Segmentation techniques for DMOs

Segmentation is an important aspect for almost all companies, thus also for Destination Marketing Organizations. In order to gain knowledge about future clients it is essential for DMOs to know how to segment in a correct and efficient way. In short segmentation means to divide all current clients into different groups which are based on certain segmentation criteria. These are geographical characteristics, demographic characteristics, socioeconomic data, behaviour and psychographic characteristics.

There are many different ways to segment a market. According to the book ‘Customer Relationship Management’ by Peelen and Beltman the following aspects are important for good and workable segmentation solutions; measurable, substantial, accessible, differentiable and actionable. Furthermore, a needed requirement for a segmentation solution is that it is stable, which means that few changes occur within the category over time. The different possibilities when choosing a segmentation technique are the Recency Frequency Monetary Value technique (RFM), the Chi-squared Automated Interaction Detection technique (CHAID) and the Classification and Regression Trees technique (CART).

As mentioned in the article ‘Market segmentation approaches: do they benefit destination marketers?’ by Fuller, Halan and Wilde a segmentation technique that could be used by DMOs is the RFM technique. This technique calculates the index value based on scores received from the clients on the following three criteria; Last purchase date, purchase frequency and amount spent. Some advantages of using this technique are that it is very accurate in predicting what the response to marketing campaigns will be and it employs transaction data. A disadvantage is that the clients who buy most are more often slected for a promotion, which can lead to clients feeling too much ‘mail’ pressure. Another disadvantage is that in order to use the Recency Frequency Monetary Value technique a company needs to have it’s own booking channel. Most of the time DMOs do not have this. In this case the CHAID or the CART technique could be used.

Both of these techniques use a tree diagram to analyse the clients. At the top of the diagram the total database is displayed and on the levels below the clients are divided according to the most significant segmentation criteria.  Even though both of these techniques are very similar there are differences. The CHAID technique is limited by a certain number of classes that can be included, but on each different level more than two segments can be identified. When applying the CART technique on the other hand, there is no limitation to a certain number of classes. A disadvantage of this technique is that the database always splits in two, so at each level only two segments can be identified.

In conclusion, when deciding which segmentation technique to use, the first thing that needs to be done is to choose the right segmentation criteria. Once this is done, the best fitting technique can be decided. The RFM technique can be a good decision for DMOs, if there is an internal booking channel. Otherwise a decision between the CHAID and the CART technique should be made.

References:

Fuller, D., Halan, J. and Wilde, S. (2005). Market segmentation approaches: do they benefit destination marketers? Southern Cross University/Business School. Retrieved from: http://epubs.scu.edu.au/cgi/viewcontent.cgi?article=1146&context=comm_pubs

Peelen, E., and Beltman, R., (2013). Customer Relationship Management. Pearson Education Limited. Harlow, United Kingdom.

 

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4 thoughts on “Segmentation techniques for DMOs”

  1. If a DMO has it’s own booking channel, they have data they can use for customer segmentation. There is a tendency though to outsource bookings to an OTA. The DMO of New York for example uses the platform of bookings.com. In those cases the DMO cannot use the RFM-technique.

    Your blog would profit from a couple of examples on how DMO’s can use and profit from customer segmentation.

    You explain what RFM is, but readers might also not exactly know what CHAID and CART are. Maybe you can also explain these methods in short.

    On a business blog complete names are being used, with capitals. The categories are missing. Could you correct that?

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    1. Thank you for the feedback and information! I will explain the methods in more detail and change it so it will be more fitting for Destination Marketing Organizations. I will also change the abbreviations into complete names with capitals and I will add catagories.

      Like

  2. I foresee a slight problem in using the RFM segmentation by DMO’s Claudia, as bookings are not done through the DMO’s channels. Segmenting (potential) visitors to their destination will have to be done based on other techniques such as behavioral targeting.

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    1. Thank you for the feedback! I will change the segmentation technique so it will be more fitting for Destination Marketing Organizations.

      Like

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