member is moved to silv ... Purchase answer to see full attachment