How to segment the market to attract the most profitable guests

26 July 2022
There are two significant reasons for hotels to use segmentation. The first reason is to create an offering based on the concept, type of hotel, content, rate, etc., to attract guests to the hotel. No guests are created equal, so a generic accommodation offering will feel unattractive to most guests.
The second reason is to create an offering with an almost perfect match to guest needs and requirements to maximize the guest's willingness to pay a premium compared to competitors' offerings.
 
The reward is enormous for hotels that get the segmentation right, so here are three views to better understand what to consider in hotel guest segmentation.

1 Segmentation is probabilistic

A hotel is more likely to receive a booking from a guest for whom the hotel explicitly designed an offering. Therefore, hotels should spend time and resources on sending positive messages and creating superior offerings to their primary target groups. Still, they will not be the only ones staying at the hotel. Therefore, even if the probability is lower that a guest outside the defined segment will purchase the same offer, hotels should not discourage them.

2 Guests determine segments

Guests decide which segment they are in, not the hotel. Hotels have probably not yet figured that out. It is still helpful to understand which guests are in different segments as hotels try to design their offerings. Having someone in mind makes the content and the pricing of the offering much better. Still, guests decide whether a hotel is the right place to stay or not. Segmentation also works the other way around: Guests segment hotels. They create categories and put the hotel in one, and then, if the hotel is lucky, the guest will consider staying there.
 
The hotel's segmentation is only as good as the guests' interpretation of the segment. It is equally important to understand which guests are not part of the segment. They provide clues on how the hotel might adjust the offering toward the actual segment versus the theoretical one. If guests are booking the offering, something is appealing, so the hotel should not scrap it but refine and strengthen it. One common reason is that the rate is too low and therefore attracts a target group that would like to stay at the hotel but generally cannot afford to stay there.

3 Segments are heterogeneous

All hoteliers around the world understand that guests are not created equal. Ideally, every offering, including the room's content, the restaurant's menu, the price, etc., should be customized. However, customizing the stay for every single guest is not feasible, so segmentation is a way to design offerings that have a closer fit to the needs and requirements of different guests. The starting point is to develop an offer with a perfect match for the ideal guest. If the hotel is lucky, a few guests might find the offering an ideal fit for their needs. Many other guests will be attracted to the offering since it is a good, but not perfect, match and therefore book the stay. Guests that find a less ideal match will look for alternate hotels for their stays.
 
Hotels that create broader offerings (less customized) to more significant segments tend to become more successful, provided that the value is higher than the second best option for the guest. Hotels that focus on high customization to match guest needs risk finding enough guests to succeed. It all depends on the market size, but with broader offerings, hotels reduce the risk of not maximizing the revenue. The conclusion is that broad offerings attract more guests, but they are not likely to be 100 percent satisfied. Highly customized offerings will satisfy the guests if there is a perfect match, but there are not likely enough guests that this narrow offering will attract.

Analyze and track segments

Analyzing and tracking segments is possible if the hotel maintains a high data quality. Hotels must code each reservation with the correct variables, such as the reason for travel, feeder market, distribution channel, etc. To maintain high data quality, setting up the hotel PMS and giving the proper instructions to reservation agents and the front office staff is critical. Keep the choices within each variable to a minimum (remember broad segments?) to make it easy to choose the correct options for hotel team members. Once a hotel has collected data, the analysis can start and give the hotel valuable insights that commercial teams can use to grow revenue and maximize profits.

Gain insights with Demand Calendar

Hotels using Demand Calendar always start with an overview of segments showing the size of revenue and rooms. In addition, hotels see ADR and Customer Acquisition Cost (CAC) to quickly determine the profitability of each segment. It is easy to analyze segments in detail by cross-checking 11 different variables and viewing a segment report for any period, showing the historical behavior such as pick-up, booking pace, length-of-stay, etc. Furthermore, hotels can analyze on-the-books and pick-up for each segment versus last year or other years pre-pandemic. With Demand Calendar, hotels secure the full potential of segmentation to grow revenue and maximize profits.