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Satisfy Your Guests at a Profit

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March 01, 2013
CIO/CFO Column: What Keeps Me Up at Night
Tim Coleman

There are as many definitions of marketing as there are companies trying to practice it. At an elementary level, it revolves around the oft-mentioned four Ps of product, price, promotion and place. These are the four tools that the marketer controls and can use to satisfy his or her customers. But, in order to get marketing to work for a hotel, it needs to go to the next level of understanding. This involves mastering three other essential marketing concepts: the marketing principle itself, market segmentation and product differentiation. They all have a direct impact on revenue management because, the more sense a property and its guests can make of its rate strategies, the greater the chances that the property’s product price combinations will satisfy its guests. In fact, revenue management becomes much easier if hotels get these marketing basics into their planning from the start.

1 Happy Customers. The marketing principle, simply stated, is, “Satisfy the customer at a profit.” Harvard University Professor Ted Leavitt characterized this idea by explaining that a business needs to satisfy its customers so they will come back. Then, a business needs to do so at a profit, so it will still be in business when they come back. This principle sounds simple; but, as many try to implement it, the devil is always in the details.

First, a property needs to recognize that its focus needs to change from what it offers to how its customers perceive what is offered; and how they feel about the property’s service offerings rather than how it feels about offering them. In other words, marketing exists in the minds of collective customers and is measured in the fuzzy concept of how satisfied they are. Marketing shifts the focus from the business to the guests. This means properties need good guest satisfaction information. However, if a property cannot afford to hire a market research firm, there are several low cost ways to gauge guest satisfaction. For example, it can monitor the social media sites, like TripAdvisor, then it should make sure to determine what objections its guests are raising, to focus and fund to these precise needs.

Secondly, in order to satisfy them, a hotel needs to know who the guests are, what they crave and how badly they crave it. This means separating guests into groups with similar needs to more precisely meet and satisfy those needs. Hence marketing demands a strong market segmentation program.

Finally, properties need to be selective because it cannot do everything for everybody and still make a profit. This means hoteliers need to differentiate their product offerings and their accompanying price levels to fit each of the market segments they choose to serve.

Putting these together will provide a key marketing strategy: product differentiation for market segmentation.

2 Market Segmentation. A market segment is a group of potential customers with similar needs. These needs can be identified and the customers buying behavior tracked to make sure the hotel is seeking out and satisfying the right bunch of potential clients.

There are many market segments. Unfortunately, due to a lack of understanding of marketing, some of the listed segments are not market segments at all. Some rate plans masquerade as segments. This is not surprising because, for many years, the best revenue reports that hotels could generate were room nights sold and revenues earned  by rate plan (or some other rate-oriented code). Since hotels could measure these bookings clearly, they began using each of them a market segment. While many applaud the idea of only using segments that can be measured, businesses should not call everything a market segment just because there are reports that track volumes, rates and sales. Hotels also need to ensure that these guests book for similar reasons and have similar wants and needs.

Similarly, distribution channels often appear as market segments for two reasons. First, many distribution channels maintain ownership of the customer relationship; so, as far as hotels are concerned, the channel participant, especially the online travel agent, is the customer. Secondly, the hotels have no information about the actual end user guests, so they tend to lump them together in a category of people who choose to book through an OTA. This common characteristic makes them a quasi-distinctive segment. Finally, even some promotional channels are confused with market segments. This happens when hotels lump together all the people who respond to a particular email or an ongoing email campaign as a market segment. While this is not exactly a true market segment it can be used because we need to accurately track the results of our marketing efforts.

The key take away on market segmentation is that hotels need to identify guests who have common desires and characteristics so they can better satisfy them. They can do this by putting together product offerings that meet their guests’ needs at prices they are willing to pay in distribution channels where they like to shop.

3 Product differentiation exists at several levels in the hotel business. The simplest variation is to look at the chain level where many hospitality giants offer various brands in their portfolios to match different market segments. For example, Marriott International has the Ritz-Carlton product for upscale customers, the Marriott for full-service business travelers, The Courtyard for limited-service business travelers and Residence Inns for temporary living customers. Some chain products change to match evolving segments. Recently, Aqua Hotels, headquartered in Hawaii, split its portfolio into three distinct brands to better align its offerings with some emerging market segment trends. The Monogram Collection provides luxury accommodations, the Aqua Hotels and Resorts Brand provides mid-level pricing with an island-oriented experience, and the Lite brand serves the economy market. 

The same concept of product differentiation happens at the property level. Here the property might have different room types appealing to different market segments. Some of those segments will only be satisfied with a particular room type. One main problem that hotels face is that each night a different mix of market segments shows up at their properties; unfortunately, a property cannot change the room types in its hotels every night. Also, many customers place more weight on the location of the hotel itself than on the particular room they might get. Hotels must segment their customers to try to determine who needs a particular deluxe room to be satisfied and who may just want one. The implication for revenue management is enormous. The person who needs a suite is much more willing to pay extra for it than someone who merely might find it a nicety. 

How does all this marketing theory help with revenue management? First of all, a guest does not always visit as part of the same market segment. Sometimes he may be a luxury business traveler on an expense account and other times he may be traveling with family at his own expense. He may not be satisfied with the same combination of price and product for all visits.

How can we solve this conundrum? Actually, there are some very smart people working on this. Some Silicon Valley scientists have developed the theory of willingness to pay to determine what price to charge for various rooms in a property. Relying on new scientific research available from Big Data and super-fast computations, these scientists are analyzing millions of transactions and figuring out what segment a guest is acting in as he proceeds through the booking process. They assign the guest to one of many personas that have been identified. With a high degree of statistical certainty, this provides an estimate of what the guest is likely to pay. As this work progresses, it will take one-to-one marketing to its logical conclusion in one-to-one revenue management. You may be thinking, Big Brother is at it again, but remember, satisfaction lies in the mind of the customer, so your price needs to be exactly what he or she is willing to pay.

With this power at your fingertips, you will soon be able to truly satisfy your guests at a profit and fulfill the marketing principle dream.

Tim Coleman is the former chairman of the HSMAI Revenue Management Special Interest Group Advisory Board.

©2013 Hospitality Upgrade
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