How Business Travelers Buy: Hotel Pricing in a Social World

With the growing popularity and availability of online reviews and ratings, consumers have more information than ever before when purchasing a hotel stay. In order to build effective pricing and positioning strategies, hotel managers need to understand how consumers are using all of this user generated content with price to make a purchase decision. Dr. Breffni Noone, Associate Professor at Penn State, and I have done a series of studies to understand how consumers use all of this information to assess value, and ultimately, make a purchase decision. Our latest research looked at unmanaged business travelers.

As in previous studies, we used a choice modeling experiment. In this technique, researchers select a set of attributes of a product or service they wish to test, and subjects are presented with a set of options with varying combinations of levels of those attributes. They are asked to select the option that is most attractive to them (the one they would buy). As participants repeat this exercise over different sets of options, it is possible to statistically assess the importance of each attribute in decision making, and the value that they place on the attribute and its levels.

The study design
For this study, we told our business traveler participants that they were attending a meeting in a city center. We told them we would show them a set of hotels that were "business-friendly" with equivalent class of service and amenities, all with locations equally convenient to the meeting. We then showed them a set of three hotels in which the price (low, medium, high), review sentiment (positive, negative), review content (physical property, service) review language (emotional, descriptive), aggregate rating (low, medium, high), TripAdvisor Rank (low, mid-range, high) and brand (known, unknown, preferred) varied. We asked them to select the hotel they would book from the set of three options, and they repeated that exercise three times.

The data was gathered via an online survey distributed to a representative sample of the US population. We screened for participants who traveled on business at least six times per year, and were able to make the choice of where to stay themselves (i.e. not overly constrained by a corporate travel policy). Since we knew that loyalty program affiliation could be influential in traveler decision making, we asked them to tell us what loyalty programs they belonged to, and to identify a preferred brand from within those loyalty programs. We presented a list of brands within these loyalty programs that met the study criteria of "business-friendly" hotel, so for example, the Hilton Honors brands were Hilton, Embassy Suites and Doubletree. Note that this was not a study about loyalty program membership, so we can't really make inferences to the general population of business travelers, but it is interesting to see how these business travelers are affiliated with common loyalty programs.

Business traveler loyalty behavior and demographics
Figure 1 shows the distribution of membership and the distribution of preferred brands by loyalty program. We also asked whether they belonged to a "non-brand" loyalty program (like hotels.com or Leading Hotels), and you can see that 45% of them were members of such programs.

How Business Travelers Buy: Hotel Pricing in a Social World | By Kelly McGuire— Photo by SAS Institute Inc.

Figure 2 shows the demographic composition of the business travelers in this study. You can see that about half of them take 6-10 trips a year, and the vast majority stay two or more nights per business trip. Interestingly, the vast majority of these business travelers do read reviews and say they are influenced by them.

Study Results

Overall Attribute Importance

The first output of a choice modeling study is the overall importance of each attribute in driving customer's decision making. The following list of attributes had a significant impact on value perceptions, and they are presented in order of importance to the business traveler:

Review Sentiment (positive, negative)
Brand
Aggregate Ratings
Price
Review Language (descriptive, emotional)

Contrast this with the list for the leisure traveler:

Review Sentiment (positive, negative)
Price
Aggregate ratings
TripAdvisor Rank
Brand

As you can see, there are already some interetsing differences in how these two segments assess value and make decisions, yet review sentiment is most influential for both segments.

Influence of attribute levels on value

The next step in a choice modeling analysis is to understand how value assessments vary with the different levels of the attributes. In other words, how do negative versus positive reviews impact value?

The following results were obtained from the analysis of value impact by attribute level:

When reviews were negative as opposed to positive, not surprisingly, there was a large negative impact on value perceptions
There was a small positive impact of the known brand over the unknown brand, but a large positive impact on value of the preferred brand over the known brand
While the value impact associated with both a mid-range aggregate rating over a low rating and a high rating over a mid-range aggregate were significant and positive, the impact of mid over low was actually greater than the impact of high over mid
There was a negative impact on value when the price was raised to the mid-level over the low price. Business users did not notice the difference between the mid and high price
Finally, there was a slight positive impact on value of a review with descriptive language ("The bed was very comfortable", "The room was cold") over emotional language ("I LOVED the bed", "The temperature in the room was annoying")

Looking at the aggregate rating results suggest that it is more important to business travelers that the hotel is OK, than great. They will assess what the experience will be like (by reading the reviews, especially descriptive ones), and as long as they feel it will be OK (and they can get points), they will book. This doesn't mean they don't appreciate a great hotel, but in the balance between staying with their preferred brand that is just "OK", and a hotel with "great" reputation, they are likely to choose the preferred brand. While business travelers are relatively price-insensitive, they do respond to a deal. Hotels with an "unknown" brand that are in a better reputation position than the "preferred" hotels in their market (the ones with well-known loyalty programs), might be able to encourage business travelers to stay by offering a deal. However, if the price isn't among the lowest prices in the competitive set, the business traveler is not likely to notice.

Assessing overall value

Choice modeling analysis also allows you to look at a combination of attribute levels and assess the overall value to a consumer of an option with that set of attribute levels. We are going to present a set of equations below representing an hotel option from the study. The important thing to focus on is not the value of result of the equation, but how the number changes as we change attribute levels.

The below equation represents the most valuable option for the business travelers, in order of attribute importance.

Positive Reviews + Preferred Brand + High Rating + Low Price + Descriptive Reviews = 1.52

With this set of attribute levels as a baseline, we can manipulate the attribute levels and track their impact on overall value. For example, holding everything else constant, the below equation represents overall value when the price is raised from lowest to highest. You can see that the overall value is impacted slightly, but not by very much. This is not surprising since the price was only the fourth most important attribute to business travelers, and it was only the low price that the business travelers valued.

Positive Reviews + Preferred Brand + High Rating + High Price + Descriptive Reviews = 1.25

Contrast this result with the leisure traveler study, where price was the second most important attribute. The first equation is the most valuable option for the leisure traveler, and the second shows the impact of raising the price from low to high. Leisure travelers are clearly highly price sensitive. The overall value drops significantly when the price goes from low to high.

Positive Reviews + Low Price+ High Rating + High TARank+ Known Brand = 1.95

Positive Reviews + High Price + High Rating + High TARank+ Known Brand = 0.46

Now look at what happens when the most important attribute for each traveler changes. Holding everything constant from the baseline, the first equation below demonstrates the impact of negative reviews on overall value for business travelers, and the second for leisure travelers. You can see here that the impact on value for business travelers over the baseline was quite significant, nearly half of the value is lost when the reviews are negative as opposed to positive. However, for the leisure travelers, all of the value is lost when reviews are negative. Business travelers clearly pay attention to reviews, but they are willing to balance that against other attributes like brand and rating. Leisure travelers simply wont consider the hotel if the reviews are negative.

Business: Negative Reviews + Preferred Brand + High Rating + Low Price + Descriptive Reviews = 0.69

Leisure: Negative Reviews + Low Price+ High Rating + High TARank+ Known Brand = 0.01

Summing it all up

So, what does all this mean?

There are a couple of key takeaways from this study:

Reviews matter –
business travelers look to the reviews to assess what their experience will be like. If the review is positive or negative they want to know why.
Loyalty matters – Business travelers will put up with "good enough" or "OK" if they can get their points
Price matters – Business travelers still recognize a deal, but it's only the lowest price that entices them. They are relatively insensitive beyond that.

Figure 3 summarizes the key takeaways from this study as compared to the leisure study. These takeaways present several opportunities for hoteliers. For example, a hotel that has a heavy mix of business travelers who are members of their loyalty program might be able to put off renovations for a while (assuming the declining quality of the product is reflected in declining reviews and ratings), but a leisure property would not. A brand that is relatively unknown in the market, could attract business travelers to forgo their preferred brand if their reputation was better, by offering a "deal".
The bottom line is that pricing in today's social world is not getting any easier. Not only do you have to understand your price relative to the market, and your reputation relative to the market, but you also need to understand your business mix. All of these decisions require good knowledge of the market backed by solid revenue and reputation analytics.