The market share is a useful indicator that helps identify the various positions (according to inventory, sales, or revenues) of one company towards its direct or indirect competitors. The calculation can be a broad industry scope or a set of companies similar in product offerings, category, geographical location, or target markets.
Unlike consumer goods, for which global market shares are calculated on a total potential market (i.e. the sales of Bass beers in the UK versus the total number of beer drinkers, or versus the total number of households, etc.), the hotel industry uses the inventory of the number of available rooms as a basis for its fair market share calculation. (Note: available rooms are rooms that can be rented and do not include rooms that are out of service for repair or remodeling.)
Fair market share is the first basic indicator that gives the competitors’ positions in terms of capacity (total number of hotels, outlets, rooms, beds available), sales or revenue that the company should achieve based on its available production capacity. Unless new competitors arrive on the market or there is a change of available products (new building, additional rooms, inventory closed for refurbishment), that number should not vary over the years.
(1) Fair Market Share (Theoretical Market Share) FMS:
Besides the importance of a company’s production capacity, the Fair Market Share (FMS) analysis does not give much information regarding its profitability. However, it becomes the standard for comparison with the market share of the actual production (profit, revenues, room nights, seats, sales, etc.).
(2) Actual Market Share (Realized Market Share) AMS:
The Penetration Ratio will give further an immediate indication of the company’s performance on its market, by combining the two results that were obtained previously. A figure exceeding 1 or 100 indicates that the company is stealing market shares from one or more competitors. Any figure under 1 or 100 indicates on the contrary that the company is losing market shares to its competitors.
(3) Penetration Ratio Pen Ratio:
However, markets are expected to move according to various external and internal environmental factors, such as economic up and downturns, competitors’ strategies, and investment in communication tools. Therefore, Actual Market Shares as well as Penetration Ratio need to be understood over time, as to their history and/ or in a prospective format. The analysis of their variances requires rigor and structure.
(4) Analysis of variances:
Ideally, the market share measurement should be analyzed with related indicators such as the share of mind (the market awareness of competing products), the share of heart (the market preference for competing products), and the share of voice (the competitors’ spending in advertising on a given market).
Behind the calculation these formulas can easily be designed and stored in a PC file it is important to identify and verify the source of data. The first decision refers to the choice of competitors one wishes or needs to compare to, i.e. with 1965 establishments, Accor accounts for 21% of the total lodging market in Europe. That indicates the position of the group on a global market. In this case, the figures to compare will be chosen between hotels, rooms, or beds available for sale and compared to the total number of hotels, rooms, or beds available in Europe. This number will fluctuate not because of the consumers’ market, but with the closing and opening of new European Accor and non Accor properties. That same calculation could be reduced to the 4* ) category, or else extended to the comparison revenue with all tourism related industries. This analysis will provide useful indication as to the evolution of a company in a region and the effectiveness of its growth strategies in the sector. However, if used to set business objectives, the fact that data must be provided by secondary sources, might represent a problem in terms of precision and regularity.
At property level the market share analysis is more often used for the purpose of setting objectives to and measuring the management and more specifically the sales & marketing department. For that more regular task and purpose, the Actual Market Shares and Penetration Ratio are of significant importance.
The market share analysis requires that direct competitors are clearly identified for the long term (a new entrant will modify the FMS) and as to the main target markets they share. The marketing management will need to take efficient decisions regarding:
the reason behind the choice of direct competitors;
the number of competitors that will be taken into account (with more than six hotels to com pare, the AMS analysis becomes intricate); and the means of collecting accurate and regular figures for the calculation.
The issue starts with the identification of the target market and the property’s perceived positioning. The perception is important here, since it is the customer’s decision to choose one or the other competitor: ‘If my hotel was closed or fully booked, which other hotel would my customer book?’ We are not speaking about products looking after the same customer’s money, but products that may offer the most similar type of experience. Although many hotels have a tendency to compare themselves with better establishments or with the market leader, they will lose on accuracy if the calculation is not taking sharable markets into consideration. In today’s highly competitive environment, and especially because lodging is a convenient ingredient of the travel package but only rarely the reason for the trip, hotels always share their customers with similar establishments, although their differentiation and positioning strategies may suggest their uniqueness in some or many aspects.
In the hotel industry, the identification of competitors relies on six main criteria:
Location: is one of the main reasons for choosing a hotel among business customers.
Category: guarantees a classification according to similar features, officially approved and mutually recognized.
Size of the hotels: large hotels need to target specific business volumes, often at the expense of their Average Daily Rate (ADR).
Price: customers usually select their accommodation based on a personal or corporate expense budget. Their choice will be made within a certain price range.
Type of hotel: (usage) the same customer may very well choose different hotels (resorts, long stay, suite hotels, hotels with large congress facilities, etc.) for different stays, depending on his needs and the type of experience he is looking for.
Type of customers: direct competitors must recognize their similarity in terms of their offer to identical customer segments. The market share analysis might be biased if a business hotel for instance, accommodating business and leisure markets, would compare itself with hotels from the same category and in the same location but targeting only leisure segments.
Fine tuning of the analysis may also suggest the breakdown of competitors per target market (i.e. hotel comparing the leisure market with three competitors and the business segment with two other competitors, such as when there is a strong input of one market segment in the revenue of a hotel, that is not shared with the usual competitors, but with a more distant one). This implies the exchange of information between those operators, since such calculation would require that companies assess the breakdown of room nights and revenues provided by each specific segment (possibly with congresses, airlines, where figures can be obtained from the clients, the organizational buyer). Unfortunately, such data are not easy to manipulate, this type of more accurate analysis requires transparent and disciplined markets and/or conscious associations.
The market share analysis for large congress or incentive groups could even be calculated among hotels in various destinations, since the choice between two properties is usually linked to the country, thus revealing one resort hotel in Acapulco, Mexico, to be the direct competitor to a similar establishment in Bali, Indonesia.
Positioning maps (categorization maps) might prove to be useful for sorting several direct competitors the ones that call most often for the same criteria (features, strengths and weaknesses, price ranges, target markets, etc.).
The need for accurate data is essential to ensure an effective comparison and analysis of the long term performance. It is not an easy task to collect data from competitors and record them over the years for use. There are many problems and decisions related to these tasks that need to be addressed:
the accuracy and collection,
the regularity of collection, and
The first decision lies in the identification of the type of data needed. And if it first depends on the ratio that a company will want to calculate, it also depends on their availability on the market. The collection of data for the analysis of Fair Market Share, to identify a company’s potentiality on a given market, is rather easy. Once direct or indirect competitors have been identified, figures are available mostly from official sources.
For AMS they are more difficult to obtain, since data reflect the hotel’s daily performance, and many companies consider those figures confidential and not exchangeable.
Ideally, the AMS calculation is made using the following ratio: rooms occupied, room revenue, ADR, or two of those indicators that will provide the basis for calculation. It is important, however, that the hotels concerned agree to exchange their data. A comparison of total revenues would be interesting but the industry was never keen on exchanging this type of sensitive information.
However, further important decisions need to be taken as to:
the enclosing of complimentary rooms, rooms that are out of order;
Value added tax (VAT) and other government taxes that may or may not be included in the ADR; and
the removal from the inventory of rooms that are being refurbished and their later reintroduction in the number of available rooms.
The relevance of the decisions concerns the regularity of its application and the fact that direct competitors provide data in similar format.
In good economic times, when competitors perform with high occupancy level and growth promises, the exchange of data between hotels is not too difficult, and one can reasonably expect that they are accurate and reflect reality. However, that same goodwill is not there in difficult times. Either hotels do not agree to share the information or they give wrong figures: higher than actual figures if they perform lower than the competitors or they do not communicate the higher occupancy or revenue figure, due to the accommodation of a punctual business they do not want the others to know about. In case of doubts about data provided by one or the other competitor, the market share ratio may need to be adjusted by the collector to approach reality, thus jeopardizing the credibility of the findings.
On some markets actual figures are not exchanged, and the market share analysis needs to be based on figures collected from other secondary sources, such as the national tourism board (occupancy figures) or related official bodies, observation (number of cars in parking lots), number of seats occupied at breakfast. Obviously, the calculation of indicators based on such data will be very approximate. Other companies or associations may provide data usable for part of the market, such as Travel Quick for GDS bookings, analysis based on their own reservations forwarded to the competition set. In the case of Travel Quick the exchange of data is known and mutually agreed by all subscribers.
On most markets, general managers usually agree to release a certain number of information, which will then be exchanged by front office managers or sales & marketing departments on a regular basis (daily, monthly, etc.). As for other financial data, the regularity of the exchange as well as the processing and saving of those figures in the agreed and constant format is essential for the calculation of ratios and their analysis.
Recently, some European government bodies circulated information within the hotel industry requesting the operators to stop the exchange of revenue related data in order to avoid a cartelization.
As mentioned earlier, indicators need to be evaluated over time. In this respect the seriousness of collection and regular processing of data is essential to guarantee their credibility. It requires that one or more staff members (often at front office level or the database manager from the sales & marketing department) are in charge of this task.
Market share ratios are used by marketing departments for reporting and forecasting:
Daily for early bird reports discussed in the department head morning briefing;
Daily or weekly for marketing and yield management meetings that usually involve sales and reservation teams;
Monthly for department head meetings, where budgeted figures are reforecast and adjusted to the market evolution; and
Yearly for the preparation of marketing plans or the interpretation of year end results.
These ratios are taken into consideration by hotel chains or consortia to compare their members within the group or within a region.
The market share is common business language and is therefore a powerful indicator to use when presenting the company’s performance to owners or head offices. It is often used in Public Relations to communicate positive results to journalists or potential customers. The simplicity of the market share (MS) makes it easy for employees to understand. It motivates them to aim at and fight together for higher market positions.
Besides the assessment of the market evolution and the competitors’ performance the AMS analysis also makes it possible to understand the customers’ sensitivity to prices. The company is able to identify, at various occupancy levels, how much market share was lost or gained due to the opposite move of ADR, thus reflecting one or more price modification. However, the comparison of revenue per available room (RevPar) is the complementary assessment of the revenue performance between direct competitors. The decrease in market shares may be motivated by the loss of unprofitable market segments.
The desire for and the expansion of a company’s market share need to be carefully verified as to the increase of ROI they can provide, that is the cost of acquiring new market shares. The expenses linked with communication, pricing, or distribution strategies must remain within acceptable margins.
However, the MS analysis needs to be interpreted and quoted with great care, seeing that too often the comparison of documents issued by various competitors does not show similar results. The fact that competitors’ figures can not be checked with accuracy makes it possible to manipulate the analysis, mostly to the advantage of the hotel that imports and presents the data.
In the future, hotels will probably need to identify new ways to interpret accurate market share calculations; neutral associations, or govern mental organizations could prove to be useful intermediaries for that purpose.
The more classical use of global and relative market shares, as for consumer goods, may also reveal useful indicators for hotels that wish to understand their penetration of a market not restricted to their own capacity.
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