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Hotel market segmentation: definition, examples and a practical guide to start from scratch

Your customers are at the center of your every thought. But are they also at the center of your pricing strategy? Use hotel market segmentation to increase loyalty and revenue.

Hotel market segmentation for lodging facilities

What is hotel market segmentation?

Hotel market segmentation is a methodology that serves as one of the main levers of revenue management in the hotel industry.

Segmenting one's market means dividing customers into smaller groups, or segments, that share similar characteristics. These groups can be defined based on various criteria such as demographic, geographic, behavioral, psychographic or rate criteria.

In a hotel, for example, market segmentation could include segments such as MICE travelers, families with children, honeymooners, hikers, luxury tourists, and so on.

What are the benefits of hotel market segmentation?

Proper market segmentation allows you to successfully follow the fundamental principle of selling the right product, to the right customer, at the right time and at the right price.

In fact, only by knowing the characteristics and behavior of each of your segments in detail will you be able to create specific offers that exactly meet their needs and expectations.

Here are what benefits you could gain from segmenting your hotel guests:

  • Increased RevPAR
  • Increased direct bookings
  • Increased occupancy
  • Improved scores in reviews
  • Optimization of upselling strategy
  • Better budget setting
  • Ability to pick up on market changes

How to set up a hotel market segmentation strategy

If you've never done it before, segmenting your guests may seem like a complex task. As you will see in this article and free guide, it's not at all!

By exercising your powers of observation, leveraging your expertise, and carving out the right amount of time to devote to this activity, you will find yourself holding a powerful revenue management tool in your hands.

The first thing you will need to do is to ask yourself who your guests are and what their characteristics are and then, based on that, divide them into groups (the segments).

You can start by identifying the main macro segments. In the hotel industry, these are usually:

  • Transient: individual travelers who book through OTAs or directly but with standard rates, not the result of a contract.
  • Negotiate: these guests arrive from contracts with travel agencies/tour operators, wholesalers or companies and entities. They have dedicated, preferential rates that are not available publicly.
  • Groups: guests who occupy a block of rooms (usually more than 5 units) booked by a single contact person and who get a preferential, reserved rate.

Once you have identified the macro segments, the next step is to further divide these groups into sub-segments. This is the part where knowledge of your guests will be critical.

Here are some of the criteria you might consider:

Demographic: covers age, gender, profession, education level, income, family composition, etc. For example, in the Transient segment, you might have young professionals traveling for work and retirees traveling for pleasure.

Psychographic: refers to values, attitudes, interests, and lifestyles. For example, in the Negotiate segment, you might have business travelers who prefer a comfortable, stress-free stay, and special event travelers who seek an unforgettable experience.

Geographic: this relates to the geographic origin of guests. You can segment by country, region, or city. For example, in the Groups segment, you might have tour groups from specific geographic areas.

Pricing: relates to the price your guests are willing to pay and how price-sensitive they are. For example, in the Transient segment, you might have guests who are looking for the cheapest deal and guests who are willing to pay more for extra services.

Behavioral: includes how your guests book and use your hotel, their habits and preferences. For example, in the Negotiate segment, you might have guests who book at the last minute and those who book well in advance.

When choosing criteria by which to segment your guests, remember that there is no one standard that applies to all. Successful segmentation is the one that is most meaningful to your facility: what works for one hotel may not work for another.

After establishing the sub-segments, you will need to investigate their profitability and create a pricing strategy for each segment.

Finally, by combining the historical and forecast analyses, you can define the inventory to be allocated to each segment to maximize revenue.

Examples of hotel market segmentation

Rate segmentation is the one most commonly used in revenue management and which we can take as a starting point to develop examples from:

Transient Segments:

  • Best Available Rate: is the public rate that a guest can book, either directly or through online travel agencies. It has no restrictions and offers maximum flexibility.
  • Non-refundable: is a rate with payment and cancellation restrictions. It can be booked either directly or indirectly.
  • Minimum Stay: This fare requires a minimum stay. For example, you may need to book at least two nights. It can be booked either directly or indirectly.
  • Promotions: These are special offers, such as discounts for bookings on mobile devices or discounts related to marketing campaigns. May include "opaque" rates, which do not reveal the name of the hotel until after booking.
  • Other: includes special reservations, such as complimentary rooms and rooms for internal use (e.g., for hotel staff) or merchandise exchange.

Negotiate Segments:

  • Corporate: these are dedicated rates for companies that have an agreement with the hotel.
  • FIT: are special rates for individual travelers booked by tour operators or wholesalers.

Group Segments:

  • Leisure Groups: These are groups traveling for vacation or leisure, such as families or friends. They will have dedicated rates with discounts based on the number of rooms booked or length of stay, as well as providing extra services dedicated to entertainment.
  • Business Groups: These are groups traveling for business, such as corporate teams or delegations from a convention. Their rate will be negotiated with preferential criteria and additional services to meet specific needs, such as meeting rooms or meeting catering services.
  • Sports Groups: These are groups related to sporting events, such as teams or fans. Rates and services will include transportation services to sports facilities, team building proposals, or dedicated catering offerings.
  • MICE: This segment includes groups booking a block of rooms related to an event, such as a conference or trade show, hosted at the hotel. Again, rates will be preferential and enhanced by services that offer travelers opportunities for relaxation and recreation, such as spa access.

Each segment identified should be added to your system and associated with each new reservation received. For market segmentation to be effective, information must be recorded immediately and consistently − that is why it is critical to involve your staff in the creation of the segments and give them exact directions on how to use them.

Starting from scratch

Any establishment can segment its guests, even the smallest. Getting to know your guests better is never a bad idea, especially at a time of change like the hospitality industry is experiencing.

If this is your first time approaching market segmentation, and you don't know where to start with a straightforward approach, download our free Practical Guide to Hotel Market Segmentation. Inside you'll find the theoretical basics to get started from scratch and real-world examples for hotels, B&Bs, resorts, and vacation rentals.