Why Market Share and Market Penetration Matter for Hoteliers?

Are you a hotel professional willing to assess the performance of your property in the market? Are you willing to know if you stand out compared to the competition? If you want to learn about your market position, then you must master those metrics described in this article. This will allow you to start thinking about ways to gain a competitive advantage. Indeed, market share and market penetration are important tools to determine your hotel’s success. Before computing these metrics, it is important to identify your competitive set and have access to industry’s data. Smith Travel Research (Links to an external site.) is a popular organization that provides reports of the main hotel’s key performance indicators (Occupancy, Average Daily Rate and Revenue per Available Room) of your competitive set for benchmarking purposes. If you are wondering how you can calculate the market share and market penetration and interpret its meanings for your hotel, then consider using STR data and apply the formulas mentioned below.

What does Market Share Stand For?

According to the Corporate Finance Institute (Links to an external site.), market share can be defined by the portion of the market a company has captured measured in percentage. It can help you determine the overall business of your hotel compared to the competition. It can be referred as your sales (revenue market share) or room supplies (unit market share) performance against your immediate competitors. The higher is the market share, the most your hotel has an impact in the market.

Examples:

  • Let’s suppose that your hotel has 300 rooms and the total rooms of the competitive set in your area that includes your hotel is 1200 rooms. The unit market share for your hotel in this case can be found by dividing your property’s number of rooms by the total number of rooms of your market set. Here is the calculation below using the formula:

300/1200= 25% market share

It means that in the competitive market set, your rooms percentage represent 25%.

  • Now, you are willing to find the revenue market share of your hotel or Hotel A in the table below. Below are the revenues of your hotel and the ones of your competitors known as Hotel B, C, D and E.
Competitive Set Hotel’s Revenues
Hotel A $170,000
Hotel B $90,000
Hotel C $87,000
Hotel D $122,000
Hotel E $38,000

First, you have to aggregate the competitive set’s revenue which is equal to $507,000.

Based on the revenue market share formula, your market share can be computed by dividing $170,000 (your property’s revenue) over $507,000 (the total competitive set revenue) which is equal to 33.5%.

Below is a table created by the learning platform Study.com (Links to an external site.):

Table a:

Image taken from: https://study.com/academy/lesson/how-to-calculate-hotel-market-share.html 

If you want to look for the market share in terms of rooms sold for Coconut Resort, here will be the formula:

Coconut Resort Market Share= Coconut Resort Room Nights Sold/ Competitive Set Room Nights Sold

Or 280/806= 34.7% market share.

Now that you are familiar with market share, consider learning about market penetration that can help you further understand how you compete in the market.

What does Market Penetration Stand For?

According to the Management Company Xotels (Links to an external site.), “market penetration measures your hotel´s occupancy compared to the average market occupancy levels”. It is computed as a ratio determined by dividing the rooms occupied in your hotel over the total rooms occupied in your competitive set. If the index found is higher than 1, that means that your hotel is outperforming the competition. If it is lower than 1, that means that your hotel has to work on better distinguishing in the market in which the competition is performing better. When it is equal to 1, that means that there is a fair market share and that hotels in the competitive set are achieving equal performance.

4 Hoteliers (Links to an external site.) that is an organization specialized in Hospitality and Travel News mentions an example of market penetration applied to the hotel industry (Links to an external site.).  By using the market penetration formula, the index found was 93% which is lower than 100%  meaning that the subject hotel must do efforts to achieve better performance than the competition.

Now that you are familiar with market share and penetration, consider monitoring these two metrics as it can give you a better idea about how your property is positioned with regards to the competitors in your segment. Those are useful tools that can let you reflect as a hotel professional on how effective your marketing strategies and business development are. As you will be able to get useful insights from computing these two metrics, you will most likely scale up your company’s profitability.