Improve Your Hotel’s Revenue Strategy with Proper Segmentation

Segmentation is a key feature in any hotel’s revenue strategy. To set an overall goal for the year, hotels must break down their target markets and approach to focus on which areas of business they’d like to grow and develop.

Firstly, let’s nail down exactly what we mean by segmentation. For our purposes segmentation is “the process of defining and subdividing a large homogenous market into clearly identifiable segments having similar needs, wants, or demand characteristics.” Segmentation allows you to tailor your strategy to precisely match the needs of different aspects of your market, increasing bookings, revenue and guest satisfaction.

This segmentation can be done on several levels, depending on your end goal. In this article, we will focus on the 2 main types of segmentation usually looked at by the revenue manager: Business Type and Channel Segmentation.t

Why Use Segmentation?

In the simplest terms, segmentation gives you more insight and control over your guest relationships and the way they see and book your hotel. In order to gain a strong insight into your overall business, it’s important to break it down into more manageable parts to analyse and forecast.

1. Identify who is using your property:
   • Why are your guests coming to your area and choosing your property?
   • Where are your biggest number of bookings coming from?
2. Identify who your most profitable customers are:
   • How much does each type of customer pay per booking, and then spend when they arrive at the hotel?
3. Identify trends in your business, and focus on developing these:
   • How have these types of customer changed in their behaviour in the past months or years? Should you focus on rebuilding lost business or shift your focus to a different type of customer?
4. Set goals & KPIs for each segment:
   • Some goals will differ for channels, as they should have varying objectives. The reason you are breaking down the segments is because they are likely to behave differently in certain situations. Some might:
     • Deliver business from other geographic locations
     • Deliver business at certain times of the year or day of the week
     • Deliver ancillary spend for different areas of your hotel.

It’s very likely that your property already has a segmentation process in place.

However, this may have been in place for the past 10 or 15 years. It’s important to review this on a semi-regular basis (every couple of years) to ensure that it still meets the needs of your business, is specific yet understandable, and that it works operationally for your team.

Here are a few questions to ask when you look at your segmentation process:

• Has there been a major shift from leisure to corporate guests?
• Should you take a more detailed look at corporate guests in this case?
• Looking at Groups, have you increased the number of Weddings or Corporate events in your Hotel? Should this now be segmented separately to revenue from “Groups with no Function Space”?
• Does your Reservation & Front Office team clearly understand what each segment refers to so that they can attach the correct segment type to each booking?

Business Type Segmentation

Your business type segmentation will generally break down customers according to their purpose for visiting, or the type of rate they’ve booked – e.g. a family summer plan vs a midweek break, or their stated purpose of business vs leisure.

Here’s a look at 5 common business types:

1. Transient
   • This is your individual, independent guest not linked to any company, event or agent
   • Will usually book your Best Available Rate or publicly available packages
2. Corporate / Negotiated
   • Guests staying on a contracted corporate rate
3. Groups
   • Guests staying as part of a contracted rate for a group or with an event happening in your hotel
4. Wholesale
   • Guests booking through FITs or Tour Operators at a discounted rate not available publicly
5. Other
   • Miscellaneous category for Staff & Industry Rates, Complimentary Rates etc that you don’t want to dilute the figures in your other categories.

Some of these groupings may need subcategories depending on the type and needs of your property:

1. Within Transient: BAR vs Advance Purchase, Premium vs Discount
2. Within Transient: Business vs Leisure. Many hotels find this difficult to break down if guests are booking the BAR rates, especially through OTAs – you may be only able to decipher this on arrival.
3. Within Groups: Attached to a Meeting or Event vs Rooms Only Groups
4. Within Corporate: Set Corporate Rates vs a Discount from BAR.

Channel Segmentation:

This will break down based on how the booking came to the hotel. The purpose of segmenting by channel is mainly focused on cost of acquisition. This ensures that your strategy is optimised to make the most profit from your bookings.

If a channel has a high commission and low booking value, is it worth maintaining rates and availability through this channel? Would it be more beneficial to increase focus for channels with lower commission costs?

We recommend looking at these channels:

• Direct Hotel – phone calls & emails to hotel
• Direct Website
• OTAs
• Wholesale / FITs
• GDS
• Contracted
• Other

You should focus on understanding these metrics:

• Cost per Acquisition for each channel: commissions & marketing spend
• Spend per customer: Average Booking Value & Ancillary Spend
• Lifetime value of customers: how often do they come back to the hotel, if ever?
• Booked Revenue & Trends
• Stayed Revenue & Trends: actualised bookings, ex. cancellations
• Booking Lead Time
• Cancellation Rates & Lead Times
• Geographic Location
• Average Length of Stay
• Midweek vs Weekend
• Booking Lead Times

You should analyse and have clear knowledge on what each channel (online & offline) is producing, and how this fits in with your hotel’s overall business objectives. This should be reviewed often, and alongside the Business Type segmentation, to ensure that it is a strong focus as well as being worked into your marketing strategy.

As part of your budgeting and forecasting process, we recommend creating a Channel Specific Strategy. Set specific goals for each channel in relation to your overall goals, e.g. a Book Direct Strategy, with the goal of moving bookings away from OTA channels into your direct channels.

This information should be critically evaluated to ensure that:

• You are clear on what objective each channel is delivering.

• The use of a channel should not be rooted in fear, e.g. “if we limit availability to Booking.com we will not fill the hotel.”

• Know the cost of each channel every month

Your booking engine provider should be challenging you to look at your OTA business and put a value on the cost of this business. This allows you to highlight overall costs, trends and growth or decline in these channels.

Often, looking at this information can help convert stakeholders such as the GM, Sales Managers, and Reception Teams to get behind a Book Direct Strategy.

Stakeholder Understanding and Commitment

The biggest hurdle segmentation is having the confidence in the data & reports that you are analysing. Ideally, you should be able to pull a regular report from your Property Management System with the required information.

Accuracy of data is crucial – the quality of the data pulled in reports is only as good as the information input in the system! From personal experience, allocating bookings to the correct segments is often an uncertain process.

Here are a few common problems we run into, and the solution:

Issue #1

There is an exceptionally large number of bookings under the Segment “Other”.

Cause: The team inputting bookings doesn’t understand the purpose behind segmentation, so they don’t take the time to input them correctly.

Solutions:

• Share the budget by segment with the team, making sure they are aware of why you’re asking them for this information. If they never see the reason they need to allocate bookings to the correct segment, it’s never going to be a priority for them.
• Make the segments clear & understandable. Ensure that the segments that you have decided on are relevant, and not broken down in an overly complicated manner. If your team doesn’t understand or can’t remember the difference between the segments, they will never be able to assign them to the correct category.
• Possibly look at team incentives against targets to motivate correct segmentation.
• Ensure that mapping between PMS, Channel Managers & Bookings is correct.

Issue #2

The reports from my PMS don’t have enough information, or the reporting function isn’t up to par.

Cause: some older PMS systems may not have the capability to produce these reports.

Solutions:

• Go directly to the source. Make use of the reporting from your Booking Engine or OTA extranets, or your Channel Manager may also have this functionality. Create a Channel Comparison Report in Excel to combine this information into one report.
• In the long term, look at the cost/benefit analysis of upgrading your PMS to ensure it has this capability.

Issue #3

As a Reservations Manager / Reservations Manager, I don’t have the time for all this reporting and analysis.

Solution: Unfortunately, the blunt answer to this is to make the time and prioritise the time for the segmentation and analysis. In the long run, these reports and analysis will have a serious effect on your bottom line.

Conclusion:

The purpose of segmentation it to ensure that your business strategy is met and that decisions are well informed, data driven and optimised for each segment and channel.

The four fundamental factors of a successful strategy

1. Properly setting business objectives
2. Reconciling different priorities from all stakeholders
3. Driving profitability
4. Measuring results for continuous improvement

Hotels must intelligently allocate their limited resources to support their core business strategies. Hotels’ annual business plan, sales & marketing plan and operation budget must all be aligned with stakeholders having a clear understanding and commitment to achieving these goals. Is your segmentation strategy up to scratch? What improvements can you make?