Hotel market segmentation 101: Why it’s important and how to do it

Demographics and geography can also be useful elements of the mix.

Unless you’re a Henry Ford-era manufacturer of motorcars that are available only in black, it’s hard to think of an industry or business for which segmentation isn’t useful. And even Ford’s marketing people would have used segmentation to promote his vehicles.

In the hospitality industry, you can use segmentation to identify where your business comes from, and therefore where you should focus your efforts by identifying and targeting new customers in these groups.

Done well, this will drive additional revenue to your hotel, so we can agree that segmentation strategy is a good thing; in this blog post, we’ll outline:

• Exactly why it’s so invaluable to hotel revenue management strategy

• The main guest segments you should be familiar with

• How to identify them at your hotel

Why is market segmentation important for hotels?

If you don’t understand your guests, you can’t effectively attract their business and then give them what they need, how they need it and when they need it. Trying to understand them on a one-to-one basis is impractical, which is why we deal in categories of guests – or segments.

Let’s break these ideas down.

Understand the diversity of hotel guests

Let’s say you run a hotel at a beach resort in Florida. If so, it’s a fair assumption that guests will all like the sun and the sea – at least to look at, in the case of the latter.

But beyond that, numerous differences will exist in who they are, what they want from their stay and what they need you to provide.

Are they a business traveler? If so, are they here alone and therefore in need of a single room, or are they part of a group, in which case, a twin room might be more appropriate?

Are they traveling with a young family?

Are they likely to dine in your restaurant and use your facilities – your pool, your gym, your bar, your spa – or are they simply using your property as a base for their activities?

These are all very basic questions, but you need to answer them, and your answers will demonstrate that, whatever type of hotel business you run and wherever it is, you’re likely to have a diverse target audience base. And that base must be catered for, identified and marketed to in a number of different ways.

Segmentation strategy is how hoteliers understand these different groups of guests, and the visibility this work brings will help everyone at your hotel do a more effective job, whether they’re revenue managers, distribution managers, marketers, salespeople or those working at reception.

Improve the guest experience

If you can understand a guest based on the segment to which they belong, you can improve their experience depending on a variety of factors, including:

• Length of stay – if they’re staying for a while, maybe they’d be amenable to some of the tourist trips that operate from your property

• The purpose of their trip – business travelers on flying visits might be more amenable to the convenience of your restaurant in the evening, for example, so maybe you could market a package to them, or perhaps they’ll want breakfast included

• How they might be getting to and from your hotel – would they benefit from an airport shuttle service of car valeting, for example?

• Other individual preferences – if you know your guest, you can target them with appropriate upselling

We’ll come on to how you identify the segment to which your guests below but for now, the key message is: get your segmentation right, and you’ll understand what your guests’ needs are, meaning you’re better placed to accommodate those needs.

Build targeted pricing strategy

A one-size-fits-all policy in business is rarely a good thing, and this principle extends to your pricing.

Instead of applying the same rates to all guests, segmentation allows you to develop a pricing strategy with rates that accommodate each segment, factoring in variables such as booking behavior and price sensitivity.

Such a strategy would see you offering – or rather targeting – the likes of:

• BAR rates

• Best flex (offering attractive cancellation policies)

• Wholesale rates

• Corporate rates

• Rates on online travel agencies’ (OTAs’) sites – which should match Brand.com rates, but your marketing efforts for them might differ

• Group rates, which can be flexed up or down according to demand and occupancy, and including allotments

based on booking behavior and price sensitivity. This may include BAR rates, corporate rates, wholesale rates, and group rates that can be flexed up or down depending on how busy you are.

Guests don’t always base their decision on price, but for most travelers, it’s an important factor, and it might be the decider in the event of a tie. So if you deploy an effective segmented pricing strategy, you have a clear advantage over some of your competitors.

And this doesn’t mean targeting the lowest prices; it means targeting the right prices to the right people, meaning you have a better chance of winning business and, when you do, maximizing revenue.

Optimize your marketing and distribution strategies

You no doubt have a hotel website – a.k.a. Brand.com – but smart revenue and distribution managers will mix things up with a number of other booking channels, including OTAs, the Global Distribution System (GDS), wholesalers and bed banks, all of which increase your reach.

Segmentation helps you optimize your strategies for marketing to and selling through these distribution channels to different segments.

It’s all about where and how.

If, for example, you know that your corporate traveler segment doesn’t tend to book for stays during the summer, focus instead on other segments such as the transient leisure traveler, and do this in part through OTAs that target particular segments.

As for your own channels and direct marketing, good segmentation will be the first thing you analyze when deciding who to target and whether it’s the most valuable segment for the marketing campaigns you have in mind. And remember, if would-be guests don’t bite the first time they visit your site, there are ways you can reduce abandonment.

When everything is set up and operational, monitor your results and finetune your strategy accordingly.

7 Common guest segments

Every hotel is different and some segments are more important than others. You might even want to define some of your own segments that are important to your very specific property or its location but not listed here. It’s likely, though, that the core segments we outline here will be relevant.

1. Transient

Transient guests are individuals motivated to travel for leisure or business, either alone or with a handful of fellow guests.

While it’s important to market to them where you can, sometimes simply through good SEO, and to offer channels that facilitate their booking, they won’t have an established business relationship with you and will simply reserve their room directly or through an OTA. This means they aren’t typically offered negotiated rates.

There are many examples of transient guests, including families, couples, backpackers and digital nomads, and some hotels might find it useful to break down transient business into subgroups like direct bookings, OTAs, consortia and packages.

2. Corporate negotiated

Including big corporate businesses like Google, Amazon and Microsoft, corporate negotiated guests are exclusively travelers employed by companies that have negotiated accounts with your property.

The corporate agreements that emerge from these negotiations are usually arranged by your sales colleagues and will offer reduced rates and other benefits in return for a commitment to a certain annual number of room nights.

These guests – and the people negotiating on their behalf – will look for value for money, convenience and quality.

Note that these agreements can sometimes arise from RFPs for corporate accounts from lead-sourcing platforms or GDSs, so work to foster relationships with these middlemen.

3. Local negotiated

This segment is similar to the one immediately above but, as the name suggests, its roots are with local businesses.

If you think a local business is likely to need regular hotel accommodation for things like AGMs, conferences, audits, expansions, or other business activities that see visitors from other cities descend on them, make enquiries and you could trigger some lucrative repeat business. If your town is home to the regional headquarters of Acme Inc, put in a call!

4. Group

The group segment concerns guests that travel in a group and who want to benefit from proximity to each other and the ease to socialize together.

The size can vary and it’s up to you to set upper and lower limits, but six to 10 rooms per night is typical, and in return for this business, the group would expect you to offer a special group rate when reserving a block in advance.

Groups could comprise:

• Friends

• Extended families

• Sports teams

• Pensioners

• People with a shared interest

The list goes on and there’s really no limit, but some groups are more common than others, and for them, you can personalize your marketing strategies. Which brings us to SMERFs, who deserve a special mention.

SMERFs

A SMERF is a group that falls into the category of social, military, educational, religious or fraternal.

SMERFs represent a significant market, and by coinciding them as a segment in their own right, you can develop a strategy to capitalize on an often neglected demographic, one that epitomizes the opportunities of group business and maximizing occupancy.

The examples we could give are virtually infinite but two that caught our eye while writing a much more detailed article on SMERFs were:

• This Scottish clan gathering in Texas, who met for the 61st year running in 2022

• These go-kart racers who travel to Super Nationals in Vegas every year

While SMERFs shouldn’t be treated as one amorphous blob, and each group needs the personal touch, they do have much in common in terms of your broad marketing approach.

5. Discount

Discounted rates are a common feature of a number of segments, with discounts often being applied to the best available rate, but the discount segment is also a segment in its own right.

Typically, the segment refers to discounts such as those associated with roadside assistance membership (in the US, this is likely to be the AAA or AARP), credit card rewards, various promotions online or on mobile, traveler programs and packages.

Given the size of the discounts, this segment is particularly susceptible to spontaneity, so play to that impulse in your promotions and packages.

6. Wholesale

Guests who book through a wholesaler fall into this segment. The booking won’t usually be direct; rather, it’ll be through third-party resellers, such as tour operators, travel agencies or OTAs, who benefit from the preferential net rates that that wholesaler has negotiated with the hotel.

Guests in this segment usually travel for leisure, booking as free independent travelers (FITs) or in tour groups. But travel can be for business reasons, with production crews being an example of traveler in this category.

7. Other

‘Other’ is a distinct segment comprising guests that don’t comfortably fit into the hotel target market segments we list in this section or any of the hotel-specific segments that you might usefully define yourself. Examples could include diplomats, politicians and military personnel, but there’s no limit.

Targeting this segment is tricky for obvious reasons, but it’s useful to be aware of it so that you can categorize guests accordingly and decide which elements of other segments’ offerings might work best for their needs.

How to identify guest segments for your hotel

Of course, hoteliers can’t solely rely on the common guest segments discussed in the section above. As we say, you might have niche guest segments that are specific to your hotel that you must define and focus your attention on. And the importance of each segment – and therefore how much attention you pay to it – varies from one hotel to the next.

But with all that said, there are still common methods for identifying the segments into which your guests fit, which we’ll discuss here.

Assess who your guests are

The first step is to assess exactly who your guests are. What type of traveler are they and what proportion of your total guests over a given period of time or season do they represent?

This starts with capturing and then analyzing data, such as that in your:

• Customer relationship management system (CRM) – this is the main hub of your marketing and sales colleagues, and it should be integrated with your other systems, granular and well-maintained

• Your property management system (PMS), the digital home of revenue managers, where info on room type, length of stay and other metrics are stored and can be fed into…

• … your business intelligence tool for analysis of these metrics, along with occupancy, average daily rate (ADR), revenue per available room (RevPAR) and the like

• Social media channels

Group guests into segments

Equipped with the information above, you can start to segment guests based on factors like the length of their stay, the purpose behind their travel, and how much they spend.

Again, you need to capture this information. Some of it can be inferred from the way in which they made the booking; some has to be asked directly as part of the booking or checking-in process.

Over time and with enough data to render your efforts statistically significant, you can then define your segments and attach appropriate activities and levels of focus to them. There’s no theoretical limit to how many segments you can include in your strategy but if it rises significantly beyond half a dozen or so, you risk complicating your processes, which will of course be counterproductive and inefficient.

Identify your VIP guest segment

As an extension of that last point, make sure you properly monitor and analyze your activity. By doing so, you can identify which segments are most important to focus on at your hotel, and weight your promotional activity accordingly.

It’s obvious but we’ll spell it out: by focusing attention on these guests, you’ll generate the greatest ROI as they offer the highest profitability and greatest volume. But don’t sacrifice other segments: every segment is important or you wouldn’t have defined it as a segment, and every guest is a potential writer of online reviews and repeat customer.

Monitor bookings

Segments and the promotional activities that are designed to cater for them needn’t be – and shouldn’t be – set in stone; if the landscape changes over time, adapt your segments and your activities.

You can only do this by monitoring the performance of your bookings by segment, something that’s reliant on:

• The right software, whether proprietary (see section below) or Google Analytics

• Good integration and data-flows between systems

• Good, granular data and data-capture

• The ability to analyze it in a meaningful way and an understanding of hotel revenue management metrics

In doing so, you can see which segments are over performing and which are underperforming.

If a segment is over-performing, while you wouldn’t want to stop the broad thrust of what you’re doing and might indeed want to increase promotional activity, you could consider whether your room rates are too generous.

If you’re underperforming, an exploration of the data should be able to reveal whether the problem lies with your promotional activity or with your identification of the segment.

Leverage hotel management tools to ensure your distribution strategy helps you reach your target guest segment

Lighthouse is a hotel industry expert. We understand the value of that good data and the right software can bring to all of your efforts, including segmenting your specific market and understanding those segments better..

We have a huge range of solutions for revenue managers; here’s a preview of just a few that will support your efforts:

• Business Intelligence – forecasts, reports, assessing your metrics: this is the platform to understand your hotel and drive strategy, and you can break your analysis down by segment.

• Market Insight – also segmentable, with this AI-enhanced tool, you can spot and analyze demand patterns and get a view on trends before your competitors.

• A range of other tools, including Rate Insight, that can also help manage bookings, assess competitors’ prices and forecast revenue.

• Last but not least is Channel Manager. Used alongside and integrated with your other tools, whether those of Lighthouse or from elsewhere, this platform could be at the heart of a successful distribution strategy. Such a platform can help you ensure that you’re reaching all of your guest segments.

We’re always happy to showcase these solutions to anyone who’s keen to learn, so get in touch.