As those of you who follow me know, I’ve been working on a series of studies with Breffni Noone (Professor at Penn State) about the impact of user generated content (UGC) and price on consumer buying behavior. When we speak about this research, we tend to hear the same sets of questions from most audiences – whether they are revenue managers, marketers or even outside the industry. In this blog post, I’ll review our research to date, and then I’ll answer some of the common questions we hear based on what we’ve seen in our literature reviews for our research. Next month, I’ll explain our latest study which compares business travelers to leisure travelers.
Price and UGC – Influence on quality and value perceptions
Now that user generated content is available at the point of purchase, consumers have more information than ever before as they evaluate a hotel purchase. In order to continue to build profitable pricing and positioning strategies, hoteliers must understand how all of this information together influences consumers. Previous research has shown that consumers’ perceptions of quality and value are the primary drivers of purchase behavior.
In our first study, we designed a scenario based on the online purchase of a four-star hotel for a weekend leisure break. We presented a hotel where the price varied low to high (relative to a reference price), the reviews were either mostly positive or mostly negative, and the ratings were low (2.8) or high (4.8). We then asked consumers to report their perceptions of the quality and value of that hotel. You can read my post about this study here.
The main takeaways from this study were:
- In the presence of ratings and reviews, consumers do not use price as an indication of quality. Hotels can lower price (within reasonable bounds) to generate short term demand, without impacting consumers long term quality perceptions.
- Reviews are the most powerful value indicator for consumers: Consumers look to the reviews over aggregate ratings to form quality and value perceptions. We hypothesize that the uncertainty associated with the hotel experience leads consumers to gather as much information as they can before purchase. Reviews provide this, ratings do not.
- Competing on price alone is not a winning strategy. Consumers will look closely at UGC and price. This means you must understand your price position and your reputation position versus the competition.
- Good reviews are not a license to charge more: Despite the power of positive reviews, consumers still prefer to pay the lowest price. All things being equal, if your price is lower, you’ll drive demand to your property.
- It’s hard to overcome “bad” UGC: Lowering the price of a badly rated, and negatively reviewed, property drives no additional value in the minds of the consumer. If you happen to be in that unfortunate position, you should keep the price up, and take what you can get – which according to our results won’t be much. Use your energy to fix the problems with your property instead of worrying about how it is priced!!
How consumers choose – Price, UGC and Value
In our first study, participants evaluated one hotel. We were interested to understand how they would behave if they were forced to make a choice. We designed a choice modeling experiment that would help us understand the tradeoffs consumers make and the attributes that drive value perceptions. In this study, we again used a four-star hotel for a leisure break, and told participants that all hotels had equivalent amenities and location. We then showed them three hotels in which we varied levels of the following attributes: the brand (known or unknown), price (low, mid, high), ratings (low, mid, high), TripAdvisor Rank (low, mid, high), review sentiment (negative, positive), review language (emotional, descriptive) and review content (service, physical property). We asked them to select the hotel they would book. They repeated this exercise three times. By tracking their patterns of choice, we were able to understand how each of the attributes, and the levels of those attributes influenced choice behavior and value perceptions. You can read more about this study in this blog post.
There were four main takeaways from this study:
- Reviews and price are the most important influencers of choice. While consumers did pay attention to aggregate ratings, TripAdvisor rank and to a lesser extent, brand, positive reviews contributed the most to consumer choice behavior followed by lower price.
- Negative reviews remove you from the choice set. Period. Lower price or higher ratings do not overcome the impact of negative reviews. Consumers simply will not choose a hotel with negative reviews.
- Consumers prefer to pay a lower price. While consumers would go for a higher-priced hotel when the reviews and ratings were better than the alternatives, all things being equal, they will look for the lowest price. Hotels need to understand their position relative to their competition both on reputation and on price in order to take advantage of any pricing power associated with positive UGC.
- Consumers only notice high ratings and rankings. Our results showed that consumers only notice ratings and rankings when they are high as compared to other choices. Consumers do not place any value on the comparison between low and mid-level ratings and rankings.
These two studies were focused on the leisure traveler. Our next study looks at choices of the business traveler. I’ll describe that study in next month’s post.
Any discussion of the influence of UGC on consumer purchase patterns tends to raise a similar set of questions.
How do your findings relate to the Cornell study where a one point increase in Reputation Index resulted in an 11.2% increase in pricing power?
Our study results definitely complement the Cornell Center for Hospitality Research Study done by Chris Anderson in 2012. If you missed it, I covered it in this blog post. That study focused on performance measures, where we looked at consumer behavior. We did provide one nuance to that work, and that is that the pricing power associated with improving your reputation index by one point will only happen on the “top end” of ratings – as in, if you raise your score from a 3.5 to a 4.5. Consumers will not notice any movements on the low end – as in a 2.8 to 3.5.
My advice is to take any of these study results in the context of your market and your business strategy. You will have increased pricing power with a good reputation (likely if you have a well-run, high quality hotel, you’ll have a good reputation, good performance and you’ll already be at the top of the market). How you take advantage of that pricing power depends on your business strategy and your market conditions. Our study demonstrates that consumers prefer to pay the lowest price they can. With a great reputation, you have the ability to drive share with an aggressive pricing strategy. You can drive revenue with a good reputation – but only assuming you are clearly better than the competitors in the market. Both Chris’s study and ours reinforces the point that you need to have a good understanding of where you sit in the market on reputation and price, and a good understanding of your hotel’s business strategy, before making any pricing decisions. The job of revenue manager is not getting any easier!
Should I respond to reviews?
Many hotels have invested a good deal of resources in responding to reviews – both positive and negative. I have seen one study so far that looked at “response to negative reviews” in the context of hotel performance. There seemed to be a relationship such that hotels that responded to negative reviews had better performance (ADR, RevPAR, Occupancy). There is plenty of anecdotal evidence as well. My own opinion – this comes down to service recovery. You would address a problem if it were brought to you in person or via letter, so responding to negative reviews is a good idea. I suspect that ‘over-responding’, or not being genuine, however, can do as much damage as that negative review, so I’d say be careful. More research needs to be done in this area.
Should I be worried about my TripAdvisor Rank?
I have heard plenty of stories from industry about improvements in TripAdvisor Rank correlating with more bookings. In our study, TripAdvisor rank was influential only when it was high, and the attribute was not a hugely influential overall. However, there are two aspects of TripAdvisor Rank – the absolute number itself and the positioning that the rank gives you in search results. In our study, we just presented the number (x out of 217 in the market). Consumers may not be focused on the number itself, but being higher on TripAdvisor gets you noticed more because you will show up sooner in the search results. There has been plenty of research on how many pages consumers will search through before making a decision, and it isn’t many. Despite what our results say, I’d still recommend working to get the best rank on TripAdvisor that you can so that you show up as early as possible in the search.
Are the number of reviews important? Should I be working to get more reviews?
I have seen a number of studies that show that consumer confidence increases with the number of reviews. Consumers “believe” the UGC more when there is more of it. I would definitely recommend that hotels work to increase the number of reviews posted across all types of review sites.
There is one exception to this. I saw one study where increased number of reviews actually had a negative relationship with RevPAR at the luxury level. These researchers hypothesized that as the number of reviews increased for luxury properties, the perceptions of exclusivity decreased, which left some consumers thinking “I don’t want to pay this much to stay where everyone is staying”.
Does the “quality” of the review influence decision making?
I have seen some research indicating that consumers “trust” a review more if the review quality (length, grammar, etc.) is good. While there isn’t much that a hotel can do about this, you can feel secure that a badly written, negative review will not be valued as highly as a well-written positive review.
There is still much more work to be done– but what is clear from all of the research described here, is that reputation definitely drives consumer decision making. To stay competitive, hotels need to monitor their reputation, and to use the information within the reviews themselves to continuously improve their offering. Stay tuned for the results of our new research next month!