Hotels: To Manage Demand, Master Segmentation

June 19, 2015 SnapShot Team

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Note: This is part two in a series of articles following our recent Hospitality Management MBA Bootcamp at ESSEC Paris. The session on Demand Generation and Segmentation was conducted by David Turnbull, the Chief Operating Officer, and co-founder of SnapShot.

New Call-to-actionTo understand segmentation we first need to get back to hospitality marketing basics. Doing so, we are confronted by the obvious question; “Why do we segment our markets in the first place?” The answer is fairly evident, in that different people have different needs, and are willing to pay differently, according to those needs. Consequently, by properly segmenting potential customers, we can take a different marketing, pricing and demand generation approach to optimize each market.

As aptly stated by Warren Buffet,

"Price is what you pay. Value is what you get."

Breaking it down, the traditional approach to segmentation is similar to this:

Business travelers are willing to pay more, if they can get certain needs met. These clients will probably want such values as speed of check-in/check-out, excellent bedding, working space, silence, room service and other business oriented offerings.

Whereas a business guest may need and want such particulars, a single leisure traveler is probably willing to give up some of these facilities, to get a cheaper rate. Similarly, families need more space and safe space for the kids, and so on. Also, family oriented travelers may not want to be situated too near business travelers for fear of disturbing them. The list of examples could go on.

The essence of our discussion is shown in what value we can give our guests in order to suit their needs and wants. In so doing, hoteliers can optimize the price and thus return the best experience for said price. Last, but not least, do not forget that, in hospitality, experience is what drives it all.

Be advised however, there is a lot more to segmenting than just breaking down the classic guest types.

HOW TO SEGMENT

There are some very complicated theories on how to create segmentations including; by geographic zones; by demographics; behavioral segmentation; and even psychographic facets. While many of these may be right for some business segments, some are not practical for hotels from the usability and effectiveness standpoints. The end result of segmenting from these angles would be 20+ largely unmeasurable segments. This leads us to discern that there are basically four parts of understanding segmentation:

Measurability

The market segment has to be measurable. For example, if you're looking for business travelers, then you will need to have an idea of how many business travelers visit your city/area. You can easily get this from your existing PMS data, tourism board, GDS and Consortia, etc...

Then, once you know that there is a market you can measure, you will be able to use that knowledge to initiative the following steps. Keep in mind however, measurable also means that you can measure the guests coming from that segment.

Actionability

Are your product offering and price interesting enough for that segment to buy from you? Can they actually book a room at your hotel? You need to be able to ensure it is actually possible, as well as interesting. For example, some hotels that are focused on business travel in a business part of town find it near impossible to attract romantic leisure travelers. They often find this segmentation would not work because such leisure travelers absolutely wouldn't want to stay in that part of town.

Accessibility

Can you reach that segment? Is there a channel you can use to communicate to them and to promote your rooms? An example here might be targeting female travelers with pets. This could be too specific a segment as you would not have any easy way to communicate to them using distribution and advertising channels.

Substantiation

Is your segment large enough to be viable? Considering the marketing costs to reach customers, the price they are willing to pay, will it be profitable to target a particular segment? This aspect is self-explanatory, but for the sake of the argument, an example would be if you are targeting a business segment, and you are in the beach resort niche. The problem of this segment is not having enough potential guests to finance the additional Consortia/marketing costs.

By using the four aspects of segmentation, any hotel can start working out market segments. One key to success here is: do not do too much, too fast. Having dozens of segments is not going to do you any good. Remember that for each segment you establish, you will also have to work out marketing and pricing actions. Managing too many will be either inefficient, or nearly impossible.

Let us consider OTAs for a moment. While they perform as a single channel, they have quite simple segments. TripAdvisor has 4 segments, which are; Families, Couples, Solo and Business. Meanwhile, giant OTA Booking.com has only 5; Families, Couples, Groups of Friend, Solo and Business.

This brings our discussion to channels, most of which are today segmented by rate. Herein resides the problem of rate parity agreements. If you study this, you will eventually conclude that most of your revenue comes from a single segment, and this defeats the whole point of segmentation.

In order to properly segment, you will need to have channel segmentation. To achieve this, you are better off segmenting every channel separately, and using categories to group the channels later. The value here cannot be underestimated, as this is how you will distribute your rooms and rates, and thus market your hotel.

PRICING BY SEGMENT

There are six data points you need to consider to determine your price. You can see from the slide below that most of these rely on proper segmentation.


The example above lays the foundation for the pricing structure, and, over time, reveals the factor of how high/low a property can go in establishing those prices per segment.

What about the micro decisions?

Just a few years ago price elasticity was impetus enough to increase room reservations very quickly. When a revenue manager did not see the reservations pick up for a certain date, he or she could lower the price and provide an instant remedy.

Today, with user generated content, mobile and other technical considerations, plus the increasing complexity of distribution algorithms, there are more other factors to take into account.

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Micro pricing decisions are now based on three factors; the price (the standard price elasticity concept); user reviews; and position/ranking/visibility. These all let us get our first look at how segmentation and hotel demand management begin to work together.

By working with these three factors per the slide above, any hotel property can actively manage their demand. For an instance; should one override the commissions on an OTA (advertising), or should a manager increase the ad budget to gain more visibility? Should one reduce the price because of recent negative reviews that are impacting guest booking decisions? Or is it better to raise the price due to positive reviews that increase the demand? Then too, it may simply be time to find out what is happening in the hotel that causes reviews to be “not good enough.”

These factors don't just play on OTAs with commission overrides, they are valid for every channel too. The key points are to look at them as:

Price versus Value (reviews) compared to Visibility (advertising).

These work for your brand.com website, your OTAs, GDS and every other channel as well. Here, adequate Hotel Demand Management tools can deliver the right information to manage demand (stimulate and convert).

RETHINKING SEGMENTATIONS FOR DEMAND MANAGEMENT

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With the growth of new distribution and sales channels at an ever increasing rate, the opportunities for marketing and sales through different channels are going to increase too. This is a positive way of looking at the current situation. TripAdvisor adding direct reservation, varying rates through applications like HotelTonight, AliTravel adding new distribution and payment methods for Chinese and maybe international travelers, these and more are factors of the landscape where channel becomes increasingly important.

A massive re-think is required here. The market and the cannels are not merging, but must be clearly identified. This poses challenges for hotels in the form of; PMS limitations, CRS to PMS interfaces not communicating all the information, data stored as summarized information rather than transactional. These are technology challenges that hotels need to insist to be resolved by providers and/or partners.

These must be, and can be resolved via the entire segmentation process being automated based on rules set at the hotel, if the data is correctly stored and available. However, the issue of manual tagging (and the mistakes therein) exists due to inadequate technology.

CONCLUSION: DEMAND MANAGEMENT, SEGMENTATION and the COST OF DISTRIBUTION

To manage any hotel’s demand, managers must know which distribution channels can be activated to increase that demand. To understand how to activate these channels, one must know which segments they bring with them, and how flexible a property can be with prices and marketing. Managers need to understand how much they can, or should, invest in marketing, and to do this properly they must understand the cost of distribution.

In conclusion, rethinking your segmentation and building proper data storage that inherits all the relevant information from every channel, should be a priority for every hotel now. Understanding the real cost of distribution will happen once you have proper data, and that will be the "holy grail" of increased revenue, and the bottom line, now and in the future.