There are numerous ways that customers can be segmented (geographic region, demographics, psychographics, etc.) but for the purposes of yield management and maximizing revenue, we want to segment them by purchasing behavior. What this really translates into is profitability. It can feel like a sin to say that not all customers are equal (I.e. some are more profitable than others) but it’s true none the less.
Ideally, you want to have offerings for all of our customer segments in order to capture the most amount of revenue possible. This can be difficult to do, but yield management and price elasticity make it easier.
If we segment customers into purchasing behavior we get 4 groups; (Note that these groups can overlap a bit, and there are many nuanced subcategories. For the purpose of simplicity we’ll stick with these four general groups.)
The Bargain Hunter; these folks are mainly interested in the best deal that they can find. That doesn’t mean that they don’t have standards, but they are willing to give up certain things in order to get a great bargain. For this group it’s all about the best value and how much they saved in the process.
The Planner; this group’s main focus is getting everything set for the family vacation/event that they are putting together. They can be very budget conscious (I.e. overlap into the Bargain Hunter category) but their goal is to have all of their ducks in a row well in advance of the trip, with as few surprises and hiccups as possible.
The Jet-setter; this group isn’t looking for a bargain, for them it’s all about the experience. Money is not nearly as big a concern as it is for the other two groups. They are willing to pay top dollar for convenience, privacy, and whatever else they feel they need.
The Procrastinator; these folks have left their planning, or their decision to travel, to the last minute and now they are scrambling to get it all together.
Now let’s look at these groups in order of profitability and how yield management (the right service to the right customer at the right time for the right price) can help us meet each of their needs and capitalize on the revenue potential in the process.
The Jet-setter: These folks have the most to spend and are willing to spend it in order to have the kind of stay they want. Progressive pricing (increasing the daily rate as occupancy goes up) is the best way to capture additional revenue from this group.
The Procrastinator: This group can be willing to pay a premium for their stay due to their lack of planning. They know they left everything to the last minute and therefor aren’t going to have many options. Progressive pricing works well here too. If occupancy is on the lower side, then a reduced rate or last minute deal can capture their revenue and likely turn them into a repeat guest. (Assuming they have a great stay with no headaches.)
The Planner: These folks are a bit harder because they tend to plan quite a ways out where occupancy may not be all that high. Incentives to stay longer or upgrade to a better unit can come in handy here. For example, we could offer this guest a slightly reduced rate if they are willing to stay at least a week. Let’s say our daily rate is $350 and the average length of stay is 3 nights. That comes out to $1,050 in rent. If we make the offer that the daily rate is $300 if they stay a minimum of 5 nights, that brings in $1,500 in rent and also helps drive up the occupancy percentage so that our progressive pricing (daily rate increases when we hit 70% occupancy, again at 80%, etc.) kicks in. The guest also received a deal on their stay which tends to make them feel good.
The Bargain Hunter: While this group is our least profitable in the short term, if we can turn them into repeat guests, their lifetime value goes up. While this group is always looking for a deal, they want to get the best value possible, not necessarily the lowest price. If they can stay in a penthouse for $350 a night (normally $500 a night), instead of a bungalow for $200, that’s a great bargain for them. Offering last minute deals helps capture this market, and even though we’re dropping our price to accommodate them, their stay increases occupancy which helps our progressive pricing plan and drive up rent overall.
The most effective pricing plans will have options for each of these buyer segments. I know that “discount” is a dirty word for some, but keeping the long game (or losing the battle to win the war, if you prefer) is the key here. Offering a discount can still bring in more revenue than it otherwise would have if the stay is longer, it increases occupancy allowing other yield management strategies to kick in, and we can turn the guest in a repeat customer.
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