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Measuring the impact of online reviews on rate
November 1 2012

New research reveals how a single percent increase in online-reputation indices impact performance metrics like occupancy, ADR and RevPAR.

Highlights
  • A one point gain in user review ratings would make someone 13.5% more likely to book that hotel.
  • A 1% increase in an online-reputation index contributes a 0.49% increase in RevPAR for luxury hotels.
  • Revenue managers must factor online reviews and ratings into their overall pricing and yielding strategies, sources said.

REPORT FOR THE U.S.—As the realms of sales, marketing and revenue management collide, revenue managers must begin to account for online reviews and ratings in their pricing and yield strategies.

Failure to do so means a failure to leverage all attributes of pricing power, according to panelists Tuesday during a webinar titled “Reputation drives revenue: How traveler reviews affect hotel pricing power.”

“Reviews and ratings place such a key role in traveler decisions, that they should therefore play a key role in revenue-management decisions,” said Daniel Edward Craig, founder of Reknown, an online-marketing, social-media and reputation-management firm.

To help understand the extent to which reviews should play in those decisions, Chris Anderson, associate professor in Cornell University’s School of Hotel Administration, shared new information from two key studies.

(Editor's note: "The Impact of Social Media on Lodging Performance" is now available for download at Cornell's website.) 

Chris Anderson
Cornell University's School of Hotel Administratio
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The first analyzed booking data from nine U.S. cities, specifically looking at the last 25 hotels a consumer looked at before purchasing one of those properties. He identified attributes from each of those properties, such as price, star ranking, position on the screen, location and user reviews.

Anderson then used the data to model a consumer’s likelihood to purchase or not purchase as a function of those attributes. User reviews yielded a coefficient of 1.135, meaning a one point gain in user review ratings would make someone 13.5% more likely to book that hotel.

Knowing this, a revenue manager could increase the rate, which negatively impacts a user’s likelihood to book, without seeing an overall net decrease in bookings.

For example, if a property was able to increase its average user rating from 3.8 to 4.8 on a 5-point scale, its revenue manager could increase rate by 8% without seeing a negative impact on overall net bookings.

“You get a sense of the pricing power of user reviews,” Anderson said.

Rate and reviews
The second study examined two-and-a-half years worth of hotel performance data from STR and compared it to online reputations ratings, as measured by ReviewPro’s Global Review Index. ReviewPro sponsored the webinar. STR is the parent company of HotelNewsNow.com.

Anderson used the two data sets to measure user-generated elasticity, or the percent change in pricing power, demand and performance as a function of a percent change in online reputation.

The results, shown in the chart below, highlight the increase in the various metrics given a 1% gain in online reputation.

For example, if a luxury hotel was to increase its online reputation by 1%, then its average daily rate would increase by 0.44%, its occupancy would increase by 0.09% and its revenue per available room would increase by 0.49%.

Because luxury assets are typically more established with predictable levels of strong service, user-generated reviews have less of an impact on performance. But as one moves further down the chain scales, uncertainty increases and reviews have a much stronger impact, Anderson said.

In the midscale segment, for example, a 1% increase in online reputation yields a 1.42% gain in RevPAR, compared to only 0.49% for luxury hotels.

“We see a dramatic impact upon performance of that property as a function of improvements in their online reputations,” he said.

That means online reviews and ratings are more important now than ever before.

“Users are communicating with lots of social content, whether that’s TripAdvisor or reviews for Travelocity or Expedia, and that’s part of this research process. At the time of purchase … that’s sort of swaying the consumer from one hotel to another potential,” Anderson said.

“The net of this as we look at aggregate performance, there truly is some correlation between a firm’s online reputation and the pricing power that comes with that and the ability to drive demand or drive rate and ultimately increase performance.”

COMMENTS   Show All
Roberto Simone
12/1/2012 5:04:00 AM
I m an Hotelier, Hospitality Advisor and Lecturer for an Hotel Management school in Suisse and I have to say this work what was needed more. Debate about the effective impact of on line review on major key ratios has since ever conflictual and with different point of views. Ther is another work of Anderson which deserve attention and is the analysis provided about the on line booking ROI. We will expect something in the future about the effective customer engagement through social media.
Cornell Student
11/1/2012 10:56:00 AM
Professor Anderson is one of the most intelligent professors at the School of Hotel Administration. His analysis helps quantify the value of reviews. This will be very useful to the industry going forward
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