Pricing in a Social World by Kelly A McGuire, PhD and Breffni M Noone, PhD
November 7, 2013 3:36pm
The price transparency afforded by the advent of the OTAs changed the way that hotels think about pricing. Social media and online reviews are driving the next major shift in pricing - value transparency. Consumers now have easy access to detailed consumer opinion, along with price, through review sites, OTAs and even hotel websites. In order to continue to price effectively, revenue managers need to understand how consumers are using this user generated content (UGC) with price, to make a hotel purchase decision.
To help hotel managers understand how value transparency will impact their pricing and positioning strategies, we conducted a series of studies.
Study #1 - Quality and Value
Since consumers' perceptions of the quality and value of a purchase are strong determinants of their purchase behavior, this study investigated how price interplays with consumer reviews and aggregate consumer ratings to influence consumers' quality and value perceptions. We designed eight scenarios based on a typical online purchase of a hotel room for leisure, in which the price (low and high relative to an established reference price), the aggregate rating (low or high out of five) and the review sentiment (mostly positive or mostly negative) varied. We asked our participants to evaluate the quality and value of the hotel in the scenario they were presented with. (For more details on the study design and results see http://blogs.sas.com/content/hospitality/2013/06/21/pricing-in-a-social-world/ )
Reviews and aggregate ratings drive quality perceptions. Price does not: This is good news for revenue managers, because it means that they can play around with price (within reasonable bounds) to generate short term demand, without impacting consumers long term quality perceptions.
Price drives value perceptions, but so too do reviews and aggregate ratings: Our findings suggest that, regardless of whether price is high or low, positive reviews increase value perceptions. Aggregate ratings only impact value perceptions when the price is low.
Reviews are stronger driver of quality and value perceptions than aggregate ratings: Our research overwhelmingly indicated that consumers look to the reviews over aggregate ratings to form quality and value perceptions.
Competing on price alone is not a winning strategy. Consumers will look closely at your UGC, and that of your competitors, when making a purchase decision. This means you must understand how your UGC compares to the competition.
It is hard to overcome "bad" UGC: Our results indicated that 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!!
Study # 2 - Choice Modeling
In our first study, we tested consumers' reactions to price, consumer reviews and aggregate ratings in the context of a single hotel. For the follow up study, we wanted to see how consumers make tradeoffs when forced to choose among alternative hotel properties. We designed a choice modeling experiment where we asked consumers to select the hotel they would buy from among a choice of three, with varying levels of key attributes. In addition to price, consumer reviews, and aggregate ratings, we included two other attributes in the study: hotel brand, TripAdvisor Rank. Also, with regard to consumer reviews, we tested the impact of review valence, as well as the content and language of reviews, on consumer choice. Table 1 shows the attributes and levels that we tested.
For more details on the design of the study and the results see:
Reviews and price are the most important influencers of choice. This research suggests that, while consumers do pay attention to aggregate ratings, TripAdvisor rank and to a lesser extent, brand name, positive reviews contribute the most to consumer choice behavior followed by lower price. It seems that consumers are less concerned with the content and language of reviews than with review valence - whether reviews are positive or negative is king.
Consumers prefer to pay a lower price - but negative reviews remove you from the choice set. Period. The study's findings indicated that (not surprisingly) the combination of attributes that maximize a consumer's likelihood to choose is positive reviews, low price, high TA rank, high rating and known brand (Total choice likelihood =1.95). When price is changed to the highest price level (everything else held constant), the total choice likelihood changes to 0.46. Raising the price has a relatively large impact on total likelihood to choose even when everything else is held equal. Clearly consumers prefer to pay the lowest price they can. However, when you hold all of the values equal (low price, high TA rank, high rating and known brand), but change the reviews from positive to negative, the total choice likelihood drops to practically zero (0.01). Even the positive impact of a lower price does not outweigh the negative impact of the negative reviews.
Consumers only notice high ratings and rankings. Consumers only notice aggregate ratings and TripAdvisor 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. This finding adds a nuance to the recent study from the Cornell Center for Hospitality Research, which found an 11.2% increase in pricing power for each point increase in a ratings metric. Our study suggests that hotels will only see this benefit if they raise their ratings from a mid-level score to a high score.
These two studies support the notion of a relationship between positive UGC and pricing power. However, revenue managers must think before they rush to raise prices.
While better UGC is correlated with increased pricing power, how revenue managers chose to use that pricing power depends not only on their property's position in the market versus the competition, but also their long term business strategy and goals. Are there branding, market share or future development considerations? How would pricing based on UGC impact plans for attracting business that isn't directly influenced by UGC (contract, groups, wholesalers)? Are there loyalty or marketing implications to a price change?
Second, revenue managers need to have a good understanding, not only of their own price, demand and value proposition, but also that of the competition. To accomplish this, they will need to work with other departments across the organization to get the information they need to make the right decision.
The bottom line is that driving revenue and share in the hospitality industry is no longer just about competing on price. Consumers are clearly turning to user-generated content to inform their purchase decisions, in particular, reviews. This means that hoteliers must not only keep an eye on how they are priced relative to the market, but also on how they are positioned in terms of their reputation.
 Noone, Breffni and McGuire, Kelly (2013) "Effects of Price and User-Generated Content on Consumers' Pre-purchase Evaluations of Variably Priced Services," Journal of Hospitality & Tourism Research 1096348012461551, first published on February 27, 2013 as doi:10.1177/1096348012461551
 Noone, Breffni and McGuire, Kelly (2013) "Pricing in a social world: The influence of non-price information on hotel choice," Journal of Revenue and Pricing Management, 12, 385-401
Tags: price transparancy,
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