A Guest-centric Approach to Hotel Pricing: Reputation Pricing

IDeaS Blog

Reputation pricing is a new and exciting way of utilizing your reputation data in hotel management. Reputation Pricing aligns your hotel’s pricing strategy with guests’ knowledge, expectations, and willingness to pay – at the point of purchase. In the age of big data and the abundance of social channels, user generated content acts as a signaling mechanism by the better-informed party to the less-informed party to communicate the true characteristics of a product or service. 

Value Transparency

The emergence of social platforms and value transparency of consumer goods now enable prospective guests to consider a hotel’s online reputation – and even prioritize it over price – when determining the value of each choice. One of the leading research studies on the impact of online reputation on hotel pricing, by SAS Institute’s Kelly McGuire, clearly indicated that “reviews are the most powerful value indicator for consumers.” The reason why this is so important is because today online reputation is eliminating or diminishing the long-held consumer perception of “price = quality.”

Demand as a Function of Price Where Demand Is a Function of Online Reputation

Most reputation programs help hotels not only identify operational advancement opportunities for improving guest experiences but also increase the effectiveness of their marketing programs by leveraging their reputation performance. The next era in leveraging online reputation for hotels is to take their reputation management programs beyond operations and marketing and to utilize it for making more competitive pricing decisions. But how should hotels accomplish that? Specifically, how can hotels set pricing strategies for demand as a function of price when demand is also a function of reputation? The answer has to do with how online reputation impacts guests’ price elasticity: user generated content minimizes guests’ perceived cost of uncertainty when making online purchases, and influences their price-elasticity especially as the cost of the decision increases. According to one Market Metrix Hospitality study, user generated content influenced guests more than the importance of location, price, and loyalty programs in luxury, upper upscale, and timeshare categories.

Reputation Pricing: Beyond Operations and Marketing

Reputation pricing enables hotels to utilize the benefits of peer-to-peer social technologies to influence the intent to purchase at the point of decision making. The technology to integrate online reputation into pricing analytics empowers revenue managers to keep up with their guests’ technology consumption and turn them into dynamic revenue-optimizing inputs. Graphical tools that help hoteliers visualize their market position in relation to both rate and reputation will arm them with additional insights and data to measure the impact on their online reputation performance. The correlation between a hotel’s rate and reputation indicates over time helps identify new pricing opportunities, especially every time there is a visible change in relative trends of rate and reputation. Chris Anderson of Cornell Hospitality Research reported, based on the transactional data from Travelocity, that “if a hotel increases its review scores by 1 point on a 5-point scale (e.g., from 3.3 to 4.3), the hotel can increase its price by 11.2 percent and still maintain the same occupancy or market share.”

“Competing on price alone is not a winning strategy”

Hotels have long incorporated rate shopping and competitive pricing in executing their revenue management strategies. However, as Kelly McGuire’s research study “Pricing in a Social World” also emphasized, “[c]ompeting on price alone is not a winning strategy.” Revenue Managers worldwide must integrate the impact of guest ratings and reviews into their optimally and competitively priced offerings. In the age of big data and value transparency it is absolutely imperative that hotels utilize their reputation performance to enhance their pricing capabilities to realize new revenue opportunities and drive rates. Guest-centric pricing not only introduces reputation management into the revenue management realm but also provides an avenue to promote collaboration between operations, marketing and revenue management teams.