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Your complete guide to hotel market segmentation

  Posted in Resources

Some differences between hotel guests are obvious, and others are as small as their booking channel preferences or tendency to spend additional money on-site. Careful market segmentation in the hotel industry is a catalyst for understanding these differences and acting on them.

This blog provides an introduction to hotel market segments, including practical help to identify a hotel’s ideal target segments and tips on attracting guests in a chosen segment.

Table of contents

What is hotel market segmentation?

Hotel market segmentation is a strategy used to identify key customer segments in a hotel. Hotel market segments rely on guest data and offer a structured view, with an opportunity to slice and look at the data in different ways. When used appropriately, it empowers decision-makers in hotels to target specific market segments with individual strategies, from marketing to pricing.

Why is market segmentation important for your hotel?

Hotels collect a lot of guest information during the booking process and stay. While not all the information is consistent across all channels (for example, direct reservations may carry fields of data OTAs do not provide), making sense of consistent data components is required to successfully understand your own hotel’s market segmentation. It is a crucial step in applying this data for the benefit of the hotel’s business. For example, when you identify the market segment that offers your hotel the longest stays you can focus on this segment to drive up the average length of stay in your property. This may be a goal if reducing housekeeping costs for turning over rooms is on your agenda.

An additional step is understanding the market segmentation of your local market: knowing what travellers are already staying in your market sets the tone for establishing fair share and fuels meaningful comparisons as well as realistic outlooks.

Hotel market segment examples

There are no rules as to how you choose to segment the market for your hotel in your individual analysis, however there are recurring themes across hotel data providers and revenue tools that are useful to understand.

  • STR: The global supplier of weekly benchmarking data to the hotel industry also provides market segmentation insights divided into three segments. Transient (including most retail, discounted and negotiated rates), group and contracted business are separated by their reporting guidelines.
  • Revenue tools: Depending on individual setups, most revenue tools use rate categories from your PMS to group reservations into market segments including group, retail, discount, negotiated, wholesale and other. They may also group by channel to provide segmentation.

When in doubt about how a data provider or tool defines a certain market segment, or what data they count in or out, it is best to review their guidelines or ask. This way, you always know how to accurately interpret hotel market segmentation provided to you by outside sources.

Meanwhile, existing reporting structures should not limit you in your own approach to successful hotel segmentation. Useful segments for your property may include but are not limited to:

  • Length of stay
  • Day of week
  • Source market (which may be different from a traveller’s nationality)
  • Leisure and business travel

Your data likely will lead the way once you identify what information is available for all, or the majority of your guests, and where the biggest differences or commonalities occur. For meaningful internal comparisons, compare results year over year or, for seasonal impacts, your low season with your high season.

How to identify your hotel’s ideal target segments

When approaching the question of what the ideal target segment for your hotel is, consider that the answer may differ depending on day of week, the season, and the way in which you want to shape your business going forward. This means you may end up with more than one answer, for example for weekdays vs weekends, or the answer may be in what a healthy mix of segments looks like for your hotel. In identifying those attributes that matter most to your hotel, you want to focus at a minimum on the following two principles equally.

Your most profitable guest

In most industries, businesses focus on selling products at the higheest profit margin possible. For your hotel this translates into attracting more stays from your most profitable guests. As you look for indicators of highest profit in your PMS, keep in mind that this is not uniquely identified by highest ADR, but may be highest total spend (for example, including F&B spend). In addition, guests that stay for longer periods of time may require less turnover of the rooms or housekeeping time, reducing your costs and increasing your profit margin. Be clear in how you define your most profitable or most valuable guest for this exercise.

Fair share in your market

While detailed, a hotel’s own data is only part of the picture needed to meaningfully interpret market segmentation. Knowing the make-up of the overall business in your local market or at your competing hotels, perhaps within a specific comp set, puts your own results and vision into perspective. Fair share is a term that is used when a market or comp set receives the same distribution of business as the subject hotel; an example is a market or comp set that receives 60% business travel and 40% leisure travel, with the subject hotel also receiving 60% business and 40% leisure travel. Any difference here would indicate under-performance and opportunity, or over-performance as a stronghold on a specific segment. Your objective as a hotel may be to aim for fair share or increased share of a market segment that suits your hotel.

Local market comparison data on inbound travellers can be bought or obtained for free, for example via local tourist boards. You can also interpret this information as existing demand in the market to tap into, rather than creating demand within a segment that is not even searching for your destination.

3 tips on attracting your chosen guest segments

Attracting guests within any market segment is an art that can take many forms. Staying authentic to your brand is crucial to not get sidetracked into hunting down what may not be the best fit of guests. The following three tips will help your hotel approach this task with more clarity.

Understand your existing customers in the target market segment

Begin by browsing your internal data for the market segment you want to attract more travellers from: what are common features and differences? Does your hotel attract group business well in the wedding segment but not by corporate groups? You may notice these differences in when and how long these groups stay. Then further work is required in following their path of decision-making. Your own staff who regularly speak with guests or internal survey data may become useful sources.

Beyond their decision-making, understand what it is they are seeking out of their stay that differentiates them. If possible, gather similar insights about this market segment about guests in the market that are not staying at your hotel yet. You may notice, for example, that while you attract a fair share of leisure travellers on the weekend, yours are predominantly bachelorette parties compared to a competitor, who receives a lot of family business. All of this information is useful when it comes to successfully targeting this segment in your marketing messages.

Know how your offerings are different to your competition

With clarity on what matters to your targeted market segment comes an additional task: understand how your hotel provides against those needs—and how that compares to other hotels in the market. For example, a hotel with the largest rooms in town wants to attract more business travellers but knows they underperform compared to a competitor closer to the business district. They may consider a number of actions, such as adding a free shuttle service to their offer to compete or messaging attributes such as ‘the largest business suites in town’, to differentiate the hotel. Knowing that their target segment books on the GDS or using travel management companies, should also gear their marketing activity in this direction.

Referrals

Sometimes it is easiest to ask, and you might just get. This is no different when it comes to hotels: your existing guests in the market segment you wish to grow may know more of their type of people, and so their reviews and referrals matter. Most importantly however, you do have to speak with them, listen to their needs and simply ask questions such as “Help me understand, if you were to refer someone for a stay with us, who would it be?”. There is an additional lesson in their response for you. Always remain mindful and listen between the lines in your approach to any such conversations. For example, if ‘only’ executives of a company stay with you and not their wider staff, you might pose the question carefully. The response may just be one they do not wish to give outright, such as them enjoying the relative privacy your hotel may offer during larger conferences. In that case, you have just learned not to target the wider company at lower rates, but to instead aim for other business executives who are looking for a similar level of privacy at similar rates.

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