How to Set Up Hotel Segmentation: Tips on Modern Segmentation Strategies

July 14, 2016 Linda Girrbach

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After our popular guide, How Hotels Can Determine the Right Pricing Strategy, our in-house Demand Management Consultant and Revenue Management jack-of-all-trades, Linda Girrbach, had to get in on the action. She wrote the following amazingly practical guide to developing a modern, effective segmentation strategy for a hotel. Because, let's be honest, most hotels struggle with segmentation. Thankfully, Linda is on your side and here to help!

 

Modern Segmentation in Hotels: A Blessing and a Curse

Defining a useful segmentation strategy for a hotel can be very complex. The main obstacle is that hotels experience limited flexibility. Quite often, chains provide segmentation structures that were defined 20 years ago and don’t allow hotels to make changes based on their individual properties’ specifications or developments. 

In the past, emphasis was placed on market segments defined by the purpose of the traveler’s hotel reservation, such as leisure or business. As highlighted by Janel Clark in a blog post on determining the right pricing strategy, it is critical that your segmentation strategy follows the MAAS (Measurability, Actionability, Accessibility, and Substantiation) principle. With the shift to today’s internet based booking landscape, it became nearly impossible to tell who the client actually is, let alone why the hotel room was booked. To make it even more complicated, it is not uncommon for travelers to combine a business with a leisure trip (what is sometimes known as "bleisure," I know, but I didn't make it up!).

As a result, hotels have learnt to focus on channel segments rather than market segments, to track where the booking was coming from rather than why the guest made the booking.  

A well-defined set of market and channel segments coupled with correct pricing per segment is the foundation for successful Demand Management. Let’s take a closer look at the possibilities. 

     

Market Segments 

Regardless of the current trend, market segmentation should not be forgotten. It is still the cornerstone for a successful pricing strategy. Each market segment shows different booking behaviors and price sensitivity. Hence, each segment has a unique pricing and stay restriction strategy and requires distinctive sales and marketing efforts. The aim is to create the ideal market mix, which brings the highest possible profits to the hotel.  

Market segmentation also allows us to identify the reason for downturn periods. With year-on-year comparisons we can analyze which market segments are performing better or worse and plan our sales and marketing strategies accordingly.  

Let’s now look at a market segmentation example (stay tuned, trust me, it's worth it!): 

Market Segment #1: Transient

A hotel usually has different BAR (Best Available Rate) levels, which are non-restricted and available to all customers. Guests booking these rates don’t have access to qualified rates (contracted rates). BAR rates are highly dynamic and are usually changed very frequently. Many other rates, such as non-refundable promotions, are derived from BAR (% off BAR).  

Market Segment #2: Negotiated

Negotiated rates are restricted rates, agreed upon between the hotel and a company or government. While BAR is available to all customers, negotiated rates can only be booked by guests who qualify for that rate. That’s why negotiated rates are often referred to as “qualified” business. Negotiated rates are only available for a limited period of time and need to be re-negotiated continuously. It is common practice that the more volume an account produces, the lower the negotiated rate. Last Room Availability (LRA) also plays an important role within this market segment. LRA means that the partner has the right to book the last available room at the hotel at their contracted rate, regardless of the current hotel BAR level. 

Market Segment #3: Groups

Group pricing has to be defined ad-hoc and is highly dependent on high and low demand periods. They are often derived from BAR. Group business in general tends to have longer lead times and stricter cancellation policies to control group wash. Depending on the size of the hotel, group business can be used to build an on-the-books base for dates far into the future.   

 

Channel Segments 

Once market segments are defined, they need to be connected to channel segments. Examples for channel segments include the GDS (Global Distribution Services – what travel agents all around the world use to book rooms for travelers), direct channels such as telephone and email, and OTAs (Online Travel Agents like Booking.com and Expedia).  

OTA channels have to be differentiated between net and gross channels. There are various OTAs which work with net rates, so the hotel receives the rooms revenue without commission. If net and gross were mixed, the result would be a dilution of rate within one segment. 

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Successful Demand Management means you not only tailor marketing and sales activity around your market segments but you also have a close eye on how you distribute your rooms across all channels. By accepting group business are you displacing higher rated transient business? Or does it have the potential of returning in a lower demand period with less cost. The challenge (but the ultimate goal) is to keep the Cost of Distribution as low as possible while maximizing revenues at the same time.  

 

Creating Market and Channel Categories 

The list of market and channel segments can be extremely long, so it makes sense to summarize these segments into categories. Typically, a hotel has various transient segments, such as flexible and inflexible (AKA flex and non-flex) conditions, which could be combined in one market category called “Transient.” The same applies for corporate accounts, such as high and low volume producers as well as Consortia. All of these segments can then be summarized as a market category “Corporate.” The “Group” market category could include market segments such as Wedding, Convention, Corporate, Government and Leisure Group.  

The same approach can be used for Channel Categories: Phone, fax and email can be categorized in Direct, OTA net and OTA gross can be summarized as OTA.

You should aim for a maximum of four to five channel categories, which could be Brand Website, Direct, OTA, GDS, and maybe Management (for Staff, Family & Friends, House Use, and Complimentary bookings, so they don’t dilute the Direct rate).  

Regardless of market or channel segments, data accuracy is of utmost importance. Assigning reservations to the correct markets and channels is crucial for Demand Management to work properly. With today’s CRS – PMS integrations (how Central Reservations Systems communicate with Property Management Systems) most segment assignments are automated. A proper setup and mapping in all related systems is required and segmentation should be kept as simple as possible to minimize the risk of (human) error.  

 

SnapShot and Segmentation 

Now let's look at how you can apply this to your work in SnapShot Analytics (and for those of you stragglers still not using it, take a practical example of why it could be a useful tool for you and your team). OK, sales pitch over, let's get to it! 

Mapping PMS Segments 

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Most SnapShot users probably agree that one of the most useful functionalities within the SnapShot setup is the possibility to customize the segmentation mapping, regardless of how the individual segments are grouped in the PMS.  While all market and channel segments are imported from the PMS, users can simply group individual segments into categories to obtain the most useful reporting structure.  

 

Cost of Distribution 

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Based on the above functionality, SnapShot can then break down Distribution Costs and display the actual Net (Commission) RevPar, the Total Cost of Distribution per day, as well as the Net (Commission) Contribution. This can be looked at historically as well as for the on-the-books in the future. 

And that's really just the tip of the iceberg. There's so much more you can do, but we'll save that for another time. 

Conclusion

To understand the real cost of distribution, which should include all marketing related expenses, fixed transaction fees as well as dynamic and fixed commission, you might want to re-think your segmentation. To make the right tactical and strategic decisions, you need proper data – per segment and/or segment category. Only then you can start to optimize profits. 

Wrong or outdated segmentation can be a curse. Take your time, re-think your current segmentation, and once you have defined it properly, you will see that the curse transforms itself into a blessing. A blessing in the form of profit optimization!