Pricing in a social world: Five tips for revenue managers

By. Kelly McGuire 21st Jun 2013

The price transparency afforded by the advent of the online travel agents (OTAs) had a profound impact on the way that revenue managers think about price.  Instead of focusing on their own demand and price, price transparency forces revenue managers to also consider the impact of competitors’ pricing on their demand.  With social media and online review sites came the next major shift in pricing – value transparency.  Consumers now have easy access to detailed consumer opinion 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 revenue managers understand how value transparency will impact their pricing decisions, my colleague, Breffni Noone, Associate Professor at The Pennsylvania State University, and I recently conducted a research project designed to get at the way that consumers evaluate hotel room purchases in a social world.  We designed scenarios based on a typical online purchase of a leisure stay and manipulated 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). This gave us eight scenarios, described in Figure 1.

Our background research told us that consumers’ perceptions of the quality and value of the purchase are strong determinants of their purchase intention, so we tested these perceptions as combinations of price, aggregate ratings and user reviews changed.  We deployed these eight scenarios via an email link to a survey to a representative population of the US market, asking consumers to evaluate their quality and value perceptions of the hotel scenario they were presented with[i].

We found the following:

Quality: In Figure 2, you can see the mean perceived quality by scenario (on a scale of 1-7).  The blue bars represent high price and red bars represent low price.  You’ll notice that there does not appear to be much difference between low and high price scenarios at the same levels of ratings and reviews.  You’ll also notice that the scenarios with positive reviews had the four highest quality perceptions.  Our statistical analysis showed that in fact price had no significant relationship with quality, but positive reviews were associated with higher perceptions of quality (and vice versa).  Aggregate ratings also had a positive relationship with quality perceptions, but it was weaker than the review relationship.

Value: Value is defined as what you give for what you get, so not surprisingly, looking at the red bars and blue bars in Figure 3, as price increased, value perceptions decreased (on a scale of 1-7).  However, there was an interaction between price, aggregate ratings and reviews, meaning that UGC altered the magnitude of the negative relationship between price and value perceptions.  For both high and low prices, positive reviews increase value perceptions.  Ratings had no impact on value in the higher priced scenarios.

The interaction came into play when price was low, aggregate ratings were high and reviews were positive.  In this scenario the aggregate ratings gave a bump to the value perceptions – as if the consumers were using the high aggregate rating as a signal that they were getting a really good deal (Figure 4).

Worst Case Scenario: We also looked at a comparison between value perceptions at low and high prices when aggregate ratings were low and review sentiment was negative (Figure 4 – the purple bars in each chart in the “negative review” category).  We found that there was no statistically significant difference in value perceptions between low and high price.  Consumers saw no additional value in the purchase at the lower price when the property had poor UGC.

Our findings suggested the following tips for revenue managers to consider when they are building their pricing strategies in the new world of value transparency:

1- In the presence of ratings and reviews, consumers do not use price as an indication of quality.  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.

2- 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 can’t undercut (or raise) your price simply based on the price movements of your competitors.  You must also understand how your UGC compares, evaluating consumers’ value perception of your hotel versus the competition.

3- Reviews are the most powerful value indicator for consumers: Our research overwhelmingly indicated that consumers look to the reviews over aggregate ratings to form quality and value perceptions.  This runs counter to some theoretical arguments that suggest that consumers are “information misers”, preferring a metric that’s easier to consume (like an aggregate rating), as opposed to the information-rich review.  We have hypothesized that the uncertainty associated with the hotel experience leads consumers to want to gather as much information as they can to mitigate against the risk of uncertainty.

4- Good reviews are not a license to charge more:  Despite the power of reviews in these scenarios, value perceptions were highest in the low price scenarios.  Consumers will still prefer to pay the lowest price.  This means all things being equal, if your price is lower, you’ll drive demand to your property.  Consumers do consider your review position, so if you are clearly better than the competition, you’ll be able to push the price.  If you are not “clearly” better, pricing decisions are not that simple.

5- It’s 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!!

Our study supports the notion that is a relationship between positive UGC and pricing power, whether you look at it from a consumer behavior or performance perspective.  However, revenue managers must think before they rush to raise prices. We strongly urge revenue managers to consider two things.

First, while better UGC leads to 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? Remember along with the tactical, day to day pricing decisions that are used to drive revenue there are strategic considerations associated with pricing (we’ll talk about that in July).  This study provides support for the importance of including UGC-related analytics in that strategic discussion. The better information you can bring to the table, the better decisions you will ultimately make!

Second, revenue managers need to have a good understanding, not only of their own price, demand and value proposition, but that of the competition too.   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. This adds a layer of complexity and interdependence to an already complicated decision.  It reinforces the points we’ve been making so far this year about the importance of fostering a strategic analytic culture across the enterprise.  Once the door is open for collaboration, all department have the ability to make better decisions to drive enterprise wide revenue and profits.

About Kelly McGuire

Kelly McGuire is an analytics evangelist, passionate about helping the hospitality and travel industries realize the value of data-driven decision making. I focus on connecting the dots between strategy, business process, technology and execution. I have a background in revenue management. I have also worked extensively in marketing analytics and hospitality operations. She adept at facilitating integration

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