In my view market segmentation is not quite dead, but it is very unwell in its current form and, I believe, unlikely to survive for long. Here’s why.

Surely the underlying principle of market segmentation is that the product and service needs of customers differ. Market segmentation (in its purest form) involves the grouping of customers with the aim of satisfying their needs whilst enjoying the benefits of the economies of scale.

In the good old days of pricing, there was one rate and segmentation was pretty straightforward. Pricing was set at one rate: the rack rate. We posted it on cards and placed it in racks at the front desk. We were so confident about it that didn’t expect to have to offer discount. As technology became more sophisticated and hoteliers became more marketing-savvy, market segments began to evolve. Each segment had its own buy decision and its own travel trends. An in-depth understanding and skilful integration of those segments placed the hotel in a better position to maximize rates and occupancy. This was all made more manageable as better hotel-operating systems became available, so it became feasible to make offers, set different prices and analyse who bought them.

However, as we all know, the travel and hotel industries have changed dramatically over recent years, led largely by the availability of more supply, the onslaught of e-distribution and the arrival of low-cost ‘no frills’ air travel. It used to be pretty easy to segment our customers into fairly straightforward ‘buckets’, usually based on how much our guests will pay or the reason why they stayed in our hotel.

For some worldwide, multi-product hotel companies, these ‘buckets’ or segments are indeed somewhat complex and detailed. The system has developed a momentum of its own. Hotel companies, including the one closest to my heart (Paramount), are forever endeavouring to revise, amend, streamline and/or update their market segmentation. In some groups I hear that they work with 12 major market segments and up to 32 minor ones.

I challenge anyone to keep such a complicated system stable from year to year. Let’s face it, the question is asked annually, usually during business or budget reviews: ‘Shall we make this right for next year?’ They usually end up rewriting it and why do we think that is? I can tell you why: it is because classifying our business into traditional forms of segmentation is no longer sustainable.

Constantly revising our segmentation undermines any year-on-year comparisons, making our budgeting, forecasting and evaluation processes all the more challenging. Even world-class revenue-management systems (RMS) make hard work of it. Also, when the segments change from year to year, this completely messes up comparisons with your competitors—one of the main reasons for the system in the first place—so why are we doing segmentation at all?

Rack rate

Let’s take the good old rack-rate segment and look at it more closely. Once known as the Rolls–Royce of all market segments, most hotel companies (but not all) have stopped using it, because we just don’t know what it stands for anymore. Yes, it was our higher-rated business, but who were these customers, why were they staying and how were they booking? At Paramount, we’re now much savvier at looking for answers and so have decided to move those ‘rack’ customers into other segments—on the basis of survey data—to give us much more meaningful marketing information. Oh, and of course, inflating the rate performance in those ‘other’ segments.

Let’s look at an individual example to show some of the problems segmentation sets up. Today, we might have a customer (who happens to work for a local company) who has booked four rooms at our best-available rate (bar or sell rate) for Thursday, for a business event in the town. He has booked on-line, told his colleagues about the great rates, and they then book 20 rooms for the same night.

Our ‘transient’ market segment is therefore inflated at this hotel. At the point of reservation, we don’t know where these customers are from. The tracking of that company’s production is reduced (unless we happen to find out on check-in).

What happens when we try to compare our rooms’ revenue performance with that of our competitors. Overall we get a picture, but when we try to drill down to the market sectors, we arrive at a tangled mess of mapping. We can’t tell if our ‘residential conference room nights’ are really the same as our competitors’ ‘residential conference room nights’.

Hotel companies currently range from having approximately eight to 40 (major and minor) market segments. The same companies then have a multitude of channel codes, source codes and my favourite segment—the ‘How did you hear about us?’ code. All this coding clogs our PMS systems, giving us a tangled mass of information with which to attempt to decipher our mix of business.

It’s time to put market segmentation out of its misery, once and for all. Do we need it, or could we manage with a very clear set of customer classifications driven by how the customer has booked, where they are coming from and why are they staying with us. Market segmentation does not provide that information and I declare it is indeed dead.