Segmentation & Revenue Management

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  • firms are reluctant to accept changes that require new ways of reaching target segments“Maximum profit is achieved when pricing levels discriminate between segments” (Dibb & Simkin, 2008:5). Products can be tailored to meet the needs of those customers that generate the greatest profit and/or other return such as e-word of mouth (eWOM) advertising. “A segment is a collection of customers who have something in common which makes them share broadly similar products” (Dibb & Simkin, 2008:5).
  • Criteria would include internal factors such as operational requirements, price sensitivity, cost efficiency, anticipated profitability; size, structure, growth of the segment and other related external environment factors. From a revenue management perspective, it would be wise to also consider when the segments utilise inventory to assess opportunity cost.
  • Segmentation & Revenue Management

    1. 1. Advice on Tools & Technology for Smaller Chains & Independents<br />Extract from a presentation on:<br />Segmentation & Customer Centric Revenue Management<br />Kate Varini & Alessandra Bartoli<br />Oxford Brookes University<br />
    2. 2. RM<br />New technologies<br />Consumer purchase journey<br />Distribution channels<br />Consumer behaviour<br />Increased transparency<br />Fairness of RM<br />Information<br />Revenue optimisation<br />Familiarity<br />CRM<br />Willingness to pay<br />Segmentation (right fences)<br />Valuable customers<br />
    3. 3. Segmentation & CCRM<br />RM has been affected by the strong impact of new technologies, <br />an extended on-line customer purchase journey<br />individualistic and changing customer behaviour<br />increased transparency leading to <br />a more intense perception of fairness  <br />Using segmentation to integrate CRM & RM would help to:<br />understanding individualism<br />monitor changing consumer behaviour<br />building customer trust<br />HOW?<br />by matching RM practices with CRM technologies. <br />“proper” segmentation needed<br />
    4. 4. What is “Proper” Segmentation?<br />Obtains MEANINGFUL groups of customers<br />Do NOT necessarily correspond to specific buying attitudes and preferences. <br />It is not accurate to assume that business travellers have a high WTP <br />Price sensitivity has increased <br />Define segments which represent important features of the customer for the business concerned, hence thinking who are your most valuable customers. <br />CRM data should actually help in finding the answer to that. <br />
    5. 5. Real World Segmentation<br />
    6. 6. Benefits must <br />overcome the<br /> costs<br />MOTIVATING FACTORS<br />BENEFITS<br />Increase <br />Profit<br />Scarce Resources <br />Better resources allocation<br />Diverse customers and heterog.<br />needs<br />Develop Specific marketing mix and products<br />Concentrate on the most profitable customers<br />Enhance Customer satisfaction and loyalty through better understanding<br />Shift from product orientation to market orientation<br />
    7. 7. Products for segments that generate the greatest return <br />Segmentation strategies result in increased profits ….<br />“A segment is a collection of customers who have something in common which makes them share broadly similar products…..<br />“Maximum profit is achieved when pricing levels discriminate between segments”<br />READ: Market segmentation success: making it happen! By: Dibb, S. & Simkin, L., (2008)<br />
    8. 8. General prosperity raises willingness "to pay a little more" to get "just what I want” <br />identification of base variables through customer profiles and the way consumers use or consume products.<br /> Evolution in IT provides a richer picture of product needs and buying behaviour but…. <br />There is a tendency to use simple variables due to ease of gaining information <br />….NOT the optimal basis to target segments and gain associated benefits<br />
    9. 9. Useful Tools<br />Buying Proforma<br />uses a schematic formula to help visualise segment characteristics<br />This would typically include:<br />customer profile elements<br />key customer values <br />the decision-making process <br />factors that influence the purchase decision. <br />Segment evaluation matrix <br />can provide a valuable assessment of segments towards the development of new or existing products<br />
    10. 10. Scarce resources<br />Blockers<br /> MIS<br />Poor expertise<br />Lack of time<br />Lack of time/resources can lead to wrong forecasts and ineffective pricing decisions<br />internal communication<br />
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    12. 12. Wrong Segmentation<br />Consumer expectations not supported by the consumption experience<br />Segments being too large to be effective<br />Resources invested wasted <br />A consumer from a non-targeted group spread eWOM that negatively influences the buying decisions of numerous others. <br />
    13. 13. Seek Expert Help <br />Before a segmentation project begins<br />to review contributing factors<br />to conduct market research to understand the attributes that customers value<br />During analysis<br />to establish the qualities emerging segments should exhibit. <br />After output has been finalized<br />to identify criteria to use to appraise segment attractiveness.<br />Minimise failure by <br />using formal processes<br />being critical about data <br />taking into consideration operational strengths and weaknesses<br />
    14. 14. Easy Profit: Raise Revenue <br />Higher prices for core products<br />Higher sales volume<br />Increased customer spend on extras <br />Include extra complimentary amenities to increase perceived value and differentiate between products <br />A multi-segmentation strategy will promote the profit opportunity of stays with different characteristics<br />
    15. 15. Segmentation & RM: What experts say<br />Critical for successful RM implementation<br />Key to assessing demand patterns, linking the purchaser with attributes sought and willingness to pay. <br />Can help the firm increase revenue on a day to day tactical basis as well as on a more strategic basis identifying<br />segment profitability <br />financial contribution <br />segment satisfaction<br />historically lucrative segments that no longer make much of a financial contribution<br /><ul><li>Operational departments working in parallel with costs and profit information by market segment enabling the full assessment of segment attractiveness with profit as the central focus </li></ul>The most profitable segment should attract the stronger advertising intensity and be eligible for the lowest prices<br />
    16. 16. Product Development Segmentation<br />Intelligence can direct hotels towards the product line that matches the real demand of the “best mix” <br />…..as long as segmentation is on the bases of perceived benefits and values <br />….that will enhance customer satisfaction<br />
    17. 17. Segmentation Criterion <br />More than one is needed <br />Segments identified should present some basic characteristics that are <br />measurable (size and potential)<br />substantial (large and profitable enough to be worth targeting)<br />accessible (possible to reach)<br />actionable (feasible specific and effective programs can be deployed)<br />
    18. 18. Segmentation & RM<br />Customers should be grouped into categories that include the time of booking as part of the observable product-specific <br />Low cost airlines focus on observable product specific variables such as business/leisure routes and take-off <br />If customers have access to a personalised, customisable page, then preferences can become observable. <br />Ideally multidimensional segmentation should be deployed to obtain smaller and more defined groups as customers’ responses to a firm’s actions can be based on several criteria and dimensions, including perhaps attitudes, needs, values, occasions<br />
    19. 19. Consumer Characteristics <br />Individually, not sufficient to explain the variation in buyer behavior<br />Occasion based segmentation considered to be richer & more relevant <br />Personal differences and differences in situations, when considered separately, can be poor predictors of preferences<br />IDEA: Analysis combining product & consumer characteristics with specific situations as linkages produced through consumption underlie the consumer decision-making process. <br />
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    21. 21. Linkages between personal values, consequences, product attributes in different situations <br />A study of wine consumption identified that a strong association between consumer values and consumption occasions. <br />When drinking alone, “self-fulfillment” stood out as the most important feeling desired, followed by “value for money” and “mood enhancement” as a consequence (or benefit sort by the consumer). <br />On the other hand, drinking wine during a meal with friends was linked with “being well respected”<br />This “means end” framework can be adapted to link consumption and purchasing with situation using customer interviews to assess the consequences (benefits sort) and values (resulting feelings) that shed light on the real reasons behind product choice. <br />
    22. 22. TOOL: Customer Profitability Analysis<br />Segmenting using revenue & cost <br />the majority of profits can often be assigned to a small proportion of the customer base <br />to understand the profitability levels of different customer segments to optimise long-term pricing and marketing strategies. <br /> assign costs and revenues to determine levels of profitability by customer segments that contribute differently to profit levels<br /> A greater customer focus that does not negatively affect profit levels <br /> too complicated and costly to deploy i.e. that the potential for financial gain may not exceed the cost of deployment<br />
    23. 23. Assigning Revenue to Segments <br />PMS used throughout the four stages of the guest cycle to manage revenue, guests and data related to bookings, requests, and charges. <br />As CPA measures the total profit contribution by customer segment, the system should be able to source data from all revenue generating departments, not only from rooms OR average spend of each customer segment <br />Customers may have more than one profile in the PMS which further impedes the efficient collecting of accurate customer related revenue figures<br />
    24. 24. Activity Based Costing: to assign cost to customer groups<br />Can produce cost and revenue figures with the accuracy and type of focus needed for a CPA. <br />Overhead costs are assigned by allocating on the basis of how much activity is needed to produce the product <br />The basic process of implementing ABC involves identifying what activities take place, determining the resources each activity consumes i.e. anything that is a cost to the organisation<br />
    25. 25. CPA Studies <br />A relatively small proportion of customers generate most profit<br />20 per cent generate 250 percent of the profits and the remaining 80 percent create a loss of 150 percent<br />Does not consider opportunity cost i.e. the cost of not accommodating the 80% that create a loss of 150%<br />Can provide intelligence to allow firms to improve the profitability of existing customer segments as well as guidance as to which segments to target further <br />Provide a better view of the true cost of serving certain customer segments thus promoting more effective pricing strategies <br />This does not however consider revenue management principles and the fact that the fixed costs will be incurred even with no customers.<br />CPA provides a better view of how customers groups consume hotel resources, however, within groups there will be differences and, customers may not maintain the same behaviour pattern in subsequent stays. <br />Basing price discounts on CPA information is more effective as CPA often shows that the largest customer is not necessarily the most profitable one. <br />However, in the case of distressed inventory (forecasted to remain unsold), how should price levels be assessed?<br />
    26. 26. Advice on Tools & Technology for Smaller Chains & Independents<br />Extract from a presentation on:<br />Segmentation & Customer Centric Revenue Management<br />Kate Varini & Alessandra Bartoli<br />Oxford Brookes University<br />

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