What is Segmentation?

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From the course by ESSEC Business School

The Fundamentals of Revenue Management: The Cornerstone of Revenue Strategy

402 ratings

ESSEC Business School

The Fundamentals of Revenue Management: The Cornerstone of Revenue Strategy

402 ratings

Course 2 of 4 in the Specialization Hotel Management: Distribution, Revenue and Demand Management

With a fixed capacity, a highly disposable product and high fixed costs, hotels are a natural candidate for the application of revenue management. Originally developed by the airlines in the 1970s, these analytics-based techniques help predict consumer behavior at the hotel’s market level so that the hotel can sell each room each night at the optimum price. With modern-day rising acquisition costs and distribution complexities, revenue management techniques have increasingly been adopted by both small and large hotel companies, making a comprehensive understanding of segmentation, forecasting and pricing an essential requirement for today’s hospitality professionals. The purpose of this course is to provide a core understanding of the fundamentals of revenue management, which ties into the larger picture of revenue strategy. The course is structured to provide an insightful look into Revenue Management. Created in conjunction with Duetto, this course is hosted by a group of revenue management leaders in both theory and with hands-on experience at properties around the world. Upon completion of the course students should be empowered with industry best practices, which can be applied across the vast diversification the hotel industry to empower those to optimize profits. Duetto delivers powerful revenue strategy solutions to the world’s leading hotels and casinos, combining unparalleled expertise with world-class cloud-based technology. Acknowledgement: Bela Nagy, Agnes Roquefort , Jonathon Liu, Frederic Toitot, Pierrick La Masne, Markus Keller - ACCOR Simone Truscello - ACE HOTELS. Richard Valtr - MEWS SYSTEM. Jean-Luc Chrétien - FAST BOOKING. Jeannette Ho - FAIRMONT RAFFLES HOTELS & RESORTS. Chinmai Sharma - TAJ HOTEL & RESORTS. Cindy Estis Green - KALIBRI LABS. Jason Thielbar - RED LION. Christopher Cooper - ROCCO FORTE. Rom Hendler - SANDS. Rafi Rejerano - AB Hotels. Riko Van Santen - KEMPINKI HOTELS & RESORTS. Vinod Sukhija - BANYAN TREE HOTELS & RESORTS. Olivier Flement - WALT DISNEY COMPANY. Cidalia Pinto Coehlo - LOUVRE HOTELS. Trevor Stuart-Hill - REVENUE MATTERS. Vincent Cusma, Marco Benvenuti, Eric Stoessel, Gayle Ehrean, Nevin Reed - DUETTO. Claire Bertrand, Vincent Chatain, Jessica Moses, Benjamin Six (ESSEC Business School), Emilie Dupré (IMAGE-IN), Gregory Halidy (TRIPLAY)

From the lesson

Introduction to Segmentation

In this second module we will discuss segmentation 101, four things to consider while determining segmentation, as well as our best practices in regards to working with properties who need to go through a re-segmentation exercise, and presenting you with some key takeaways.

Overview of Segmentation2:49

What is Segmentation?6:33

Evolution in Segmentation17:10

Evolution in Segmentation26:35

Meet the Instructors

Peter O'Connor
Professor of information systems, Director of the MBA in Hospitality Management
Information systems
Augustin Cacot
Director of Customer Success, EMEA
DUETTO
Nathaniel Green
Senior Global Solutions Engineer
DUETTO

[MUSIC]

Segmentation is really the foundation of pricing and general hotel strategy.

If you have two customers with different pricing characteristics

in the same segment, you are missing revenue.

You are either overpricing one or you're underpricing the other.

Economic Times, a leading national and financial newspaper defines segmentation

as a means to divide the market place and the parts or segments that are definable,

accessible, actionable, and profitable and have growth potential.

There are two major types of segmentation, one for pricing and the other for

reporting purposes.

Hotels generally start with four macro level segments,

transient, corporate, group, and other.

And from there, their segmentation can be customized based on the location and

other characteristics of the property.

If it's a resort location, for example, it might have no need for corporate, but

it might have a more detailed wholesale, or to operator, segmentation.

How many segments you should have really depends as well

the number of segments depends on the size of your hotel.

A giant casino resort on the Las Vegas Strip that has more than 3,000 rooms

will have quite a few market segments because it's going to be promoting and

selling to a variety of different types of customers.

Other hotels have a lot of conferences and events business, directly or

indirectly tied to the property.

Planning around such potential business is really important and

sometimes you have to build up specific segments for customers that you might only

see during one part of a year, during a specific event.

The goal with segmentation is to show an understanding of

how you bucket together your customer ties.

Starting with these core fundamental groups,

enables you to then work towards your end goal of a more detailed segmentation.

Depending on what you're using it for,

different types of segmentation can be utilized in different ways,

as levers to control consumer actions, primarily buying or not buying a room.

It's important to think about categories of customers

depending on what actions you want to take.

The way a hotel traditionally look at segments is that they are made up of

a collection of rate or market codes associated with the specific rate for

the customer portrays at a hotel.

To give a simple example, a hotel might have customers who booked for

Expedia during a certain promotion,

which the hotel's reservation system may register as Rate Code EXP1.

The same hotel might also have an early purchase discount on its own website

with a Rate Code ERL1.

The hotel may aggregate both rate codes together to create a customer segment.

In this case, let's call it the promotion segment.

In many cases, hotels will look at the entire distribution channel, or

collection of channels, as a segment,

as they believe customer trends within those channels predict behavior.

However, as we shall see, this is not always necessarily the case.

To show the impact of detail segmentation,

let's take into account two possible theoretical hotel options.

In this example, we have Hotel ABC and Hotel 123.

A little background on Hotel ABC, it's 300 rooms, all

other factors are the exact same as Hotel 123, but it has limited segmentation.

Just breaking apart customers looking at their website, corporate and

OTAs, or online travel agency.

Hotel 123 has 300 rooms as well.

All other factors are the same, but it has a much more detailed segmentation,

namely customers looking at their website, corporate customers.

And then breaking apart OTAs into the Expedia or

Merchant and HotWire or opaque model.

Let's meet our two customers, Jim and Joe.

Jim is looking for the best deal possible.

He's willing to sacrifice selection and he's using all of his

different shopping methods to find the absolute best deal possible.

Jim doesn't have a preference other than star quality and location, and

he has price range of 175 to $200 per night.

Joe on the other hand is looking for a good deal, but

also wants to select a specific property.

He's searching on the same distribution channels as Jim, and

looking at a variety of different places.

But he's also a little bit more selective

in regards to which property he wants to choose.

Because of his issue, he is willing to pay a little bit more and

is targeting a 200 to $250 price range.

Hotel ABC, the 300 room property with limited segmentation,

charges $215 across all OTA channels.

On the other hand, Hotel 123, with it's more detailed segmentation,

is able to charge $225 on Expedia and $195 on hotwire.

In this scenario,

price constrains Cus Joe to be able to purchase at Hotel ABC while Jim will not.

That is because the price is slightly out of his range

at 215 when Jim wanted to pay 175 to 200.

Hotel ABC has not just lost an entire consumer but

also earned $10 less from a consumer who was willing to pay slightly more money.

Hotel 123 at $225 on Expedia falls

right in the middle of where Joe is willing to pay.

And that 195 on Hotwire falls right on the high end of what Jim is willing to pay.

So they're much more likely to get both, clearly demonstrating the value

of segmenting your market with more flexible and

detailed segmentation you could start to isolate specific customer's behaviors,

and consumer pricing patterns so as not to disperse any type of

consumer as long as they are going to be profitable for the property.

Segmentation hasn't always been so complex,

as I will explain in the next video.

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