Hotel Revenues: Profitability by Segmentation

By Jaavid Bharucha Corporate Director of Revenue Management, Arbor Lodging Management | October 20, 2019

I would say segmentation is or should be one of the main discussion topics in any hotel's revenue strategy. It's difficult to understand segments without getting a overview on segmentation and its importance to the hotel. From total revenue on the top line to IBFC (Income before fixed charges) on the bottom decision makes

The total revenue for the property must be broken into sub-segments and approached individually with a plan of action for each segment that impacts the overall success.

First the hotel must set an overall goal for the year example of a goal "lower OTA reservations and book more on brand.com" then the hotels must break down their target markets and channels, approach each area of business they'd like to grow and develop. This can be done by identifying a few key segments that book through brand.com and start from there.

Segmentation is the process of defining and subdividing a large homogenous market into clearly identifiable segments having similar needs, wants, or demand characteristics." Segmentation allows you to tailor your strategy to precisely match the needs of different aspects of your market, to increase bookings, revenue and guest satisfaction.

The segmentation and sub-segmentation analysis can be done on several levels, depending on the end goal at the hotel. Profit by segmentation is the next step to understanding the types of business a property should take keeping in mind net vs. gross profit.

Profit by segment is the process of understanding what each segment is going to cost the hotel in relation to each goal. Incorporate KPI's along the way to ensure progress is being made and conversely address any challenges with the thought process.

Some things to consider with building the strategy:

1.     Define the segment – Retail/BAR, Special Corporate/BT, Groups, OTA, Discount

2.     Identify the customer – purpose of their travel business or leisure

3.     Understand the cost by segment- what do I need to spend to get this traveller

4.     Cost of promotion- where am I going to spend my marketing dollars to find this traveller

Segmentation by profit gives the hotel more insight and understanding over their expenses prior to the month end P & L review. Sub- segment discussions and analysis tend to highlight the hidden cost that are not usually accounted for in a displacement analysis scenario.

Hotels generally use CPOR (Cost Per Occupied Room) or a similar baseline calculation to cover estimated cost on an aggregate.

A few KPI's could also be:

Occupancy rate– the number of occupied rental units at a given time, compared to the total number of available rental units at that time.

Occupancy rate = Rooms sold / Room available

Average daily rate (ADR)– this rate is applied to a room's average rental income during a certain period of time. ADR = Rooms revenue earned / Number of rooms sold

Revenue per available room (RevPAR) – a KPI that assess financial and business performance of a hotel. RevPAR measures ability of a property to fill all the rooms and define the best price for them. There are two ways to calculate it:

RevPAR = Rooms revenue / Rooms available, RevPAR = Average daily rate * Occupancy rate

Total revenue per available room (TRevPAR) – a metrics that accesses total revenue, generated by property and based on room cost and money spent on it. This KPI captures a snapshot of overall business performance. TRevPAR is one of the main benchmarking tools for big hotels and resorts. The higher the TRevPAR, – the better the revenue.

TRevPAR = Total revenue / Total number of available rooms

Net revenue per available room (NRevPAR) – a KPI that allows hotel revenue managers to calculate the distribution cost to see how the room revenue is generated. NRevPAR includes spending on marketing and distribution.

NRevPAR = (Room revenue – distribution costs) / Number of available rooms

Gross operating profit per available room (GOPPAR)– measures the profit of a hotel and value of all assets at any given time. GOPPAR measures profit to capacity, including all a hotel's spending and taxes.

GOPPAR = Gross Operating Profit / Number of available rooms

  • Knowing who is booking the hotel is key to a segment and profitability strategy:
  • Why are the guests coming to your area and choosing your property? Looking at feeder market reports from the Brand is a good place to know where your online traffic originates.

How much revenue does each type of customer generate per booking, and in addition what is their incremental spend at the hotel? Do they buy breakfast or are they planning to spend food and beverage dollars at the restaurant?

Business Type Segmentation and Potential Cost Associated With Each Segment

A family leisure traveller vs a midweek customer travelling on business don't necessarily have the same needs and cost of acquisition.

Here's a look at 5 common business types:

  1. Transient- generally stays between 1 to 3 nights, these independent guests are not linked to any company, event or agent and will usually book your Best Available Rate or publicly available promotions. This typically is the highest net rate segment in the booking strategy. They are generally brand agnostic and are looking for the best priced deal. They tend to be price conscious with lower incremental spend at the hotel.
  2. Corporate / Negotiated – most likely staying midweek over a Tuesday and/or Wednesday on a contracted corporate rate, that is exclusive. This segment also has a high incremental spend in the restaurant, Bar, Coffee Shop, Lounge and so on. This is also the subsegment the hotels spend the most to maintain and retain. These are generally road worriers with benefits like brand points, double points and miles, free breakfast, transportation in some cases to mention a few.
  3. Groups - Guests staying as part of a contracted rate for an event happening at the hotel or in the area. Sports tournaments, weddings or social events generally have pre-arranged meal plans and breakouts. This segment does not typically receive perks like points and miles, double points and so on.
  4. Wholesale/Frequent Individual Traveller (FIT) - Guests booking through FITs or Tour Operators at a discounted rate not available publicly. These customers are typically part of a tour bus program and on a strict schedule. This is a contracted and discounted rate and this segment also does not receive perks.
  5. Extended stay- Projects staying for a select period (7 to 14 days, 14 to 21 days, 22 days and more) at a discounted rate. Depending on the duration of their stay the hotel may offer participation in cost savings programs.

Transient segments can be further defined by sub segments, this included BAR, Advance Purchase, AAA, AARP, Consortia to name a few.

Group segments are further defined by sub segments, this includes Corporate, Sports, Entertainment, Social, Governments to name a few.

Channel Segmentation "How Was the Reservation Made":

This ensures that your strategy is optimised to make the most profit from your bookings.

If a channel has a high commission and low booking value, is it worth maintaining rates and availability through this channel? Would it be more beneficial to increase focus for channels with lower commission costs?

I look at these channels:

  • Direct Hotel – maintaining a reservation department to answer phone calls and answer emails is an additional expense.
  • Direct Website- free to book and has the most updated rates and availability for a given period.
  • OTAs- high cost of commission in addition to credit card fees at the hotel.
  • Wholesale / FITs- discounted rates and commissions for a lower net rate.
  • GDS- cost per transaction and additional GDS promotional/marketing fees.

Hotels should focus on understanding these cost metrics:

  • Cost per Acquisition for each channel: commissions & marketing spend
  • Spend per customer: Average booking value & incremental send
  • Lifetime value of customers: how often do they come back to the hotel?
  • Stayed Revenue & Trends: actualised bookings, ex. cancellations
  • Booking Lead Time
  • Cancellation Rates
  • Average Length of Stay
  • Midweek vs Weekend

The hotel team should have clear knowledge on what each channel (online & offline) is producing, and how this fit in with your hotel's overall business objectives. This should be reviewed often in conjunction with the marketing strategy.

As part of your budgeting and forecasting process, the hotel should focus on a Channel Specific Strategy. Set specific goals for each channel in relation to your overall goals, e.g. a Book Direct Strategy, with the goal of moving bookings away from OTA channels into your direct channels.

Know the cost of each channel, this can help stakeholders such as the GM, Sales Managers, Revenue managers support and impact a Book Direct Strategy.

Understanding the Strategy

Reporting is a key factor of the strategy execution. The hotel should have confidence in the reporting system and must spend time understanding the information.

Accuracy of data is crucial – the quality of the data pulled in reports is only as good as the data entered in the system.

The purpose of discussing profit by segmentation is to ensure that your business strategy is met and that decisions are well informed, data driven and optimised for each segment and channel.

The fundamental factors of a successful strategy:

    1. Setting goals based on the objectives
    2. All stakeholders should buy into the objective
    3. Driving profitability by sub segment
    4. Measuring results for ongoing improvement

In conclusion hotels can impact profit by segment, simply knowing the expenses allocated to acquisition is a good start and helps with the displacement analysis. In addition, hotel leadership will have a clear understanding of what to expect prior to the month closing instead of waiting for the P and L at the end of the month.


Mr. Bharucha Jaavid Bharucha, Corporate Director of Revenue Management for Arbor Lodging Management. Mr. Bharucha develops and executes revenue strategies. Through his career of over 12 years in the industry with revenue management experience, Mr. Bharucha brings insight from his time at Radisson Lexington and Hotel Pennsylvania in New York and The Bricton Group and TPG Hospitality in the Chicagoland area to his current role at Arbor Lodging Management. Throughout each role held, Mr. Bharucha worked directly with on-property general managers and vice presidents or sales & marketing to generate forecasts, monitor the comp set, check for movement and rate variance, and assist in development of sales plan across the board. Mr. Bharucha can be contacted at 312-854-0540 or jbharucha@arborlodging.com Please visit http://www.arborlodging.com for more information. Extended Biography

HotelExecutive retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.

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In the event that you have chosen to have your membership automatically rebilled, unless and until you notify HotelExecutive that you wish to cancel or terminate your membership to HotelExecutive, you hereby agree and authorize HotelExecutive's Internet Payment Service Provider to automatically renew your membership to HotelExecutive on a continuing basis and to charge your credit card (or other payment means you have selected) to pay for the ongoing cost of your membership. You hereby further authorize HotelExecutive's Internet Payment Service Provider to charge your credit card (or other approved payment means you have selected) for any and all purchases of products, services and entertainment provided to in, at, through or in association with HotelExecutive.

13. PRIVACY POLICY

The following is the Privacy Policy for HotelExecutive

We can be reached via telephone, email, or online at our contact page. When you visit our site we do not log any information regarding your domain or email address. Information Sharing: We do not share user information with any third parties other than via press release distribution as described below.

Hotel Newswire is a newswire service that distributes press releases on behalf of our users. If you decide to submit a press release for distribution through our system we will transmit your entire press release including any personal information therein contained to our media contacts and online distribution points including search engines. This is the only redistribution of your information that we engage in. Your submission of press releases through our system indicates consent with this policy. The information we collect during your registration process is used to notify users about updates to our service and inform users of any special events hosted by Hotel Newswire. This information is not shared with other organizations for commercial or non-commercial purposes.

Cookies: Our system requires the use of cookies to enable the user to log back into our website to access information from the newswire, without having to log in each time using the required username and password.

If you do not want to receive email from us in the future, please let us know by following instructions included in our communication with you. Users who supply us with telephone numbers online may receive telephone contact from us regarding their account, or informing them of new products and services available on the HotelExecutive website. If you do not wish to receive such telephone calls, please edit your account and remove your phone number from your account profile. This can be done from your user account menu.

Ad Servers: We do not partner with or have any relationship with any ad server companies. From time to time, we may use customer information for new uses not previously disclosed in our privacy notice. If our information practices change at any time, we will post the policy changes to our website to notify you of these changes and provide you with the ability to opt out of these new uses. If you are concerned about how your information is used, you should check back at our website periodically.

Upon request we provide site visitors with access to all information (including proprietary information) that we maintain about them. Users can access this information by logging in to their account.

Security: We always use industry-standard encryption technologies while transferring and receiving user data exchanged with our site. We have appropriate security measures in place in our physical facilities to protect against the loss, misuse, or alteration of information that we have collected from you on our site. We do not store credit card information in our systems.

If you feel that this site is not following its stated information policy, you may contact us.

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Coming up in December 2019...

Hotel Law: A Labor Crisis and Cyber Security

According to a recent study, the hospitality industry accounted for 2.9 trillion dollars in sales and in the U.S. alone, was responsible for 1 in 9 jobs. In an industry of that scope and dimension, legal issues touch every aspect of a hotel's operation, and legal services are required in order to conform to all prevailing laws and regulations. Though not all hotels face the same issues, there are some industry-wide subjects that are of concern more broadly. One of those matters is the issue of immigration and how it affects the ability of hotels to recruit qualified employees. The hotel industry is currently facing a labor crisis; the U.S. Labor Department estimates that there are 600,000 unfilled jobs in the industry. Part of the problem contributing to this labor shortage is the lack of H2B visas for low-skilled workers, combined with the difficulty in obtaining J-1 visas for temporary workers. Because comprehensive immigration reform is not being addressed politically, hotel managers expect things are going to get worse before they get better. Corporate cyber security is another major legal issue the industry must address. Hotels are under enormous pressure in this area given the large volume of customer financial transactions they handle daily. Recently, a federal court ruled that the Federal Trade Commission had the power to regulate corporate cyber security, so it is incumbent on hotels to establish data security programs in order to prevent data breaches. The lack of such programs could cause hotels to face legal threats from government agencies, class action lawsuits, and damage to their brand image if a data breach should occur. These are just two of the critical issues that the December issue of Hotel Business Review will examine in the area of hotel law.