Tips and tricks about market segmentation in hotels

24 May 2022
Many hoteliers are entirely focused on their property and have forgotten why people travel to the destination and need overnight accommodation. It is necessary to recognize that the need for accommodation is secondary to the real reason for travel. The right insights about reasons for travel will make a hotel more successful.
Segmentation is the easiest way to attract more guests than the competition. When the hotel focuses on a few carefully selected segments and matches their needs better than any competitor, the guest will prefer to stay at this hotel.

Market segmentation in hotels

There are many ways to segment a market, but for accommodation, the starting point for segmentation is the travel reason. The main reason for this is that accommodation is secondary to or complements travel, which drives the demand for accommodation. Another reason is that people travel for a specific reason and market segmentation is about slicing the market into smaller pieces with people sharing the same characteristics and behavior. The hospitality industry is about people, and therefore all market segmentation starts with and is based on people.
 
All hotel guests do not have precisely the same needs and behavior. Therefore, the purpose of market segmentation in hotels is to target one segment at a time with an offering that attracts people with the same needs and behavior. If hotels understand the needs and behavior of the segments they target, they will be more successful in acquiring guests from that segment and at a lower cost.

The first dimension - travel reason

It is prevalent for hotels to start by differentiating business and leisure guests. The reason is that these two segments have distinctive different needs and behavior. Then hotels divide each segment into smaller segments such as individual corporate travel, meetings, fairs, or conventions. For leisure, it could be for holidays, adventure, culture, etc.
 
Hotels can quickly analyze revenue, room nights, ADR, CAC, and many behavioral patterns like stay, booking, duration, etc., to understand the segments. It is even possible to analyze reviews per segment if the hotel is a bit creative. However, the data does not show precise needs, so the hotel must interview the guest to understand their requirements.

The second dimension - feeder market

If the reason why they are coming to the destination is the first dimension, what would the second dimension be? It all depends.
 
The second dimension should be something that differentiates some of the guests within each travel reason. For example, if international guests book earlier and stay longer than domestic guests, it is good to segment by feeder market.
 
Another second dimension could be guest spending (total revenue per guest). For example, some leisure travelers only buy the room compared to other leisure guests who purchase additional products and services.

The third dimension - micro-segments

Most hotels do not need the third dimension because the segments often become too small to be relevant.
 
If the hotel has 50 % business and 50 % leisure. 50 % of the business segment is domestic, and 50 % is international. Each subsegment is now 25 % of the total business, which is a meaningful segment size when creating a marketing plan and activities to attract more people from the segment.
 
In real life, the hotel probably starts with the next level of travel reason, such as people traveling to sports events, conventions, or festivals. These segments are much smaller, so dividing them into domestic and international only makes sense to target them as micro-segments.

Market segments in large hotels

In large hotels, the revenue from each micro-segment is significant, so it makes sense to work with at least three dimensions. First, hotels can select any combination of variables to extract a market segment from the data stored in the hotel PMS. Here is an example. Leisure travelers from the UK booked the rate code BAR through Expedia for a specific period. Second, in a large hotel, it is essential to analyze the revenue and profit from each segment before taking any action to attract more guests from the segment. Third, marketing resources are scarce, so it is vital to spend time and financial resources where the return on investment looks most promising.