As consumers continue to rely on review websites and platforms like TripAdvisor, Google, and Facebook, researchers are finding out more and more about the kind of effect reviews have on businesses.
Online Reviews and Ratings Matter to the Bottom Line
And it turns out that reviews and ratings really do matter to the bottom line — especially in an industry as competitive as hotel and hospitality.
A 2012 Cornell University study, for example, found that, beyond their reputational impact, reviews also appeared to be responsible for swaying the room rates of hotels. Specifically, a one-point improvement in a five-point rating scale can result in a hotel having up to an 11 percent increase in room rates, all while maintaining the same occupancy rate and market share.
A new study by Gregory Lewis of Microsoft Research and Georgios Zervas from Boston University’s Questrom School of Business explores further the relationship between online reviews and hotel prices.
Entitled “The Welfare Impact of Consumer Reviews: A Case Study of the Hotel Industry,” the study suggests that better reviews aren’t simply correlated with higher demand (and higher prices); the feedback actually causes the increase — with independent and luxury hotels being particularly sensitive to reviews and ratings.
“Both demand and prices are significantly affected by ratings, especially in more recent years,” Lewis and Zervas wrote. “These associations are likely causal.”
According to the study, when ratings rose by one star, demand increased by 25 percent, which then led to a 9 percent increase in prices.
“Even if only 20 percent of people bother to read the reviews and then stay in places on the basis of the reviews, they’re moving the entire market around,” Lewis said.
To arrive at their findings, the researchers collected and analyzed a decade’s worth of financial data on hotels, along with these hotels’ historical records totaling more than 3.7 online reviews and ratings from three review platforms: TripAdvisor, Expedia, and Hotels.com.
“Consumers are devoting increasing attention and time to making informed choices, accessing the many information sources at their disposal,” the researchers explained. “This has implications for market structure. Hotels have responded to this phenomenon, with high-rated hotels increasing their prices, while low-rated hotels drop theirs.”
The Impact of Reviews on Markets, Demand, and Prices
Previous studies have similarly attempted to understand how online reviews and customer feedback can affect markets in other industries.
For example, a 2014 study by ShareThis and Paley Center for Media showed that strong positive reviews can sway consumers to pay nearly 9 percent more for a product or service, thus enabling manufacturers and retailers to charge more.
For restaurants, meanwhile, better reviews are correlated with higher demand. A study by Berkeley economists Michael Anderson and Jeremy Magruder found that a mere half-star improvement in online ratings makes a restaurant 30 to 49 percent more likely to be fully booked during peak dining times.
Harvard Business School’s Michael Luca took this further and found that restaurants, especially the independent ones, can drive at least a 5 percent increase in sales by aiming for a one-star improvement in overall ratings.
“Online consumer reviews substitute for more traditional forms of reputation,” Luca wrote. “Review websites improve the information available about product quality… (and) can be equally as effective at altering demand.”