A few days ago Marriott announced they would be merging with Starwood Hotels & Resorts. Arne Sorenson, the President and CEO of Marriott International, posted a blog in LinkedIn Pulse – The Marriott Starwood Merger: Growth of Choices, Value, Opportunities explaining their rationale. The most important component of his post was travelers now have unlimited options available to them. The reason travelers have so many options is the significantly improved customer segmentation that has occurred. Segmentation is critical to creating options and pricing effectively in all industries.
Sorenson specifically cited VRBO, Home Away and AirBnB as competitors in the hospitality industry. They entered the market as lower-cost suppliers who recognized that home-owners would accept lower returns on invested capital. However they also identified more segments of travelers, grouping them by length of stay, level of luxury, food requirements, and trade-offs between self-service and price. Furthermore, the new entrants expanded the ability of customers to self-select their segments. The merger between Marriott and Starwood is designed to create more options for the recently identified segments.
The customer segmentation point applies whether you are in hospitality, retail, or B2B products and services. Customers are not homogenous. Product and service needs vary from customer to customer, and the trade-offs customers will make between product quality, product functionality, provider service quality, customization, speed of delivery, ease of doing business and price vary widely.
Think of the auto industry as another example. The industry has evolved over time as auto manufacturers paid attention to how customers used their vehicles and created new options for narrower segments. Although Volkswagen had introduced a van in the mid-1950s it was not a mainstream hit. However in the late 1970s and early 1980s, American car companies created a van that drove more like a car, but carried more passengers and offered sliding rear doors. Those minivans took off in popularity.
In the 1980s Jeep offered the Cherokee which combined more seating capacity with a rugged truck chassis and off-road capabilities. This and other SUVs like the Ford Explorer and GMC Jimmy targeted consumers who wanted the additional capacity of a minivan, with more sporty looks and functionality. Since then the market has been further segmented and expanded by offering SUVs in small, medium and large sizes, plus crossover vehicles that drive like cars but offer the capacity of an SUV, plus luxury SUVs from Porsche, Audi, BMW and others. In each case, a segment of consumers was divided into sub-segments, but also was expanded by appealing to new buyers.
A fundamental challenge for all businesses is to identify segments which are real and addressable. There is no perfect answer for the number of segments, and each one can be broken down into sub-segments. As you think about your own customer segments, to the extent possible tailor your offerings to address the needs of each segment. Keep in mind, the more segments you include, the more complex it will be to manage your offerings and prices. However, modern tools and systems can help you manage that complexity; and more granular segments should lead to winning more business at better prices.
You can also start more modestly by identifying characteristics of the customers and patterns of their ordering that can indicate similarities in needs and price sensitivity. For example, consider :
- The industry in which the customers operate
- Size or annual revenue
- Annual spend with your company
- Breadth of products purchased
- Geography
- Level of integration
- Ordering style
- Purchasing style
- Number of users
- Urgency or JIT requirements
- Other
If you are uncertain whether a segment is real or not you can test your hypotheses. If it is very expensive to create a tailored offering or to manage the differentiated pricing for the segment in question, leave it out to start. Make progress with the segmentation you are confident in, but monitor the results of the sub-segments you included and those you rejected. It is impossible to be perfect from the start, but a learning organization can continue to improve. As you improve your segmentation over time, your sales and profits should also improve.
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