Revenue Management, Different Approach for Market Segmentations

What is market segmentation

In general most hotels start with market segmentation to begin the revenue management process in order to define the various segments of each market for the hotel service.

Hotels typically segment their market (customer base) into a set of categories based on the price each category is willing to pay. Typical categories include the business traveler and the vacation traveler. Because demand patterns for each of these categories may vary significantly, hotels find it difficult to satisfy all of the demand simultaneously.

A good example is the comparison between the time-conscious business executive and the price sensitive vacation customer. The former is willing to pay a higher price in exchange for flexibility of being able to book a room at the last minute while the latter is willing to give up some flexibility for the sake of a more inexpensive room.

Then hotel can design ways in which they can charge different prices to the different market segments i.e. breakdown each segment category into subcategory.

The objective of market segmentation is to expand your hotel market and increase your hotel revenue potential by charging from time to time higher prices to those market segments which are not responsive to changes in price levels and charging lower prices to those market segments which will respond to a price reduction by increasing their purchases by a large enough amount to more than offset the revenue reduction occasioned by the discount taking into consideration value add concept and the cost factors .

Revenue management designs to maximize revenues by managing the tradeoff between a low occupancy and higher room rate scenario (business customers) versus a high occupancy and lower room rate (vacation customers). Such a strategy allows hotels to fill rooms that would otherwise have been empty using the supply and demand factors.

Market segmentation is critical to the success of the revenue team as well as the overall profitability of the hotel. It is imperative to understand what is driving traveler demand to the hotel or area, what are travelers’ price sensitivities and booking windows and the relative worth to the hotel for their desired stay period over the short term and overall lifetime value in the long term. On the positive side, the transparency of the Internet and social media makes some of this segmentation even easier

Market Segmentation Setup

Market segment has an essential role on our Revenue Management strategy, since it is one of the main pillar when a hotel implement a revenue management concept where it is combined even with the hotel pricing philosophy customized to each of the main customer market segments.

Since The Market Segmentation is global basics for all hotels, so it is mandatory that your PMS is configured correctly

As basic step for the hotel RM set up , when new hotel opened or new version of PMS software need to be upgraded i.e. from Fidelio to Opera , new and complete set up of market segment need to be created in the hotel back end of hotel configuration , you might need IT help for the complete process .

Market segments (called Market Groups and as per the RM setup process hotel place their customers into market segments, and then allocate the rate codes appropriately. By attaching a market code (with each market code belonging to the hotel strategic main market segments) to each of your price points (i.e. our rate codes), and knowing that each customer “has” his/her own rate code, each and every time a guest checks-in and rooms revenue is posted, we record market segmentation.

The benefit of having proper set up that market segmentation shall help you to identify the trends of your business in terms of:

Minimum and maximum Length of Stay

• Day of Weeks stays ( weekend and weekdays )
• Revenue breakdown for each room type.
• Lead Time for each segment.
• Cancellation % for each segment
• No Show ratio

Market Segmentation and Pricing Set Up

When a hotel set up a Pricing strategy linked with the market segmentation (offering different prices to different market segments / Customers ) this shall increases overall revenues and profits, and it is particularly beneficial if you have high fixed cost structures. Obviously, price segmentation works better to the extent to which there are real customer need segments and to which you can effectively isolate those segments.

Prices can be segmented in the following ways:

• By season, peak and low season , go beyond weekdays and weekend (higher hotel room rates for holidays and other peak tourist seasons)
• By location (higher prices in locations with less competition or in which less price-sensitive think about your room locations and views
• By volume i.e. volume discounts for groups, or room with package as add value.
• By product attribute i.e. first floor vs high floors, sea view vs no view ……etc

As an example, imagine that your hotel only offers all room types priced at $5. But some consumers are willing to pay up to $8. You are leaving $3 on the table for each of them. Other consumers are more price-sensitive and only willing to pay $3. You do not get any of their business. With price segmentation more revenue is generated by offering three prices — $3, $5 and $8 – instead of just one — $5.

Market Segmentation and forecast

A market segment forecast is a core component of a market / customer analysis. It projects the future numbers, characteristics, and trends in your target market / customer. A standard analysis shows the projected number of potential customers divided into segments.

As customer’s behaviours and trends change rapidly, hotels need to understand how each segment is behaving across all channels. Going back to basics and studying booking curves and LOS for each day of the week, each segment via each distribution channel; is the key in order to understand lead time and behaviour, this will help to build accurate forecast to achieve the hotel goals .

Market Segmentation tracking and analysis

Segments must be identifiable so they can be measured. Identifying a segment also will allow for greater reporting and more accurate tracking. Results will help in future decision making

Tracking and analysis for the market segments can give us clear picture of our hotel performance by analysis any shifts in segment behavior and production where the results helps us establish/adjust our rate strategy accordingly, this is why it is one of the daily task for the revenue manager to print and check the Market Code Statistics report from the PMS to check the daily, monthly and yearly market segments performance.