To increase the benefits from a Total Revenue Management system (TRM), it is vital to optimise the buying process and measure total spend, consider different type of customers, their purchasing power, needs and habits. For optimum results the process of segmenting customers will need to take into account the contribution of each segment in all revenue streams as well as the cost of sale. This will provide a detailed view and understanding of who the customers are while having the knowledge of which segment is more profitable, will offer a clear insight and enable the development of the Optimum Business mix. In fact, while examining only rooms may classify a segment secondary due to less booked revenue, the contribution in ancillary services and products combined with how they book can make it more profitable.
Market segmentation is of particular importance in the complex and competitive world of today because it does not only help put things in perspective, but also ensures that you won’t have to waste money and efforts in areas that won’t bring any positive results.
Cost of acquisition and contribution by revenue source are extremely important factors that need to be taken into consideration when managing a business in the highly competitive and ambiguous hotel management industry of today, which is another reason why market segmentation needs to be leveraged. Doing so will not only help you understand where your customers are coming from, but it will also be easier for you to figure out which areas need improvement and which customer groups you should focus on more for greater revenues.
Still not convinced? Below, we’re talking all about why market segmentation is so important, how it’s done, and how market segmentation can prove to be beneficial for any hotel.
Benefits of Effective Market Segmentation
- Leads to better customer understanding – Lays the foundation of understanding customer behaviour, booking patterns and spending habits. This can lead to improved and personalised service
- Leads to superior insights – Segmentation is the cornerstone of Revenue management and guides efficient and accurate forecasting combined with insights such as booking pace, channel and geographic origin of business statistics etc.
- Leads to enhanced pricing and optimization strategies – Strategies take into consideration spend by revenue stream and therefore lead to more effective plans
- Leads to effective use of budgets – Effective segmentation provides guidance for better utilization of both marketing and operational budgets. Targeting the right audiences at the right time guarantees better conversion of promotional activities
- Leads to increased profitability – Contribution by segment provides a way to not just increase revenues but also profitability across the entire operation. Optimum Business Mix is now comprised of indicators that highlight the impact of each segment on profit performance
What is Market Segmentation and How Does It Fit into Your Hotel Strategy?
Contrary to popular belief, market segmentation is possible in practically every industry, which is what makes it even more unfortunate that the approach is not being fully leveraged in hotels. However, before letting you in on how hotels can leverage market segmentation, it is essential for you to understand some of the benefits that market segmentation brings. Incorporating this strategy or approach can not only help optimize the revenue and profits of your hotel by creating different groups of customers on the basis of their features, but market segmentation also acts as a great risk management technique.
With market segmentation and categorizing your customers into different groups and subgroups, you will not only be able to distribute the risk involved, but will also be able to try your hand at different techniques and strategies for each of your different customer groups to figure out which of them is most promising and brings you the best results without putting all of your eggs in one basket.
So, how can you go about incorporating market segmentation for your hotel? Read on for the details and some of the greatest tips on how market segmentation can be leveraged.
How Can Market Segmentation be achieved in Hotels?
The first thing that you must do to leverage market segmentation for your hotel is to classify your customers into groups based on certain unique or distinct features. By definition a market segment is a group of customers with similar buying power & willingness to pay for your product or services. To fully benefit from the process of defining your market segments It is important that the following criteria are considered:
- Measurable: the ability to measure the size of the segment along with frequency and volume of booking
- Accessible: segment needs to be accessible by the hotel in order to influence their booking behaviour
- Substantial: the segment needs to be big enough in order to generate adequate revenue
- Differential: segment needs to have different booking patterns, acquisition costs, price sensitivity etc.
- Actionable: the hotel needs to be able to actually sell to the specific segment
A coherent set of market segments will not only guide the process of pricing but also forecasting, setting up the optimum business mix and all promotional & marketing activities. While considering marketing activities, segmentation criteria will also include Geographic, Demographic and Psychographic variables.
In many hotels there is a tendency to mix market segments and booking channels (Segment: who is the client depending on his willingness to pay, booking channel: the channel used to make the booking), it is our opinion that these two should be tracked separately, although a well configured market segmentation will also provide an indication for both.
For example, OTA is a segment we have seen in some of the hotels we have worked with. But is it a segment? Before answering that consider the following: You have one guest who books your Best Available Rate directly on your website and one that books the same rate via an OTA. Are those two guests willing to pay the same price for staying with you? Yes, therefore by definition they belong to the same segment. What changes is the method of booking. If you then consider BAR (Best Available Rate) as the broad market segment group, it could have sub-groups to help better identification and tracking of customers. Potential sub-groups for your BAR segment could be: BAR-direct, BAR-OTA Net, etc.
The uniqueness of your segments and sub-segments will enable better and more accurate tracking of how business is picking up, deviations from your strategy and forecast while enabling you to identify periods that require extra attention.
For example, some of your main market groups can include:
- BAR: Best available unrestricted rate, sub-groups can include BAR-direct, BAR-OTA Net, etc.
- CORPORATE: Rates contracted to specific companies, sub-groups can include segments by volume/rate, Consortia rates etc.
- DISCOUNT: Restricted or fenced rates derived from your BAR, sub-groups can be as per BAR segment above
- PROMOTIONS: Ad-hoc promotions designed to fill in occupancy gaps
- GROUPS: Usually bookings for more than 10 rooms, sub-groups can include Leisure groups, Corporate groups, Residential groups etc.
- WHOLESALE: Opaque rates contracted with various travel agents that they use to resell
This is by no means a definite list of market segments but an indication of what can be included. The appropriate segments for your hotel will need to be determined by examining your product, the market and the competition & they will need to answer to the criteria we listed above (Measurable, Substantial, Accessible, Actionable, Differential)
Once you have your customer groups figured out, it is essential for you to assess and evaluate which ones of them offer the most benefits and contribute to your profits or revenue the most. Next, it is important for you to calculate the amount of money that you are spending on each of these customer groups. As mentioned earlier, the cost of acquisition and the cost of distribution are key factors that need to be taken into consideration when you’re trying to make the most of your market segments and redefine the way in which the process is carried out.
Understanding how much it costs you to get customers from each one of your market segments is crucial in order to evaluate which of the market segments that you have created gives you the best results at the least cost. Additionally, better forecasting will also be possible if you have all of the information needed about each of your customer segments and the cost that is incurred to bring in customers from each of these market segments. If the cost needed to bring in customers from one of the market segments is incredibly higher than the rest, it is essential for you to figure out how these costs can be reduced for optimization and better results.
Forecasting will also help you understand and fine-tune strategies and approaches that you are using for each of your market segments. This will not only prove to be beneficial from a revenue management perspective, but it will also ensure that you’re able to make the most of all of the available and accessible resources in the best possible way. Evaluating the market segment bringing in the most customers and the most beneficial market segment will also help you understand where you need to direct and channel most of your advertisements and energies.
As mentioned earlier, market segmentation will help you get an understanding of what you can and should expect from each of your market segments and how much time, effort, money and energy it would be wise to spend on each of these segments to reach the optimum business mix.
Combining and analyzing the information revealed to you through effective and efficient market segmentation and using it in harmony with other insights gained through booking history and trend data will also allow you to make better and more informed decisions that will prove to be advantageous for your hotel business. These strategies and approaches will prove to be fruitful especially in case of fluctuating demands and complicated market conditions.