Market Segmentation in the Hotel Industry

Subject: Marketing
Pages: 10
Words: 2753
Reading time:
12 min
Study level: College

Market segmentation is the categorization of the different components of the market, which are dissimilar from one another. Through the identification of such dissimilarities in the different portions of the market, hotel ventures can satisfy the needs of potential consumers in an effective manner. Segmentation is an important part of yield management, as it is commonly used in pricing, where price discrimination is used to maximize revenue returns, from the often fixed hotel rooms or service centers (Netessine & Shumsky, 2002).

The core of market segmentation involves comprehending customers and their needs in a better manner, so as to better satisfy the dissimilar needs, which cannot be addressed through using similar treatment and satisfaction models, as opposed to focusing on competition. The criteria for market segmentation include that the segments should be identifiable, substantial, accessible, durable and unique, as this allows for distinctions.

According to Kotler and Armstrong (2001, p. 245), market segmentation is the division of the market into subgroups of buyers, who are characteristic with distinct needs, characteristics or behaviors, which implies that they will need dissimilar market mixes and products. From such identification, it is used as an important aspect of management, where products and services are offered to the intended consumer (Ward, 2009). This results in the charging of dissimilar amounts for a particular room, in the case of hotels.

Kimes and Wirtz (2003) argue that revenue management involves the identification of the right capacity of products or services, to be offered to the right consumer at the right time, through matching demand and supply into different customer segments, towards maximizing hotel revenues (Demirciftci, 2007; Kotler, 1984).

In capitalizing on market segmentation as a mode of yield management, businesses are obligated at understanding the buying behaviors of the customer, and the market in general. In this case, sellers can choose to pursue the comprehension of consumer behavior in two modes, namely, pursuing consumer markets and studying the business-to-business markets (B2B) (McDonald & Dunbar, 2004).

In other cases, the segmentation practice may involve the study of both aspects, as this allows the hotel management to move to the next phase of classifying the different customer markets into different customer need segments (Gupta & Lehmann, 2005). From the study of the market from either approaches or both approaches, the business would arrive at a comprehensive understanding, of how consumers arrive at buying decisions. Most of the above-mentioned factors can be used in consumer population segmentation, which is very critical in marketing (Kotler & Keller, 2006).

Business segmentation is oriented towards creating positive market divisions, where the market is grouped into classes. The rationale for this segmentation model is offering priority to the groups to be addressed, through establishing an understanding of their behavior, thus responding using effective marketing strategies (Weinstein, 1994). The effectiveness of this marketing strategy is determined by its ability to realize the satisfaction of the different preferences of the different segments.

Through such effectiveness, revenue realization is improved, thus improvement in business segmentation, which further, fosters improvements in marketing efficiency (Goldstein, 2007). This improvement in marketing effectiveness results from the comprehension and address of the different industry structures, which are characteristic with lower or higher attractiveness. These may limit the address of customers’ needs (Cross, 1997).

Under this segmentation model, once a segment has been recognized, the focus is placed on it, through positioning the practical nature of servicing the given consumer population. In this case, the positioning practice involves determining how the service or product is perceived by the target consumer population (Srivastava, Shocker & Day, 1978).

Business segmentation affects hotel revenue creation in a number of ways, including allowing for comprehensive analysis of the markets, through offering information in order, ranging from the highest to the lowest average daily revenues. It offers information on the percentage of total hotel room sales for each segment of the market, where the emphasis is placed on the segments with high room rates and volumes (Kaul, 2009).

It offers information on projections, regarding an intended increase in revenues from given markets or segments. Also, it aids in the determination of the revenue drivers of the market segments in question. These impacts of business segmentation on hotel revenue creation may be depicted from religious segmentation, which has been on a growth (Jallat & Ancarani, 2008).

According to the World Tourism Organization (WTO), an estimated number of 300 – 330 million pilgrims pay visits to major religious tourism sites of the world each year. Also, according to the United States Office on Travel and Tourism Industries, the number of Americans traveling abroad for religious pilgrimage, grew from the 2002 figure of 491,000 to 633,000 in 2005, registering a 30% increase (WTO, 2011).

Geographic segmentation is the division of markets into geographical centers or units, where such divisions may be based on the following units of the division. Under regional classification for example, using the case of U.K, these might include Wales, Northern Ireland, Scotland, and England. At a more detailed level of division, the divisions may point out the different states or metropolitan areas, as centers of focus for the administration and distribution of services (Day, Shocker & Srivastava, 1979).

The categorization may also take countries into account, where the divisions and considerations of the different centers are based on size, membership of geographic area, and the level of development, characteristic with the center in question. Under categorization on the basis of cities or towns, the division criteria may include the population within the range of or above certain limits.

The criteria may offer consideration to the population density of the centers in question, where semi rural, suburban, rural and urban classifications are featured. Climatic characteristics may also be given focus, where consideration may include northern or southern areas (Lamb, Hair & McDaniel, 2011).

Geographic segmentation affects hotel revenue creation, in that it allows for more utilization of the available surplus production ability, which is done through the capacity to alternative segments. Through this model, hotel businesses are able to lower business risk, as the hotels no longer rely on a single market segment for their revenues. However, such segmentation calls for more production processes, resource and cost requirements, and the hotel is placed at a point, where it must determine whether the increasing costs can be met by the increasing revenue created.

Such segmentation also creates the need for more distribution channels; where the internet has come in to play a very important role, in aiding small hotels enter highly fine-tuned market niches. An example here is a newly established hotel, which is close to a religious tourism site, for example, Mecca. With the expansion of internet connectivity across the globe, such a hotel can advertise or create profiles, associating it to the tourist center in question. As a result, visitors visiting the center will be interested in finding the new services out, or using the relatively cheaper or customer-oriented packages, as the case may be.

Geographic segmentation, further aids the revenue managers and the strategists of hotel ventures, in evaluating the viability of the particular segment, as they are supposed to note some level of homogeneity among the members of the given geographical segment. From such understanding, revenue managers are able to decide on the most appropriate marketing mix for reaching the given segment.

From a comprehensive understanding of the best mix to be used, a firm can realize fast market coverage, as the case maybe with mass marketing. In pricing, businesses are able to capitalize on differential pricing, across the different market segments. An example here is that of Alsafa Vacation Hotel, which has specialized in vacation service provision at the Mecca tourist center, disregarding other hospitality services like economy lodging provision and extended business packages (Dallen & Daniel, 2006).

Demographic segmentation involves the division of the market into groupings, on the basis of varieties like gender, age, income, education levels, race, size of family, nationality, occupation and religion (Armstrong and Kotler, 2005). Due to their far-reaching impacts and effects on customer preferences, these fall amongst the most established bases for the segmenting of customer groupings. An example here is the impact of different cultural preferences, on the choice of hospitality services and that of income levels on the level of access to different levels of hotel services (Kandampully, Mok, & Sparks, 2001).

In this case, some are limited to certain service classes, though these may not come with substantial functional differences. The intense relationship between demographic segmentation and the marketing strategies of major market movers in the hotel industry, include the close linkage between customer preferences and the variables of age and income among others. Further, there is the underlying factor that in practical terms, there is more data available to revenue managers and marketing strategists, when formulating processes on demographic segmentation.

Demographic segmentation affects hotel revenue creation in a number of ways, including that it offers information on the major consumer groups, which purchases substantial amounts of the services of hotels, thus can shift to specialize in the provision of such services, as they greatly contribute to profitability levels. An example here is that of casinos in Las Vegas, which pushed for the amendment of laws, to allow for other cities to operate and own hotels with casinos.

The shift in target population was from that of gambling customers, to hosting the whole family, unlike before, when focus was offered to gambling consumers alone (Payne, & Frow, 1999; Day, Shocker, & Srivastava, 1979). As a result, any gambling consumers wishing to have good time with their family would opt for Las Vegas, as opposed to any other gambling center, including their home city. Such a move was marked by the development of three more megacities, addressing the needs of the family markets, a move aimed at countering the competition from South Dakota, Indian Reservation Casinos, and the Mississippi River gamble boats.

An example here was the MGM grand, which is the largest global hotel, with a capacity of 5,000 guest houses (Adams, 1993). From the same case, demographic segmentation allows revenue managers, in detecting the groups or populations, which cause trouble and issues during the flow of service.

An example is the young generation night clubs at Las Vegas, which are noted as being sources of loutish behavior and security issues, which are likely to affect the vocational expectations of the older generation. As a result, the segmentation allows in the decision on where to invest and how to do it, as investing in certain customer classes will hamper demand from other classes (Mackay, 1997; Thompson, Piney, & John, 2006).

Price segmentation is the case, where different players within an industry charge dissimilar prices to the different customer classifications, for services which are more or less comparable in terms of value, quality and the quantity of service or product offered. The rationale for charging the different costs or rates is not based on the prices charged to the clients, although, charging dissimilar prices for similar services, especially in the hotel industry, is not pure charge discrimination (Garbuz, 2011).

These conditions include dissimilarities in price elasticity among different markets, in that; there should be a difference in price elasticity of the demand, depicted by each grouping of consumers. From the usage of this strategy, hotels among other firms are able to increase their overall revenues, as well as profits (Jenkins & McDonald, 1996).

The second condition for this strategy to work includes the placement of barriers, so as to avoid the cases of consumers switching from one firm to the other. In this case, the strategy is focused on the reduction of consumers switching and market seepage, where the consumers purchasing goods or services at lower rates, can transfer them to those who would otherwise, offer the higher price. Such seepage is prevented through selling services or products to consumers at unique seasons (Haley, 1968).

An example here is the sale of time specific hotel room services, which may not be transferred or resold under any circumstances. The different forms of price segregation are optimal pricing, where a business, for instance a hotel, charges the separate consumers or consumer groups, what they are willing and ready to pay. The second model is selling off packages of the services considered to be surplus capacity at lower costs, as opposed to the previously offered or advertised costs.

This pricing model is applied in the hotel industry, as fixed production costs are high, while variable or marginal costs are minimal and predictable. The strategy is often used, when there are unsold hotel rooms. In such a case, the hotel will offer such rooms at lowered prices, so as to offload such space capacity at the discounted rates.

The offload of such surplus capacity is expected to produce revenues, which are to cover any marginal expenses of the available units. The major advantage of this strategy is that it creates a supplementary profit, and serves as an efficient model of attaining extra market share, as the increased market coverage increases the firm’s reputation, as compared to their competitors.

The effects of price segmentation on hotel revenue creation, includes its potential to offer insights on the market segments, that are characteristic with more elastic demand, as opposed to those that are not. As a result, hotel ventures can anticipate further revenue creation or strategic planning, offering focus on the more elastic demand segments, as these can better offer revenue increment opportunities.

The segmentation model offers insights on models of eliminating consumer seepage, which is done through focusing on the delivery of unique services. An example is the competitive advantage, created by a hotel that offers taxi and tour guide services, at reduced costs to its customers, as opposed to a competitive venture that does not, despite that they are both located at a locality surrounded by tourist attraction sites (Rama & Maria, 2001).

The segmentation model, further, offers a platform where suppliers can charge premium prices for their similar products, depending on evaluating the consumers, time of consumption, and ability to pay premium prices (Donaghy, Mcmahon & McDowell, 1995). The strategy is also a competition offsetting model, as it allows for the formulation of packages, like the early-bird discounts models, which make customers press for consumption in a timely manner, so as to benefit from such discount plans.

As a result, such firms will make more revenues, as compared to those that don’t offer such platforms. An example of religious tourism areas offering such discounts includes religious sight and sound centers, where first comers are offered special discounts (Hanks, Cross & Noland, 1992).

Leisure segmenting strategy is the revenue creation model, which targets the luxury fragment of the hotel business, which is highly lucrative, though very difficult to manage. In using this strategy, revenue managers and the strategists of the hotel, focus on the experience of the visitors of the hotel, offering all the luxury services that they may call for (Crittenden, Crittenden, & Muzyka, 2002; Hooley & Saunders, 1993). Such leisure visitors will expect to receive top level service, excellent surroundings and high quality services, including the food offered by the highly experienced service teams (Sullivan, 2009).

The revenue strategy of pursuing this fragment of the market is both costly and difficult, as it calls for maintenance of the excellent level of satisfaction from the customers, which are normally not coming in high numbers, as compared to those at the other segments. Further, the strategy is only able to pay off, in cases where such services are offered at premium prices. An example of global hotels using this strategy is Ritz-Carlton, which is an international luxury hotel (Talluri & Van Ryzin, 2001; Green, 1979).

This segmenting model influences hotel revenue creation, in that it offers information and insights, on contracted and non-contracted revenue centers, which form major revenue creation and management centers, for the hotel business. Among contracted business centers, include conferences, events, and corporate contracting deals. Among non-contracted business deals, include leisure travelers, personal travelers, transient visits, and last minute business visits (Baines et al., 2005).

The model, further offers insights into rate parity, which allows for the selling of hotel rooms at a comparable rate structures, across all distribution networks, which is a model that offers information on further revenue creation. The model, further offers insights into effective management of the leisure segment, as it diverts all focus into business in this line, where better management of channel gains, can be used as sources of extra revenue creation (Green, 1979).


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