Good RM starts with segmentation

by Mark Brandau, Director of Content | November 07, 2013

Earlier this year, Marco detailed why fixed-tier or BAR pricing is a revenue management mistake. The point of his Time to Lower the Bar for Good post was that dynamic pricing and yielding segments individually is the best way to optimize revenue, and pricing each segment as a percent off the best available rate (BAR) is the fastest way to lose money. He has since written about the importance of forecasting and how many hotels mistake inventory management for revenue management.

All excellent posts, but there’s an important first step critical to each of those facets of revenue management that many hotels aren’t getting: segmentation. There’s plenty of chatter about redefining market segmentation and looking ahead to the potential of lifestyle and behavioral segmentation that will lead to one-to-one marketing and even more advanced RM. That’s great, and we’re well on our way, but before we redefine segmentation, let’s slow down and make sure we can first define what it should be at its core.

It really is the first step to good revenue management. You can’t forecast or yield without first breaking down your business into the different ways customers are booking your hotel. Who are they, how and where are they booking and how should that affect your pricing strategy? Is there a difference between OTA land, package and opaque? How about between hotel and hotel call center? What other ways are customers booking your hotel? The challenge is the answers vary from hotel to hotel and market to market. There’s not one right answer.

It’s important to think about two things in particular when grouping channels to create segments. First, do customers pay a similar price when booking through the collection of channels? Second, do they tend to book at around the same time in the booking window? The first criterion tends to be obvious to most people, but the second is less commonly considered. It is critical though to consider the booking curve because if a hotel combines channels that book very early with ones that tend to book very late then the forecasting algorithm will struggle to find a forecast for the segment that fits both behavior patterns.

Our revenue management systems, Duetto Edge, Insight and Game Changer, the latest we just launched for casino properties, allow for incredible flexibility in creating segments for yielding and can adapt to fit your property and its unique set of characteristics. They also allow for multiple sets of segments so the data can be tailored to fit the eyes of different departments for reporting and forecasting. Lastly, and very importantly, if you change your mind six months after going live, our customers can change their segmentation instantaneously and Edge, Insight and Game Changer remap all of the historical data. There’s no hard reset. Antiquated systems are nightmare in this scenario because a change in segmentation invalidates the history and it’s like you are opening a brand new hotel. In these dynamic times, hotels cannot tolerate a system that does not allow them to adjust on the fly.

Here’s how we approach segmentation and our best practices:

We start by looking at what we call native segments, which are the different channels and specific ways customers are booking the hotel. These are things like hotel web, call center, corporate negotiated, OTA land, OTA package, opaque, group and more, for example. And again, these can and will vary by property. A casino property in Vegas might have comps in there, while the Best Western in Des Moines probably won’t.

We start narrow and then group these native segments into yielding segments we use for pricing. We typically do this based on price, channel and booking behavior. Why not yield every single channel or native segment separately? If there are enough bookings in each, and the segments are independent of each other, absolutely. But in most cases, many of these can be grouped together. Of the above native segments I listed, we’d likely group hotel web, hotel call center and OTA land together, calling it our transient segment, for example. These would be yielded together as a larger group because at most hotels, these prices are always going to be the same, because of parity agreements, at the best available rate publicly listed.

We’d yield OTA package separately, as its own segment and not grouped with OTA land, because there are times when you’d want to price that channel differently. Here’s a great example: While on most days you would price OTA package lower than OTA land, on a day with great demand, like New Year’s Eve in many markets, you would probably not offer a discount for OTA package. This way you're not forced to keep the two segments in lockstep when you know you’re going to sell out. If you were to yield these segments together, all based on BAR pricing, you’d be stuck dropping OTA Package a standard amount or percentage below BAR.

Here’s another example of a segment that has either been lumped into other segments for yielding purposes or one that is rarely priced on its own. Many hotels offer a AAA rate, which could be something as simple as 10% below BAR. Often, depending on demand, the hotel either leaves it on or turns it off in high demand situations. Rather than closing it, so it’s not offered at all, why not discount it 2% or not at all? These may sound like more arguments for dynamic pricing, but you can’t have that without individual segments to yield.

Many archaic systems prevent true dynamic pricing by limiting the ways you can segment your business. Edge allows you to group your business as you see fit, even allowing you to name the segments as you wish. We’re not going to lock you into the traditional way things have been done and limit your ability to revenue manage. We want to make it as easy as possible. We also know the greater flexibility you give a revenue director, the more revenue they will manage.

Edge doesn’t stop with yielding segments, allowing hotels and revenue managers to group channels and segments differently for other departments and purposes, like forecasting and reporting. We call these market segments and might combine segments like OTA package, land and opaque into a more general third party category for finance, accounting and even investors, who aren’t necessarily concerned with the most specific view of bookings.

Hotels stuck in the old ways of segmentation are used to seeing data one way. That’s how they run the hotel, from the front desk to revenue management to finance all the way up to ownership. Greater flexibility allows for better yielding, forecasting and management of the property for different departments. It also makes Edge ready for the next evolution of revenue management that incorporates behavioral and lifestyle segmentation.

Mark Brandau, Director of Content

Mark joined Duetto in January 2016 from market research firm Technomic, where he began his content marketing career after nearly a decade as a business-to-business journalist covering the restaurant industry. As assistant director of content, he helps steer the creation and promotion of all Duetto's content across its blog, video and social-media platforms, as well as sales collateral and internal communications.

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