How to set room pricing: A guide to modern market segmentation

In other words, their motivations for traveling are different. This is why it’s so important to know the traveler segments you are attracting to your hotel, and tailor your pricing strategy to each.

It is of particular importance to a revenue manager, as each segment has varying price elasticity of demand. With relevant information on each segment, revenue managers can implement a rate structure that sells the same rooms to different segments, at different prices, without leaving money on the table (also known as price discrimination). 

For example, corporate travelers are willing to pay a higher rate but the problem is they tend to book travel last minute. So should you hold a few rooms for your corporate business, or give it to the leisure traveler who is paying less, but with a longer lead time?

Understanding these buyer behaviors puts you in a better position to understand when to offer lower rates to leisure traveler segments, and when to hold rooms for higher paying customers who will book later.

Modern market segmentation

Typically there has always been two key market segments: transient and group travelers (although these segments are also made up of a range of sub-sections). It is vital that these are identified and targeted separately. 

Technology has changed travel in every way, becoming part of the entire traveler journey. As a traveler, think about how you now use technology to research, book and share travel experiences. Thanks to the accessibility of travel through the internet, it’s all at your fingertips, no matter where you are. 

Because of this, traditional segmentation is less and less clear. Hoteliers need to think about marketing to the individual, rather than bucketing everyone as a segment. Each ‘segment’ should be turned into a ‘persona’, a representation of your typical guest from that segment.

This means that you don’t just use demographics, but also behavioral factors: Why are they traveling? What do they value? How do they make their booking? When do they travel? How often do they travel? How often do they stay with you?

Market segmentation is not a fixed activity. It is important to use accurate guest data at your disposal to regularly update your segmentation strategy and recognise your most important guests.

By using a business intelligence solution you can identify the most profitable segments at your hotel, along with cost of acquisition and the booking value for each channel.

When you know your market segments in detail, you can provide the most competitive, flexible pricing, promotions and discounts to convert potential guests.

The impact of Covid-19 on market segmentation

In a post-pandemic world, domestic and leisure markets are more critical than ever. 

One of the most long-lasting effects of the pandemic on the hospitality industry has been the huge reduction in corporate travel. According to McKinsey, in 2020, total global business travel expenses reduced by 52%, while corporate-travel spending in the United States fell 71%. 

Hotels that had corporate and MICE business as a key segment suddenly had to adapt and compete for the leisure travel segment. This results in special promotions, flash sales, last-minute deals and, in general, heightened competition in many markets for the leisure segment. 

There are now more promising signs for corporate travel, but it’s by no means a complete recovery as yet. Using Lighthouse’s predictive intelligence solution, Market Insight, you can observe Global Distribution System (GDS) searches, which gives a solid indication on the state of corporate travel.

Hotel GDS Search Evolution for London and Paris - July 2021 to May 2022

By forecasting demand granularly by market segment, you can get a head start on the competition when pivoting your pricing and promotional strategy back to the corporate segment.  

There has also been a significant increase in the domestic travel segment, which independent hoteliers need to be aware of.

With international travel restrictions and the risk of Covid-19, more and more consumers are traveling by car within their own country, meaning that the balance of international and domestic travel segments has changed. 

International travel is picking up once again and hoteliers need to utilise forward-looking indicators, such as flight and hotel search patterns, lead times, and average length of stay to pinpoint what is actually happening on the ground, so that you can establish the right strategy for each segment.

To win the revenue management game, you need to combine both traditional (demographic) and millennial (behavioral) segmentation. As well as a deep understanding of post-pandemic trends to personalize your pricing and promotional strategy. 

One example of this is how hoteliers have adapted their non-refundable rates and cancellation policies to suit the modern day, post-pandemic traveler. With fluctuating restrictions, travelers now want to be able to change their plans at a moment’s notice. 

This requires revenue managers to have a highly dynamic pricing strategy in place - one grounded in quality, real-time data. 

Pricing your rooms right

Getting your rate structure right is the cornerstone of revenue management and your number one priority. With so many elements to scrutinize, especially in a market that is particularly fluid, setting the right rates has become more challenging than ever. 

There are countless factors that can influence your pricing strategy - multiple channel partners to monitor, competition to keep an eye on, shifting traveler trends and demand forecasts to watch. That’s an overwhelming amount of information to analyze and a whole lot of time needed to do it.

It may be an art form, honed over years of experience in the field, but the key to a successful pricing strategy lies in the science. You need to be able to make confident decisions based on real-time, actionable data. That’s why using a market leading rate shopping tool has become indispensable in the field of revenue management.

In this volatile market, it is simply not feasible to collect, collate, analyze, and set a pricing strategy before your data is outdated. At a time when the industry as a whole is recovering from its biggest slump in living memory, and you have less resources at your disposal, it’s important that you do more with less. 

A rate shopping tool easily allows independent hoteliers to maintain their market positioning, to maximize their bookings and revenue. Crucially, it gives decision-makers a bird's-eye view of what is going on in the market. Your competitors' rates are displayed in real-time, enabling you to make swift pricing decisions. 

Refreshed with real-time, rate and market data, a leading rate shopping tool displays a live overview of what is happening in your market, giving you a comprehensive view of your competitor’s past, present and future rates across all key OTAs, brand.com and GDS.

It allows you to monitor your own hotel’s OTB (On the Books) performance, and helps you to benchmark your performance against the market to determine whether your pricing strategy is working. 

We know, more than ever, that guests are looking for maximum flexibility and minimum risk. By using high-quality data from a rate shopping tool, you can see your current positioning, long-term outlook and unlock new opportunities.

Median breakfast cost at hotels in select cities - 09/05/2022 - Data taken from Rate Insight (Rate Strategy feature)

However, free and more basic rate shopping tools are no longer enough to compete when competition is so high and the business landscape is so complex. You need a rate shopping tool which delivers advanced rate intelligence. One that accurately depicts your market’s rate environment, enabling you to shape a dynamic pricing strategy so you can successfully capture demand.

Building an effective promotional and discounting strategy

It's critical that you have an effective pricing and promotional strategy in place. With limited resources, in a fiercely competitive environment, you need to squeeze out every drop of revenue. If you are using accurate data as your guide you can develop a foolproof pricing and promotional strategy.

The pandemic provided a somber reminder of how quickly the market can change. It highlighted the importance of being able to adapt to changing conditions.

Pricing strategies that may have worked for you in the past have evolved, and a more dynamic approach to your rate strategy is needed. You need to be prepared to pivot based on changing levels of demand. 

In recent times we have seen hotels offering more options in cancellation policies, length of stay discounts, upselling, and discounts for mobile bookers.

This further complicates the pricing process - demonstrating that a basic rate shopping tool is not fit for the job. Instead you need a rate shopping tool that supplies advanced rate intelligence, on a granular level.

Hotels offering mobile discounts in select cities - 09/05/2022 - Data taken from Rate Insight (Rate Strategy feature)

Rate Insight’s Rate Strategy feature gives you an overview of your own-property and the pricing, discounting and promotional strategies of your competition. In one dashboard, you can probe key promotional insights, and spot patterns in the data, from median breakfast cost, length of stay discounts, the percentage of hotels with mobile discounts, to semi-flex and non-refundable rates. It is insights like these that can give you the upper hand against your compset. 

The new layer of complexity that has been added to the hotel market requires a simpler, and faster way to view data.