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January 18, 2024
In today's dynamic business environment, staying ahead of the competition hinges on a profound understanding of your customers—what they want, how they behave, and what drives their choices. At WeDploy, when conversing with our prospects and clients, segmentation always come down to the table. This is the cornerstone of effective operation, sales, marketing, revenue management and overall business strategy. It's precisely why businesses are increasingly turning to demand segmentation, a potent tool for uncovering hidden potential within their customer base.
Demand segmentation may not be a novel concept, but its relevance in our data-driven world cannot be overstated. In this article, we'll delve into the realm of demand segmentation, exploring why it matters, the remarkable benefits it offers, and the challenges it presents. We'll embark on this journey with the help of a case study featuring the Wyndham Hotel Group, showcasing how demand segmentation translates into tangible real-world results.
So, what exactly is demand segmentation, and why should businesses give it serious consideration? Join us as we demystify the concept and uncover its significance in today's business landscape. This article will provide insights to help you harness the power of demand segmentation effectively.
Demand segmentation is the art of identifying distinct groups of customers who share similar consumption habits and buying behaviors. At its core, the aim is simple yet profound: pinpointing your most valuable customers.
These segments are not one-size-fits-all; instead, they are uniquely tailored to your business, reflecting your customer landscape. I usually consider two key elements : Consumption habits + Buying behavior.
We here try to identify customer habits, involving mainly :
We also tend to cluster clients based on their behavior :
It's important to note that there are no standard segmentations. It's more about identifying the one that fits your business the most. The exercise is to correlate these two sets of variables to find your ideal segmentation. From a technical point of view, what will result from your segmentation is the mapping of your pricing plans (supply) and your reservations (demand).
As a reminder, the consumer's buying process consists of 5 main stages, from inspiration to post-purchase evaluation. It's important to emphasize that each segment will have its own buying process - For a given hotel, think one minute about the difference between a corporate and a leisure stay ?
To summarize : your marketing approach should stimulate and cover all of these stages across your different market segments.
As approached earlier, one of the most important benefice from my point of view is the ability to identify your most valuable customers (and push to capture it obviously). That's where Revenue Management comes in : part of the job is to forecast the expected demand, allowing to distribute your inventory to the right clients through pricing and restrictions.
But that's not the only advantage, several logic support the importance of segmentation:
This is perhaps the most important point. Segmenting your demand means taking a step back to understand why customers come to you. It's a thought exercise that allows you to determine which offers are most likely to appeal to your customers : Individual ; Group ; Leisure ; Corpo ; Crews...
By having a good understanding of your customers' needs, you can refine your marketing strategy by demand segment:
Customer satisfaction, yes, but as you'll have understood, it also involves personalizing the experience. That's the whole principle of segmentation. This way, your customers will feel listened to, understood, and the experience offered will be even better. Think one minute about pre-arrival amenities based on your demand segments.
That's obviously a key aspect for every business. Not only in terms of profitability, but also looking at the competitiveness in a given market. This is what partners like STR or MKG offer in the hotel industry, with a distinction between individual customer performance, group performance, and contracted performance.
Analytical reading of your business's KPIs (historical, reservation, future) will be facilitated through segmentation. Providing an occupancy rate and an average price is good, but it will remain incomplete if you present it to a Revenue Manager or Sales leader. Funnel granularity is required and segments allow you to quickly dissect the business, identifying trends, opportunities and threats.
Not having a proper segmentation is also a threats for touristic operators. From WeDploy point of view, four major risks can be identified :
Ambition and resources allocation will not be adapted to each business segment. We will have instead a mass, rough figures, without further ideas on where to prioritize actions and focus.
Not being able to track your segment will results in having no idea of who is coming to your business. You'll accept demand as soon as it comes and surely left some money on the table.
To an extent, ou might overspend cash and time on a specific population, while higher ROI action could have been taken on another one. Did you ever get confused by receiving promotional email in your personal mail box, asking yourself why you've been targeted by something you never wanted ?
The one-size-fits-all approach need to be erased. Your pricing and restrictions updates should definitively apply to a specific segment, else you will either loose revenue opportunity or turn-down needed business.
It's important to start with data sources. This serves as a basis for identifying customer segments. Depending on the industry, we have plenty of them available, here are some examples:
The key is to collect and analyze these data sources to identify patterns and trends that can help in segmenting your demand effectively. Advanced analytics and machine learning can also be used to automate this process. The advantage is to identify segments that may not be apparent through manual analysis, I assume this is a trend to follow in the next couple of decades or so.
Still, in the meantime you could use a simple spreadsheet to move to the first steps. Once have gathered and analyzed the data, the next step is to create customer groups or segments. The key rule is to consider the 3 following specifications:
Let's now take the example of an industry leader: Wyndham Hotel Group.
When it comes to the number of properties, Wyndham is number one, followed by Jin Jiang Hotel Group. (Marriott leads the table in terms number of rooms). The challenge is significant for the American as they need to segment demand uniformly for their 9,000 properties worldwide!
The proposed approach is very comprehensive, nesting three levels of increasing detail within each other:
You'll get it, purpose is to provide the ability to drill down with more and more granularity.
We're having three main Market Categories : transient, contract, groups, which are primarily based on:
Drilling down, Wyndham has as many as 11 market segments. Two additional discriminant elements refine this segmentation:
Finally, Wyndham goes a step further with sub-segments of the market. This introduces the concept of sales channel (Direct vs. Indirect) or the impact of central teams (global or local corporate contract; global or local promotion).
Wyndham's segmentation is quite common and standard among American giants (Marriott, Hilton, Choice, etc.). There are two reasons for this:
*** Insert infograph brands ***
For us, the interest may not necessarily lie in going into this level of detail, which would be impractical due to its complexity and time-consuming nature. We can imagine an interesting compromise between the market categories and market segments presented: BAR + Contracted; Indiv. Business / Leisure; Group Business / Leisure.
It's worth noting that Wyndham's segmentation also introduces a distribution channel concept (sometimes involving a commission), particularly for transients, with a distinction between direct and indirect channels. This is a step forward towards the Revenue Management of the future, one that doesn't necessarily focus on revenue optimization but on profit.
At a time when most establishments aim to maintain rate parity (through an omnichannel strategy), the interest behind it is more strategic than operational. The goal is not necessarily to close the last two rooms on OTAs but rather to assess the evolution of the mix from one period to another and consider the levers to rebalance the weight of these segments in the months and years to come.
As we've seen, segmenting your demand is key to Revenue Management principles. With clarity, if you operate in a mature industry (such as hospitality or advertising), the idea is not to reinvent the wheel but to identify possible areas of improvement. However, if you're in a newer market (event ticketing, private accommodation rentals), the exercise can be interesting as part of introducing a Revenue Management function.
Keep in mind that there are no magic formulas. The equation depends mainly on your industry and adherence to the different conditions for applying Revenue Management.
We can, however, find strong similarities between comparable products:
Evaluating the appetite of segments by hotel typeThroughout this article, we've shared six arguments for the importance of segmentation. See it as building a solid foundation for practicing Revenue Management where all teams (reservations, sales, front office) are involved.
If you would like an assessment of your segmentation, let's get in touch.
Stay tuned for the next chapter in this special edition. Our next article will be dedicated to tools and training. In the meantime, don't forget to follow us on LinkedIn🤝 and subscribe with just one click at the bottom of the page. 👇
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