A Short How-To Guide to Hotel Market Segmentation

How to Do Hotel Market Segmentation Step by Step
⏱ You will read this in just 9 minutes

If you’re running a hotel business, you know how important it is to tackle your hotel revenue management challenges. Well, market segmentation is one of the most important elements of your revenue management strategy.

It can help to expand your consumer base, target new audiences, and expand your hotel business into new markets. More importantly, it allows you to tap into different groups of consumers with different habits and provide them with a new offer that suits their budget level and needs.

What Is Hotel Market Segmentation?

Hotel market segmentation is a strategy that allows hotel owners to better understand the purpose that drives the consumers and identify each trip’s goal: either leisure or business. Many hotel owners wrongly believe that the price dictates the market segmentation rules, but it doesn’t.

Market segmentation is also used as a means to determine clear differences between group and individual businesses. If it’s done the right way, market segmentation can be extremely useful in recognizing new trends in the market and hotel industry, staying up to date with the latest events in your business, getting ahead of the competition curve, and providing your consumers with exceptional user/customer experience.

If you’re running a luxury hotel, market segmentation can help you get ahead of the tourism game by knowing everything about your target market. More importantly, it can help you identify the crucial hotel business concerns, such as:

  • Length of stay
  • Day of weeks stays
  • Total revenue per room
  • Total revenue per client
  • Booking lead time
  • Cancellation %
  • No show ratio

Why Should Hoteliers Do Market Segmentation

Since market segmentation involves analyzing your target market, this strategy allows you to segment different markets based on booking behaviors and pricing sensitivity. When it comes to the hotel industry, market segmentation helps hotel owners better understand their customers and the overall demographic to improve their services and increase total revenue by applying better pricing strategies.

It can also help identify why something has happened. If there’s a drop in the bookings, market segmentation can help get to the bottom of it. If there really is a downturn, hotel owners can get all the data they need to create unique marketing and sales efforts to increase both bookings and revenue and create dynamic pricing according to your guests’ needs.

It also allows hotel owners to understand the importance of different market segments, such as:

  • Transient – transients are guests who are traveling individually, on their own, and are not part of any company or group. They make individual bookings on their own accord.
  • Corporate – these are the guests that use company discounts and benefits to stay at the hotel. They get better hotel deals due to discounted company rates that apply to corporate clients.
  • Group – hotels usually allow groups of guests to use their premises under contracted rates that are flexible and based on the requirements.
  • Wholesale – a market segment that deals with booking agents and tour operators who buy bulk tickets at discounted rates.
  •  Other – includes rates available to hotel staff, industry rates, complimentary rates, etc.

The Benefits of Hotel Market Segmentation

Now, since you know why you should invest an effort in doing hotel market segmentation, let’s see how this strategy can benefit your hotel business.

Determining hotel market opportunities

One of the most significant advantages that hotels can reap from proper market segmentation is discovering new business and market opportunities. You can gather valuable insight into each market segment to discover the needs of potential prospects and how to reach them before your competitors. 

This is one of the best, most effective ways to increase the current satisfaction of your visitors. Tap into market segments where you can do more to improve your services, launch a new range of customer-centric service, and more.

Marketing appeal

If you’re about to launch a new service, hotel market segmentation allows you to make the necessary adjustments to your service and marketing appeals. 

Instead of having just one marketing campaign to attract all potential prospects, you can create separate marketing strategies and launch several campaigns designed to satisfy the different needs of your target demographics. 

Proper sales and advertising promotional appeals can be customized and personalized to suit different target audiences’ needs better.

Media selection

The selection of advertising media significantly affects the result of your marketing efforts. More importantly, it also affects how much you’re going to spend on your campaigns. Depending on your target audience, you can allocate funds to various media to extend your reach to new markets.

Customer-centric service and flexible pricing

When you know your market and demographic, it’s much easier to provide them with the level of personalization that will not only suit their specific needs but exceed their expectations. Create a fantastic customer experience for each guest and seal the deal with the most competitive, flexible pricing that will expand your business even more.

How to Do Hotel Market Segmentation Step by Step

Once you have your market segments identified, you can start working on your market segmentation strategy by clearly determining the most important market segments

These relevant market segments are the very foundation of your pricing strategy. They are vital to the process of market segmentation as they are typically defined by the price sensitivity of your guests and their various booking behaviors

This insight allows you to uniquely segment each piece of your market segmentation puzzle according to the type of customer you’re interested in. Use each segment to further bundle marketing and sales efforts according to the intel you gather from the latest trends in your industry. 

It will help you find the best market segmentation strategy for your business. Once you take care of this, start working on the following steps that apply to every segmentation plan:

  1. Identify your guests – guests make for the majority of your business profit. You can use the booking method, channel segmentation to identify your target audience and how they prefer to make their booking. You can also use business segmentation to determine the reason for travel for every guest. Use the data your guests generate to identify your guests accordingly.
  1. Identify the most profitable guests – revenue data is the best way to determine which guests are the most profitable. That includes the amount of revenue brought in by each guest, their ancillary spend, and the cost of acquisition per guest. You can use UpStay to generate new revenue streams and enhance the guest experience for each guest.
  1. Verify your data – the only way to do an accurate market segmentation is to use correct data. The best way to ensure this is to use a top-performing revenue management software system (RMS).

You can also segment your market by paying attention to the following:

  • Geographic segmentation – includes countries and regions and helps you determine where your guests are coming from, including their stay and travel requirements.
  • Demographic segmentation – includes age, gender, and more and allows you to appeal to an age group that is likely to choose your hotel over your competitors.
  • Psychographic segmentation – includes personality characteristics, lifestyle, and social class and helps you determine the affordability of your services for different groups of guests, including millennials.
  • Behavior segmentation –  includes user response, attitude, and knowledge of your services and is meant to help hotel owners determine the group of people they are trying to appeal to the most. Behavior segmentation is the best way to measure your sustainability.

It is paramount to choose the right market segment so that you can perform your market segmentation properly. Include the following in your market segment evaluations:

  • Measurability – allows you to measure the purchasing power and size of a market segment. The main goal is to ascertain the limit certain guests are willing to pay for hotel services.
  • Accessibility – allows you to see how accessible and servable particular market segments are. If you’re trying to promote your services to a market thousands of miles away, it could bleed dry your budget.
  • Substantiality – allows you to ascertain how profitable a market segment is, as well as its size. If you’re trying to market your services to a particular segment, you need to match its size and profitability in relation to the capacities of your hotel services.
  • Actionability – allows you to develop different strategies to attract the right segment and provide the matching service quality. 

Base your segmentation strategies on the feasibility of different market segments by including expected profitability, growth rates, current segment sales, competition, and the buying power of your target audience. More importantly, the segments you choose need to match your business goals in order to be fruitful.

Once you determine the best course of action regarding your market segmentation needs, you can start developing marketing strategies based on market segmentation metrics and analytics. 

Tips for Doing Hotel Marketing Segmentation

Since the coronavirus outbreak devastated the world economy, every hotel is trying to stay afloat during these difficult times. In 2021, hoteliers are expected to start implementing more cost-effective marketing and sales strategies with the main focus on generating a direct channel for booking. 

Hopefully, this will lead to an increase in direct interaction with guests. Almost 70% of hotel owners believe local tourism will continue to be a vital market segment for hotel recovery in 2021.

With that in mind, here are a few quick tips for doing your hotel segmentation to ensure a more prosperous future for your business:

  • Survey your guests.
  • Empower your guests to create user reviews and social proof of your effectiveness.
  • Gather data on what your guests prefer, want, and need to understand them better.
  • Regularly review online reviews, especially TripAdvisor and Yelp ratings.
  • Use Google Analytics to analyze your ideal demographic.
  • Track your guest interactions using CRM and sales software tools.
  • Establish an authoritative presence on social media.

Hotel Market Segmentation Source Data

The source data you use for your hotel market segmentation is of the utmost importance for your efforts. Therefore, you need to ensure that the data you have and plan on using to develop your segmentation strategy is accurate.

We already mentioned that the best way to ensure that is to use an RMS system that allows you to create timely and accurate reports. Aim for a system that can identify and parse out factors that impact your strategy, but more importantly, your bottom line. Once you are sure your data is verified, you should perform periodical re-evaluation to ensure all segments are accurate.

Types of Hotel Market Segmentation

The type of hotel market segmentation depends on the market segments available in your hotel location:

  • Backpackers
  • Retirees
  • Families
  • Solo travelers
  • FIT’s (free independent travelers)
  • Couples
  • Vacationers
  • Adventurers
  • Medical tourists
  • Business travelers

Hotel Market Segmentation Ratio

The hotel market segmentation ratio depends on different market segments and how well they respond to your new strategy to increase overall profits and revenues. A 100% ratio means that your strategy is fully effective, and you have eliminated cancellation and no-show ratios completely.

Hotel Market Segmentation Example

Hotels use market segmentation strategies to place their guests into market segments and then allocate the prices accordingly. If we consider these criteria, here are a couple of hotel market segmentation examples:

  • Backpackers, aged 18–30, from Australia and New Zealand;
  • Retirees, aged 65–80, from the USA, retired from wealthy careers;
  • Families, from England, with children 5–15.
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Graduated from Standford University, Arielle has over 5 years of experience in the Hospitality industry. She holds an MBA in business administration from the IDC Herzliya, Israel. She currently works as Account Manager at Upstay, building and maintaining strong, long-lasting customer relationships. She is deeply passionate about helping hoteliers unlock significant new revenue streams from unsold premium inventory.

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