Are you really segmenting your market, or just filing your bookings?

When I ask how a hospitality business segments its market, I usually hear some variation of the same categories: corporate negotiated, leisure, groups, transient, wholesale, OTA and direct. There may be dozens of subcategories beneath them, along with rate codes and reports containing enough coloured cells to bring down the office printer. Nonetheless, everything has a label, and everything has somewhere to live.

These categories are useful, of course. Revenue managers need to know where bookings came from, what rate they attracted, when they arrived and how they performed, because categorising the business in this way helps a hotel to forecast, report and manage its inventory.

But it doesn’t mean the hotel has properly segmented its market. It simply means that it’s taken the business it already gets and filed it into neat little piles.

Segmentation is diagnosis

Segmentation belongs in the Diagnosis stage of the marketing process, which means it should happen before you make strategic decisions about who to target or what position you want to occupy in their minds. Diagnosis is about understanding the market as it really is, not arranging it around your own business and the customers you already happen to attract.

The word Diagnosis gives us a useful way of thinking about this. It’s derived from the Greek dia, meaning apart, and gignoskein, meaning to distinguish or know. The proper purpose of diagnosis, then, is to “distinguish apart”. That means identifying groups of customers who are similar enough in ways that drive purchase, but significantly different from the people in other groups.

This is why proper segmentation is about the market, not your business. It needs to consider everyone who might buy from the category: people who choose you, people who don’t choose you, people who choose a competitor, people who solve the same problem in a completely different way and people who could buy from the category but currently don’t.

If your analysis starts and ends with the bookings in your PMS, you’ve only examined the people who have already arrived at your reception desk. That may tell you a great deal about the business you’ve won, but it can’t show you the shape of the market beyond it.

And that matters because your biggest opportunity may lie among customers you hardly attract at all. They won’t show up as a meaningful line in last month’s revenue report because, from your hotel’s or venue’s point of view, there’s almost nothing to report. You can’t expect to find white space by only studying the space you’ve already coloured in.

The labels describe the booking, not the buyer

A lot of the categories used in hospitality tell us more about the mechanics of a transaction than they do about the person making it.

“OTA”, for example, tells us where somebody booked, but it doesn’t tell us why they chose that channel, what mattered when they selected the hotel, what problem they were trying to solve or what might persuade them to behave differently next time. It describes the route through which the booking arrived, not the customer behind it.

“Corporate” doesn’t necessarily tell us much more. One corporate traveller might be staying alone during a routine monthly visit; they might value speed above everything else and barely leave the room. Whereas another might be arranging accommodation for a project team for six weeks and need flexibility, shared space and help keeping the whole booking under control. Putting them into the same corporate bucket may be convenient for reporting, but their needs, priorities and buying behaviours could hardly be more different.

The same problem applies to labels such as leisure, group and transient. They’re broad descriptions of the business a hotel already receives, rather than being groups of customers who make decisions in similar ways. If the people inside a “segment” don’t share the behaviours that matter to the purchase, just calling them a segment doesn’t make them one.

Behaviour first, convenient labels second

Proper segmentation isn’t about finding any old characteristic that a group happens to share; it’s about identifying characteristics that explain meaningful differences in the way they choose and buy.

That might include the occasion that prompted the stay, the outcome they need, how far ahead they plan, who influences the decision, their appetite for risk, the compromises they’re prepared to accept and the things they refuse to compromise on. The important variables will change from one market to another… which is exactly why defaulting to familiar categories can be so misleading. They might be easy to recognise and easy to count, but they often tell you very little about actual customer behaviour.

Age is the classic example. Calling somebody Gen Z tells you nothing about why they are booking a hotel, what matters to them or how they’ll behave, in the same way that grouping everybody under “business traveller” doesn’t mean they all want the same things simply because the purpose of their trip can be summarised in two words.

I’ve written before about why lazy categorisations and generational stereotypes aren't meaningful segmentation, but the problem goes much further than silly personas and sweeping statements. If the inputs are wrong, then the picture of the market on which you base your strategy will be wrong too.

Segmentation draws the map

The purpose of segmentation is to draw a map of the market before you decide where you want to go. You’re trying to understand where the largest concentrations of demand sit, which customers behave in similar ways, where the boundary lies between one set of needs and another, and which parts of the market are growing, poorly served, fiercely contested or potentially valuable. You also need to understand where your current business sits within that picture.

Only once you’ve done that can you make a considered decision about which parts of the market you want to pursue. That decision is targeting.

In other words, segmentation is part of diagnosis, whereas targeting is a strategic choice. When businesses muddle the two together, they often end up constructing segments around the customers they already get and then congratulating themselves when the analysis confirms the decision they’d made.

It’s the equivalent of drawing a map with your hotel or venue in the centre, adding only the roads you already use, and then declaring that every other destination is irrelevant.

A proper segmentation map might well confirm that your existing customers still represent the best opportunity, and there is nothing wrong with that. It might, however, reveal a sizeable group you currently overlook, a segment that a competitor serves badly or a section of the market that initially looks attractive but becomes rather less appealing when you examine whether you can serve it profitably.

What matters is that the choice is based on an understanding of the market, rather than a retrospective description of the business you already have.

A segment can be attractive and still be wrong for you

Once you’ve mapped the market, there’s an understandable temptation to pursue whichever segment looks biggest, but size alone doesn’t make something a good target.

You also need to consider whether you can identify and reach those customers; whether the segment is large or valuable enough to matter; whether its needs are genuinely distinct; and whether it is stable enough to build around. You then have to assess whether your business can credibly deliver what those customers want and whether doing so supports the wider strategy, rather than pulling the operation in three contradictory directions.

This is the thinking behind my Measure Meaning Matrix that I give to my Academy members. It helps marketers work through the mass of possible customer characteristics, identify which differences are meaningful enough to create a useful view of the market and then assess the resulting commercial opportunities without confusing segmentation with targeting.

I won’t unpack the mechanics here, partly because it needs more explanation, but also because its value lies in the decisions it forces you to make, rather than in the simple act of filling in boxes.

The discipline is to first establish whether the differences you can see are meaningful; then whether the segments created by those differences are measurable; and only after that, which of them deserve your attention.

Stop segmenting the spreadsheet

Hotels and venues don’t need to stop categorising their bookings, because those categories remain useful for forecasting, reporting and inventory management. They do, however, need to stop treating that categorisation as though it’s a completed segmentation job.

A revenue report tells you about the business you won, while proper segmentation helps you understand the market in which you won it, including all the business that went elsewhere or never entered the category in the first place. One is a record of where you’ve been; the other helps you decide where to go next.

So, if your existing “segments” mainly appear as rate codes, channel labels or headings in a monthly performance deck, there’s no need to throw them away. They’re probably useful for the job they were designed to do.

Just don’t mistake the filing cabinet for the map.

My Measure Meaning Matrix forms part of the segmentation module in my hospitality marketing Academy. It helps hospitality marketers diagnose the whole market properly before moving on to targeting, positioning and the tactical work that follows. Find out more about the Academy.