Market Segments – 25 Financial Terms for Beginners

Did you know that market segments are the load bearing pillars of hotel revenue management?

In archery, the archer tries to achieve both power as well distance to hit bulls eye.

Achieving only power OR distance is not good enough.

The same goes for revenue management.

What am I talking about?

Hotel Revenue Management is not about just occupancy or average daily rate.

It is when both combine that revenue and profitability are enhanced.

RevPAR uses both and more.

Still puzzled?

Hang on.

Let’s find out how and why!

25 Fin Terms Beginner Hotel Mgrs Must Know Series

Welcome to the 25 Financial Terms Beginner Hotel Managers Must Know Series.

My name is Lakshmi Narasimhan Soundararajan.

I will be guiding you through this series of posts.

You will be learning concepts using a real life hotel - Paradise Hotel.

Let us jump right in.

This Blog Post will cover

What are Market Segments?

Consider this.

Hotel Occupancy Rate gives you:

• the average of number of rooms sold (or occupied)
• for all the market segments applicable in a hotel for a period.

Average Daily Rate gives you:

• the average of room prices charged
• for all the market segments applicable in a hotel for a period.

A key fact you will notice is that both these KPIs are related to their respective market segments.

And occupancy rates and ADR are different for different market segments.

This is why I called market segments the building blocks of hotel revenue management.

In the hotel industry, two KPIs contribute to room revenue:

• Occupancy Rate (which you saw in an earlier post) and
• Average Daily Rate

When you combine both occupancy and ADR your revenue scales heights.

Just higher occupancy OR average daily rate will not cut it.

You need both these KPIs.

In the same way as the archer aims for power + distance.

Let us now see what are the common market segments a hotel could have.

Typical Market Segments for a Hotel

Ever paid attention to the load bearing pillars of a building?

You may not even have noticed it.

However the entire building and its structure is being held up by these pillars.

You could call them building blocks literally.

Similarly, hotel revenue management has building blocks too.

These building blocks are known as market segments.

In earlier posts, you saw a little bit of what market segments are about.

In this post, you will see:

• all about market segments and
• how they are indispensable

in the revenue generation process of a hotel.

As we saw earlier, market segments impact both:

• occupancy and average daily rate
• which are the two major contributories to hotel revenue.

Particularly room revenue.

Let's now dive into what types of market segments there are in the hotel industry.

Individual & Group Market Segments

Two major categories of market segments are:

• Individual and
• Group

which we saw briefly in the hotel occupancy rate and the average daily rate posts.

Let's take the Individual market segment.

Because it's the most significant portion of the hotel revenue for most hotels.

The first sub segment of the Individual Market Segment is known as Negotiated.

Negotiated segments represent corporate contracts with major corporations.

Market Segments - Negotiated

Corporate A & B - Negotiated

For example, you could have:

• Corporate A and
• Corporate B

negotiated market segments.

Corporate A generally tends to be a less discounted negotiated rate than Corporate B.

Incidentally, most negotiated rates are discounted.

For example, Corporate A could have:

• 25% discount from the original rack rate
• for a particular room type
• that has been agreed upon with the major corporations.

Corporate B on the other hand could be even more discounted.

As opposed to Corporate A of 15 to 25% discount, Corporate B could be 25 to 30%.

In general, Corporate B room nights will tend to be higher than the Corporate A.

Why so?

Obviously when you discount your rack rate more you are likely to attract more room nights.

However, this may not be all the time.

Crew - Negotiated

The third type of negotiated rate is the Crew rate.

These are the rates given to airlines for their crew checking in and checking out of the hotel.

So together, Corporate A, B and Crew consist of the total negotiated market segment.

These contributed 1,120 room nights for the month of February (see screenshot below).

Let's get into the second of the sub segments under the individual market segment.

Market Segments - Transient

This is Transient.

Transient simply means temporary.

These are room stays which can be on an average two to three nights at the most.

The three sub segments we will be visiting are:

• Best Available Rate
• Walk In
• Packages

Best Available Rate - Transient

Let’s begin with Best Available Rate.

Each day, the yield management system of any hotel revenue management software:

• will throw up a rate category
• known as the best available rate.

This is based on the forecast occupancy over the next week or the next two weeks.

Often, this is when the occupancy of the hotel is estimated to be say, running at 50 to 60%.

So, the best available rate is actually:

• a rate for a particular room type
• which is discounted up to 30, sometimes 50%
• in order to fill up the hotel.

The Best Available Rate is part of the Individual Market segment.

Notice in the Statistics screenshot below that:

• the best available rate contributes to about 420 room nights for the Paradise Hotel
• in February which is a lean month.

Walk In - Transient

The next type of transient market segment is a Walk-In.

A Walk-In is simply somebody who hasn't made a prior booking.

This individual comes to the hotel because, they either:

• google searched the hotel or
• were looking for a hotel closer to the location they wanted and so on.

Notice that Walk-Ins contributed 140 room nights of Paradise Hotel.

Packages - Transient

The last of the Transient market segments are Packages.

Packages are offered to ensure that the hotel can increase its occupancy.

In the case of packages, often, hotels throw in:

• a breakfast or
• if the hotel has a spa, a spa treatment

at discounted prices.

Packages are generally used in the lean months to fill up the hotel.

Notice in February which is a lean month, packages contribute a huge chunk of the room nights.

In fact, packages are higher than even the corporate a and corporate b as you can see.

This is because the whole purpose of packages is to fill up the hotel in a lean month.

In this lean month:

• where the hotel is running 60% or 66% occupancy
• it's important that it is able to increase its occupancy.

Packages help in doing that.

Market Segments - Direct

The last of the individual market segments is Direct.

These are mainly incentives for:

• booking
• rate,
• loyalty programs.

Often, these are also for referrals made.

The total of the individual market segment that we just saw is 2,408 room nights.

Let's now get into the Group market segment.

The first sub segment in Group Market segment is Meetings and Incentives.

Meetings and iIncentives are applicable where the hotel has function rooms.

Of course, most hotels will have that.

This is by way of small meetings, perhaps 15 to 20 in a function room.

They can be incentives too.

Incentives are smaller groups that come in for a specific purpose.

The second sub segment is the Association / Convention.

Convention is of course the the bigger part of the group market segment.

For example, if the hotel has a big ballroom, conventions will play a big part.

This is because they will contribute good volume of room nights to the market segment.

Notice that the associations and conventions contributed 140 room nights.

Meetings and Incentives contributed 56 room nights.

Market Segments - Wholesale

The third and last sub segment under group is Wholesale.

These are commonly travel agents, tour operators who bring in smaller groups to the hotel.

Mostly, this is again to boost the occupancy of the the hotel particularly in a lean month.

Notice that in February as a lean month tour operators contribute 168 room nights.

Total Group room nights contribution through market segments:

• is 364
• compared to 2,408 Total Individual.

Thus, Individual market segment is almost 85 to 90% of the total room nights.

Remember in the first two videos we saw how:

• total occupied room nights were 2,772 compared to
• total rooms available of 4,200 for the month of February.

This resulted in a 66% occupancy (2772/4200*100).

It is also the reason why it is considered a lean month.

This emphasizes the:

• powerful role that market segments which are building blocks of revenue play
• in contributing to the hotel room revenue.

However, market segments during lean standard or Peak months play different roles.

For example, in the case of a peak month, the strategy would be:

• to maximize average daily rate room rates (could be higher) and
• discounts could be lower.

On the other hand, in lean months we saw earlier:

• packages
• best available rate

were used to boost occupancy.

You could say that in a way:

• market segments play a different role depending on
• what kind of month the hotel is currently going through.

Where Do You Find Market Segments in a Financial Statement?

Market Segments are found as separate section of Paradise Hotel Profit and Loss Statement [see below].

NOTE: The three months are an extract to highlight Lean, Standard and Peak Months.

The above is the Market Segments Statistics section of the Paradise Hotel Profit and Loss Statement.

Notice room nights are different for each market segment as well as in different months.

This is the seasonality factor in the hospitality industry.

It makes the hotel business model a challenging one.

Hotels are constantly trying to keep the room revenue high at all times.

Notice something critical in the above three month room revenue figures.

As occupancy % increases from:

• 66% in February (Lean Month) to 93% in April (Peak Month)
• market segment room nights are scaling to their highest level in the three months.

This is the power of market segments as building blocks of revenue management.

COVID-19 & Market Segments

During the covid-19 pandemic, hotels suffered in all their market segments.

Overall, occupancy levels were depressed across all segments.

Even big players like Marriott, Hilton, Hyatt were running very low occupancies at times.

You will see shortly why a consistently good occupancy across market segments is key for not just revenue generation.

But also higher profitability.

And this is what suffered greatly during the pandemic.

We will be providing covid-19 references throughout this series.

Why Should You Know About Market Segments?

Why are market segments critical?

It is key because it determines the real performance of the hotel.

Both from revenue and profitability perspective.

Owners and stakeholders:

• have poured millions of dollars as investment in the hotel project
• with an objective of earning a reasonable return on investment.

The return on investment will depend on the revenue and profit earning potential of the hotel.

That potential is squarely dependent on the market segments of a hotel at any time.

Impact of Market Segments

Market Segments are also a major factor in market share that a hotel will command in the market.

Higher the room nights across market segments, the better the chances of greater market share.

Even superior RevPAR in some of the market segments impact market share positively.

In the hospitality industry, market share is a huge KPI that determines positioning of the hotel.

Based on the business volume, a month could be categorized as:

• peak,
• lean or
• standard.

Market Segments are also used for measuring other KPIs like:

• customer patronage,
• spending,
• room types sold etc.

Market Segments as building blocks are used to calculate powerful performance indicators like:

• room revenue,
• room profitability.

which we will look at in later videos.

You could say that:

• the hotel revenue and profitability capability
• is dependent majorly on performance of market segments.

Owners and stakeholders often want to know how well the guest room asset is being utilized.

In other words:

• how much revenue is being generated and
• what profit is being retained from the average daily rate achieved in a hotel.

In a later post, you will learn the powerful link between:

• market segments (which represents customers) and
• Profitability levels which are partly representative of a hotel performance.

Formula for Hotel Room Revenue

How do you calculate Room Revenue of Market Segments?

Room Revenue = Market Segment Average Daily Rate x Market Segment Occupancy %

Related Financial Terms

The following financial terms are closely related to the Hotel Occupancy Rate.

I will discuss these in later posts in this series.

• Occupancy Rate
• Average Daily Rate
• Revenue per Available Room

FAQs

What are KPIs used for in hotels?

KPI is a generic acronym which represents the financial term “Key Performance Indicator.”

KPIs can measure:

• financial performance,
• marketing effectiveness,
• customer satisfaction,
• employee retention,
• payroll costs and

various other performance indicators of a business.

What is the best indicator of hotel success?

1. Occupancy Rate
2. Average Daily Rate (ADR)
3. Revenue per Available Room (RevPAR)
4. Customer Acquisition Cost (CAC)
5. Employee Satisfaction.

How do hotels measure performance?

Occupancy Rate measures the business volume of the hotel.

• This means how many hotel rooms are occupied or sold in that period.

Average daily rate measures average revenue earned from prices charged on occupied rooms

• It measures average revenue earned from each occupied room per day.
• This sheds light on pricing strategies.
• Average Daily Rate is commonly known by the acronym ADR.

Revenue per available room is how hotel utilizes available rooms for revenue generation.

• It combines occupancy rate and ADR to give a comprehensive view of both room sales and revenue.
• Revenue per Available Room is commonly known by the acronym RevPAR.

25 Financial Terms for Beginners Series

Here is the list of 25 Hotel Financial Terms that Beginner Managers Must Know in this Series.

We will be discussing each of these in blog posts in this series.

1. Occupancy Rate [Published]
2. Average Daily Rate [Published]
3. RevPAR [Published]
4. Market Segments [This Post] 
5. Market Share [Next Post]
6. Average Length of Stay
7. Guest Repeat Ratio
8. Restaurant Seats Available
9. Food & Beverage Covers Served
10. Average Food & Beverage Check
11. Meal Period Analysis
12. Year on Year Growth
13. Fixed & Variable Expenses
14. Undistributed Operating Expenses
15. Management Fees
16. Gross Operating Profit
17. Depreciation
18. Net Income
19. Balance Sheet
20. Assets - Fixed & Current
21. Liabilities - Long Term & Current
22. Owner Equity
23. Cash Flow Vs Cash Balances
24. Financial Ratios
25. Analysis

Want to Learn from a Video on Market Segments?

If videos are your preferred method of learning, CLICK below link.

Market Segments - 25 Financial Terms

This is the Profits Masterclass Channel on Youtube.

Subscribe to the Channel because you will get insights on all things hotel revenue management, financial statements, asset management and more.

Your Guide to Professional Success

So, there you go.

25 Hotel Financial Terms which will make you a business savvy hotelier.

Click below for other hotel financial terms as chapters of this Ultimate Guide.

Coming Soon - Market Share

Market Share is the holy grail of performance in the hotel industry.

Understand what this financial term means and how it enhances revenue and profitability.

Sign Up for Speed Tips - Learn in Minutes!

Want to Learn in Minutes?

Sign Up for Speed Tips - Learn in Minutes Newsletter for tips, strategies, secrets straight to your InBox!

Ultimate Guide on Hotel Financial Terms (Other Chapters)