First, let us be clear about what we mean by our market.
A market is made up of actual or potential customers with the characteristics that could lead them to become your guests: the authority to buy, the willingness to buy, the ability to buy, and a reason to buy — some unmet need or want that your product could meet.
Market segmentation is a marketing strategy that divides a broad target market into subsets of consumers with common needs and priorities, and then designs and implements strategies to target them.
This market is not uniform in behaviour or requirements. So you segment it, grouping customers by their needs into sub-groups.
Think of your customer base as a pie that you cut into slices, each slice a sub-group. We group customers with similar needs and characteristics into one segment, so that segment can be targeted and reached more accurately with its own marketing mix. In other words, we don't just divide the pie; we divide it by need, wherever we see a group whose needs differ from the rest, so we can reach them specifically.
Every day many travellers arrive in your city. Not all of them can stay in your hotel, so your goal is not to serve the entire market, but to target the people whose business you really want. Market segmentation helps you identify and focus on them.
How important is customer behaviour to effective segmentation, and where does information on that behaviour come from?
What information does your organisation already track that tells you about your customers' behaviour?
Common behavioural variables tracked in every hotel include unit and product types, rates, occupancy, length of stay, additional spend, marketing channels, preferred days of the week, frequency of purchase and, of course, revenue. This data can be collected from the property management system and other systems in the hotel.
What are the consequences of poor tracking?
Hotels that know less about their markets and customer segments often mix up sources, channels, booking modes and other parameters when recording transactions. When the market segment field is used to serve everyone's wish list of reports, the consequences follow.
If the data coming in from all the channels is inaccurate, a series of problems follows, starting with poor forecasting. Inaccurate forecasts lead to inventory and pricing decisions against unachievable budgets, which in turn lead to wrongly targeted strategies and wasted advertising and marketing spend.
What criteria help identify segments?
- Identifiable — you must be able to say with certainty that a reservation belongs to a given segment.
- Accessible — there is no point creating segments for markets or behaviours you can never reach or host.
- Substantial — segments must be large enough.
- Responsive — segments must react to the changes and activities you undertake, such as a price change or a marketing campaign.
Now let's look more closely at the process of segmenting a market. Why do we group some people in one segment and others in another?
One way to test a segment's viability is to ask whether its customers are homogeneous and self-referencing: do they talk to each other, read the same publications, attend the same conferences, belong to the same professional associations, shop in the same places? A self-referencing group should be reachable easily and cost-effectively with a single marketing mix.
In practice, we segment markets in one of four ways:
- Demographic — by age, gender, income, nationality, occupation and so on.
- Psychographic — by interests, attitudes, opinions and needs.
- Geographic — by region, country, population density and climate.
- Behavioural — by occasion, benefits sought, usage rate, readiness to buy, attitude to the product and loyalty status.
Brand managers and PR executives most often use demographic and psychographic segmentation. They track customers by demographic group and by the psychology of their behaviour, so they can create the product that best fits the target segment. But it is very difficult for a hotel to collect demographic and psychographic information from its everyday operations and customer interactions.
So we tend to use geography, and more often behaviour, because that is the data we can collect. Geographic location alone doesn't give enough information to segment a market usefully. That leaves customer behaviour as the best tool for market segmentation.
The way forward
When we analyse the behaviour of a segment, the aim is to build a more effective marketing strategy for it. Three things matter here.
Why are they here? Why is this customer at your hotel? Is it business or leisure, family or socialising — or is it simply because your marketing team has done a great job on the brand?
What are they looking for? Quality, competitive pricing, ambience, flexibility?
How do they use the product? Are they brand-loyal, or do they switch between brands? Are they returning guests or first-timers? What do they spend on during their stay, and how often? Do they respond to your offers? How loyal are they to your brand?
All of this adds up to a sound behavioural analysis, which lets the revenue manager build the right marketing strategy and the right revenue management programme for each market segment.
Who is responsible for this?
Accurate market segmentation is critical to a revenue manager's work. So it is also critical that the data used to define and maintain the segmentation is tracked properly and accurately.
Accurate, consistent tracking is a team effort led by the revenue manager. It begins with the correct set-up of the property management system and continues with the quality of the information entered into it. Every department involved in revenue management should be trained to enter reservations, arrivals and other segment data accurately.
To recap: segmenting and focusing on specific sub-groups of potential customers lets a hotel market, price and operate more effectively. Not all segments are of equal value, and there are criteria to help you decide which matter most to you.
Benefits
Correct segmentation brings accurate forecasting, which enables market-mix optimisation, more effective and targeted pricing, and greater operational efficiency. Put together, they keep your hotel focused on the customers it serves best, and that translates into more success.
- Accurate forecasting
- Market-mix optimisation
- More effective, targeted pricing
- Operational efficiency
Segmentation is where every pricing decision starts. Get it right first.