Revenue management is about selling smart. The goal is to sell the right product to the right people for the right price at the right time and through the right channels with the best commission efficiency.
You want to match supply to demand for the right price. To understand demand, you need a deeper understanding of your customers, the factors that influence their buying behaviour and their decision making process.
In this blog post, I want to dive deeper into one aspect of revenue management and that is customer segmentation.
What is customer segmentation?
Customer segmentation means dividing your customer base into distinct groups who might differ in travel styles (luxury or budget), booking behaviour (early birds, last-minute or somewhere in between), group size (single, couple or friends), or any combination of factors that makes sense for your business.
When it comes to customer segmentation for revenue management, you also need to understand the source of business, otherwise known as the booking channel. Knowing this means you can calculate how much revenue each customer brings in, allowing you to get better at managing your distribution channels.
Clear customer segments therefore let you precisely target customers through the right sales channels at the right price, which is one of the fundamental strategies of revenue management.
How to segment your customer base?
We've previously written a lot about customer personas and how they can give you a better understanding of the customers you're marketing to. Customer segmentation for revenue management is simply an extension of this idea.
While most tour businesses will have multiple customer segments, what criteria should businesses use for segmentation?
There are a tonne of different ways to segment your customer base and companies typically combine a few different factors to make sense of each customer base. Here are a few common characteristics used to segment your customer base:
- Booking behaviour - Is this customer likely to book way ahead of time or more last-minute? Should you incentivise customers to book further in advance so that they get a better rate and you can guarantee profits for that tour? Check out our report on booking habits for shoulder seasons.
- Booking period - Does this segment prefer to travel off-peak or during the high season? Why are they booking your tours around this time? Might it be because their kids are still in school? Or could it be because they work remotely and are really flexible with timing?
- Price sensitivity - Is this segment very price sensitive or not? If not, can you charge them a little more? Can you upsell them with an additional service or get them to book another tour?
- Source of business / Booking channel - Where is this business coming from? Are they booking from an OTA, reseller, or directly with you? What's your plan of action to make sure that
- Group size - Does this segment typically travel alone, as a couple, as a family, or perhaps a single-parent family? What kind of packages or offers can you create to attract these groups?
- Decision making factors - What are the key factors to get this segment to choose your tour over your competitor's? Perhaps they like the laid-back style of your tours? Maybe it's the extra transfer service you offer? Perhaps they really wanted to go on a tour like this and yours was the only tour that fit their travel schedules? Figure out what are those factors are and use it to your advantage.
- Purpose of travel - Why is this segment travelling? Are couples booking an adventure experience as part of their honeymoon? Are parents booking this tour because you offer child-friendly extras?
Other factors you can also consider include cancellation and no show rates, and length of travel.
Once you've decided how you want to segment your customers, you can begin to calculate your customer acquisition costs and the revenue contribution of each customer segment.
Your goal will then be to create the most profitable customer segment mix depending on seasons, booking channels and booking habits.
Verifying a customer segment
I'm sure that by now, you have a rough idea of who your customer segments might be. But before you run off to change your marketing or sales strategies, you need to verify your customer segments.
Firstly, your segment needs to be large enough such that it makes financial sense for your business. Whether its an existing segment or a new segment that you want to reach, make sure you've done your research into each segment.
Secondly, each segment should have significant differences. Just like how Louis Vuitton is distinct from Zara, you need to make sure that your customer segments are also distinct from one another so that you can employ effective sales and marketing strategies for each segment.
Firstly, as I've already alluded to, you can start writing down the different customer segments you have off the top of your head right now. If you already have customer personas developed for your marketing strategy, dive deeper. Provide as much detail as you can about each segment, especially factors that affect their booking behaviour and how much revenue each segment contributes to your business.
Secondly, you can look at your past booking data to understand your demand - which segment is likely to book when and through which channels? If you know that families tend to book trips with you for the summer holidays through OTAs, what can you do increase the revenues gained from this booking? How can you increase direct bookings from this segment?
Thirdly, how can you upsell these segments? If a segment seems to book through OTAs, how can you upsell them on additional services that enhance the experience? Perhaps you could also promote different experiences to them?
Want to learn more about revenue management? Catch up on our latest webinar.