Market segmentation: Is it time to reassess your segments?

by | Sep 24, 2018 | Revenue Management | 0 comments

Segmentation has always been a very important part of a hotel’s revenue management strategy. This was true even before hoteliers called it “revenue management”. In other words, segmentation has been around for quite some time and has always played and important role in marketing and sales strategies.The question now is, “Do the traditional definitions and way of tracking segmentations still work for hoteliers?”

Traditional definition

The traditional definition of segmentation includes having a clear understanding of customer definition, segments that apply to the property and to the corporate level, and an understanding of the source of business.

At the most basic level, the industry differentiates between rooms sold as a group and those sold individually, also known as transient business. The next level of categorization usually separates rooms booked but the purpose of the guests travels such as business or leisure. Sub-segments are then further developed and customized to unique demand drivers in a market. These are commonly referred to as market segments.

Market segmentation

Initially defined as the purpose of the customers visit to a hotel such as someone travelling on business staying at a corporate negotiated rate. Prior to the inception of the internet and the of the internet as a channel through which to receive hotel reservations, it was relatively easy and sufficient to define market segments as each customer’s reason for travel. If the reservation was made via the telephone directly with the hotel, the reservation associate would simply ask the direct question, “What is the purpose of your visit to the hotel?” If the reservation was booked via a Global Distribution System (GDS), the confirmed rate or rate code would typically provide the reservation associate with the reason for travel. For example, someone traveling on corporate business but not with a preferred company would typically book the public corporate rate. This was obviously long before hotels offered more complicated rate structures. In other words, it was clear and typically very easy to understand the customer’s purpose of travel making it easy to track and measure. But today, we operate in a very different environment and the purpose of our current market segments has become less cut and dry.

Behavioral segmentation

It may be time to rethink segmentation. Perhaps it is time to create segmentation based on the booking conditions, behavior of customers and lifestyle of customers. For example, customers booking through an opaque channel may be traveling for either business or leisure, or both. But their willingness to accept the strict booking terms imposed by an opaque channel makes them a unique group of guests compared to others who do not want to prepay and who want a last minute change and/or cancellation option.
It is important that hotels understand the behaviors of their customers. This will lead to a better understanding of what choices the customers are willing to make. If the hotel knows the specific value proposition the guest is seeking they can price accordingly.
A large global hotel company is a good example of a company that is segmenting with a focus on behaviors. They have created brand targets based on the behaviors of the customers for each of their branded hotels. They actually incorporate profiling questions into their guest satisfaction program. Because each guest defines value differently, their goal is to identify whether or not the target segments are getting the intended experience.

New definition

One could argue that Internet-Merchant and Internet- Opaque could in fact be market segments defined as non-loyal guests traveling on business or leisure. Hotels that define these channels as market segments can easily adopt this definition.
For hotels that prefer to keep channels and market segments separated, it may work better for them to redefine their market segments by focusing on behavior and lifestyle segmentation. Behavior segmentation can be defined as guests traveling for business or for leisure who have specific booking preferences or varying levels of willingness to accept different booking conditions.

Lifestyle segmentation is based on those individuals who select hotels based on their own values and lifestyle choices.

Benefits

One of the benefits of redefining traditional market segmentation and how we use segmentation information is that it will allow hoteliers to ensure the definitions currently in use are reevaluated to reflect the needs of today’s market. Too many hotels use market segments that are outdated or serve little purpose.

Reevaluating segmentation will allow hoteliers to stay ahead of trends. There does need to be some continuity to be able to accurately compare data year-over-year but this should not prevent hoteliers from tweaking the segments in the same way amenities and soft goods in the rooms are refreshed every few years. Or perhaps hoteliers can add behavior and lifestyle segmentation to their existing market segmentation allowing for yet another way to slice and dice the data. Adding another dimension could provide more depth to the hotel’s performance information. It may complicate things in the short-term but technology can help to ease the burden.

Adding another dimension by which to collect and analyze hotel data may very well allow for more accurate and easier tracking and ultimately add value to the accuracy of hotel forecasting.

Another potential benefit to this is the opportunity to increase the accuracy of hotelier’s target marketing initiatives.

In the end by adding another dimension to understanding behavior segmentation, the biggest benefit is a clearer understanding of who and what is truly making up the mix in the hotel, and understanding a hotel’s mix of business is critical.

Lifestyle segmentation is a tremendous opportunity for hoteliers to understand their customers far better than ever before. Having a greater understanding of the lifestyle choices customers are making with regard to their hotel stays will lead hoteliers into the opportunity of practicing one-to-one revenue management which after all, is the future of revenue management.

Once a hotel makes the decision to incorporate behavioral segmentation, they will need the ability to track the data in their existing technology. It will require writing reports to allow them to gather the information. Training must also take place to ensure all of the appropriate team members such as reservations and front desk agents understand not only the new fields and definitions they see but also the reasons for the changes. Ensuring everyone understands the reasoning behind the changes and the benefits they will bring will increase the accuracy of the implementation, tracking and ultimately the results.

Key review questions:
What is the purpose of market segmentation?

    • What is behavioral segmentation and what are the benefits?
    • Which of your customers are price elastic and price inelastic?
    • What are some of the actions or items that a hotel may need to consider in order to effectively implement behavioral segmentation?

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