Tammy Farley

A Strategic Approach to Segmentation for Hotel Revenue Managers

One essential factor of a successful hospitality revenue management program is the ability to segment demand based on customer preference and behavior, including price sensitivity. Traditional revenue management strategies take advantage of the fact that different guests have different preferences and behavior and thus, are willing to pay different rates for the same type of room. Some guests are even willing to change their booking behavior to get a lower price. Selling rooms at different prices to different customers through different channels at various points along the booking cycle puts into action the well-known revenue management objective of providing: the right room, at the right price, at the right time, to the right guest, through the right channel.

This objective has evolved into the “segment-of-one” concept, which is the theory that robust customer data and advanced analytics technology combine to support customization of service offerings to each

One essential factor of a successful hospitality revenue management program is the ability to segment demand based on customer preference and behavior, including price sensitivity. Traditional revenue management strategies take advantage of the fact that different guests have different preferences and behavior and thus, are willing to pay different rates for the same type of room. Some guests are even willing to change their booking behavior to get a lower price. Selling rooms at different prices to different customers through different channels at various points along the booking cycle puts into action the well-known revenue management objective of providing: the right room, at the right price, at the right time, to the right guest, through the right channel.

This objective has evolved into the “segment-of-one” concept, which is the theory that robust customer data and advanced analytics technology combine to support customization of service offerings to each person. In reality, the segment-of-one approach to demand is a hypothetical ideal and popular marketing strategy, but is infeasible from a revenue management perspective and potentially unacceptable from a customer standpoint. Adapting the concept for practical use involves identifying and serving micro-segments, which are very small market segments that are differentiated by distinct customer attributes. Next generation revenue management systems with big data processing capabilities and accurate dynamic pricing models are able to provide solutions that allow for skillful target marketing to these specialized micro-segments.

person. In reality, the segment-of-one approach to demand is a hypothetical ideal and popular marketing strategy, but is infeasible from a revenue management perspective and potentially unacceptable from a customer standpoint. Adapting the concept for practical use involves identifying and serving micro-segments, which are very small market segments that are differentiated by distinct customer attributes. Next generation revenue management systems with big data processing capabilities and accurate dynamic pricing models are able to provide solutions that allow for skillful target marketing to these specialized micro-segments.

Accurate and up-to-date segmentation is a cornerstone of revenue management, so revenue management professionals should periodically review their property’s segmentation strategy and how it supports both their broader revenue-optimizing plan and overall business goals. When performing this review, revenue managers should verify that their segmentation strategy effectively utilizes current and appropriate segment categories and establishes the most profitable pricing strategies for each segment. Additionally, because different functional areas have different perspectives and applications of demand segmentation, a hotel segmentation strategy has to be flexible enough to meet the varying analytical and reporting needs of the property. The frequency of reviewing market segmentation depends on many factors, including recent changes to the market or property, the time since the last segmentation review, and the sophistication of the property’s revenue management system. The more data-driven aspects of segmentation can even be continually and automatically updated with the right revenue management technology.

Segment Categories

The hotel industry serves a wide variety of customers, which translates into many market segments made up of customers with very specific characteristics. To be effective in a revenue management context, segments must differ with regard to preferences, price sensitivity and booking behavior. Most hotels benefit from a narrow segmentation strategy; meaning customer segments are defined along tight lines, resulting in a large number of customized micro-segments.

In reviewing the segment categories of a property, a revenue manager should not shy away from innovating and increasing their segmentation as necessary. Focusing on very specific characteristics and buying patterns of micro-segments allows for not only targeted marketing, but also discovery of revenue-generating opportunities. An appropriate segmentation scheme essentially expands price elastic segments by introducing innovative products and prices to fully take advantage of all the moving factors of hotel demand. One critical factor to determining and utilizing micro-segments for revenue management purposes is the availability of enough data to accurately forecast the micro-segment. Without a useful forecast, pricing and managing that micro-segment would be challenging.

A segmentation strategy should be flexible in how categories and micro-segments are tracked and reported. While revenue managers need micro-level detail, many other hotel executives need segmentation information on a much more aggregate level. A property’s revenue management solution should be able to accommodate current and relevant segment categories for many departments and purposes.

An assessment of segmentation gives a revenue manager the opportunity to look within and beyond the segments currently used in the hotel industry to identify distinct price sensitivity or booking behavior that may represent a serviceable micro-segment. In general, the three most commonly used segment categories have to do with personal characteristics and patterns, hotel-use characteristics and booking behavior. Personal characteristics that serve as the basis for hotel demand segments can include demographics, shopping behavior, loyalty status, and negotiated rate association. Segments based on booking behavior include booking channels, such as OTAs, property website, GDS, etc., and booking time information like lead time to booking, time of purchase, time of searches, etc. And hotel-use segments are defined along group, transient, business, leisure and other lines. A micro-segment is likely to be associated with all three categories and as such, represents a functional, yet highly differentiated sub-section of demand.

Segmentation and Pricing

Customer segmentation is closely tied to hotel pricing, and the primary purpose of segmenting customers in hotel revenue management is to apply differential pricing. Also known as variable pricing and dynamic pricing, this is the practice of charging different rates to different market segments, based on the willingness of the segment category to pay for specific service offerings. Next generation revenue management technology solutions are able to handle the complex data and processing requirements of dynamic pricing so revenue managers no longer have to rely on the pricing strategies of the past. Powerful revenue management tools are available that account for the simultaneous impact of price and demand within and across segment categories in dynamic pricing models.

More market segments mean more prices offered, and logical rules and restrictions — known as rate fences — are still necessary to differentiate prices. Rate fences provide customers with clear reasons for variations in price and allow customers to self-segment. A more complex application of rate fences to micro-segments allows the revenue manager to determine what pricing strategies work best for each customer segment at a particular time and through specific channels.

The number of segments, plus the rooms sold and pricing of each segment, determines the total room revenue of a hotel. Past academic research has been conducted to determine the optimal number of segments to use, and models have been built to recommend room allocations and prices to the different segments. However, more recent market-level transformations in communication and distribution channels, as well as new ancillary revenue streams and a renewed focus on profitability have complicated the process of maximizing revenue. Fortunately, this has created opportunities for hoteliers to re-think their segmentation strategy and leverage solutions that include micro-segmentation.

Segmentation and the Revenue Management Solution

Capitalizing on the varying preferences, price sensitivities and buying behaviors of customer segments is one of the foundations of revenue management. Evaluating and updating a hotel property’s customer segmentation strategy is essential to optimizing the property’s broader revenue management program. A flexible revenue management solution can support a robust segmentation strategy and vice versa, so segmentation and pricing rules can be adjusted as needed. One way to make sure your property’s segmentation strategy is aligned well with, and supported by, your revenue management solution is to review The 2018 Smart Decision Guide to Hospitality Revenue Management. Whether or not you are looking to invest in next generation revenue management programs and solutions, The 2018 Smart Decision Guide can give you more insight into strategies that may benefit your property and profitability.

Tammy Farley co-founded The Rainmaker Group in 1998 and serves as its president. She spearheads all sales, marketing and customer-related operations for the organization, which is the market leader in profit optimization solutions serving hotel, casino hotel, resort, and multifamily housing operators. Farley graduated from the University of Michigan with a bachelor’s degree in political science. She lives in Atlanta with her husband and, during college breaks, her daughter Grace. She loves to travel, and when visiting Grace in New York City, the two bond over shopping expeditions that allow Farley to explore the world of fashion through her daughter’s eyes. A work-out fiend, she particularly enjoys putting pedal to the metal at Flywheel.