Market Segmentation – Road Map to Revenue Results
Imagine that you have driven for hours and hours and finally arrived at a place which looks like a big city. Would you not want to know where you have reached and more importantly whether that is the city you wanted to reach.
How would you do that? Probably, by whipping out a Road Map and tracing your journey from source to destination so that you can determine whether you have achieved what you set out to do – meaning, reaching the place you wanted to go to.
Actually the Road Map is to be used the other way – you decide where you want to reach and use the Road Map to chalk out your driving directions. This is planning to arrive at a certain place and making ensure you do arrive at that place.
What does the Market Segmentation Report do?
The Market Segmentation Report is the Road Map for the target markets and consumer segments from which a hotel plans to earn its major revenues.
The Market Segmentation Report is a Revenue Management Tool and in its basic form lays out the various market segments that have contributed to the earning of the revenues during a particular business performance period.
What are Market Segments?
Market Segments are consumer groups with differing tastes, preferences and objectives to which hotels can target and market in a focused manner matching their needs and budget.
In short, the market segments are categories of consumers who will patronize the hotel and generate revenues for it. Since different types of consumers have varying needs in terms of the hotel product they are looking for and the price they are willing to pay, market segments determine in a structured manner each of those types which the hotel will adopt. This is key to generating revenues and meeting targets while also ensuring that profitability is enhanced and growth is achieved.
Different forms of market segmentation
Market segmentation can take different forms depending on important criteria applied for determining them. These criteria could be geographic, demographic, psychographic, or behavioral to name the major ones.
A geographic variable, as the name implies, relates to the consumer’s geographic area of residence. Countries are often classified into geographic regions in order to pin point the market targeting effort.
A demographic criteria takes variables such as age,gender, income and expenditure patterns, family size, stage in the family life cycle, educational level achieved, and occupation.
Psychographic criteria refers to segmentation based on lifestyle, attitudes, and personality.
Behavioral criteria refers to segmentation based on behavior of consumers like extent of loyalty, inclination to respond to marketing targeted at them etc.,
How to use the Market Segmentation Report?
The Market Segmentation Report normally is a reflection of how the hotel is positioned in its competitive set market. Competitive set refers to the hotels which are considered as direct competition within the geographic area of operation.
Market Segmentation Reports are barometers of measurement of performance of a hotel in its core revenue sources. For example, if a hotel is positioned as a corporate hotel, then the corporate and related segments would be the bread and butter revenue earners for that hotel.
The Market Segmentation Report normally measures performance from three angles: revenues, room nights and average rate.
As said earlier, whether the hotel is driving room nights or average rates or both will be determined by the positioning of the hotel in the competitive set. Moreover, all marketing efforts will also follow this positioning and the resultant market segments.
Market Segmentation Reports & Financial Analysis
Since results from market segments are tracked according to revenues, room nights and average rates, these have a direct bearing on the profitability of the hotel.
One of the golden rules of profitability arising out of financial analysis is the fact that revenue contribution due to higher rates than room nights generates more profit.
It simply means that a hotel’s room department will show better profits in dollar terms when average rate has contributed to the revenues more than room nights. This is based on the principle that increased average rate will not be accompanied by any costs and thus will go straight to the bottom line. We will be looking at this principle of financial analysis in greater detail in a later post.
In the earlier blog post on Financial versus Operational Analysis, we discussed how informed decision making is key to effective decisions and results and the market segmentation is all about informed decision making on a hotel’s revenue sources.
The Market Segmentation Report is one of the most powerful tools for effective financial analysis.
In our next post in this series, we will be looking at two key areas related to Market Segmentation Reports – Repeat Guest Ratio and Average Length of Stay and how they significantly impact hotel revenues and profits.