Over the last 20 years, the rise of internet review sites for products and services has given consumers enormous sway over many businesses. More than eight out of 10 U.S. adults said they read online reviews occasionally or regularly before purchasing a product for the first time, according to a 2016 Pew Research Center report.
Academic research has also well established that consumers pay attention to, and act upon, online reviews. A study establishes that firms pay attention, too, and actually change their advertising strategies in response to ratings.
Research by UCLA Anderson’s Brett Hollenbeck, University of Toronto’s Sridhar Moorthy and University of Southern California’s Davide Proserpio suggests that hotels with favorable overall consumer reviews have been able to treat those ratings as a substitute for advertising: They have notably reduced ad spending as their online quality ratings have risen.
By contrast, hotels with relatively poor online reviews have had to use ad spending to substitute for their lack of strong consumer recommendations, according to the paper, forthcoming in Marketing Science.
The authors studied 14 years of consumer reviews on TripAdvisor, which describes itself as the world’s largest travel platform. The company’s website has a database of 760 million reviews and opinions covering a total of 8.3 million hotels, restaurants, airlines, attractions and travel experiences worldwide.
The study focused on TripAdvisor reviews of 5,563 U.S. hotels (4,020 independent, 1,543 operated by chains) posted between January 2002 and December 2015. The authors chose only hotels for which detailed monthly advertising strategies were available from media-tracking firms, including Kantar Media and SpyFu. The ad data covered spending on media that included print, TV, radio, outdoor, internet display and internet search.
Budgeting ad spending against the overall ratings (up to five stars) that TripAdvisor assigned based on consumers’ reviews suggests “an extra half-star in TripAdvisor’s displayed ratings causes hotels to spend about 7 percent less on advertising,” the study says. On the flip side, a half-point reduction in a hotel’s TripAdvisor rating causes a 7 percent increase in ad spending.
The effect is more pronounced for independent hotels than chains: A half-star increase in TripAdvisor ratings reduces independent hotels’ ad spending by about 9 percent.
What’s more, “Comparing the relationship between online ratings and ad spending in the early years of TripAdvisor (2002–2005) to what it became in later years (2012–2015), we find that the relationship has strengthened,” the study says. Why? As online review platforms have surged in popularity with travelers, “The proportion of informed consumers has almost certainly grown,” the authors write. “When this proportion was small, both high- and low-quality hotels probably found it optimal to ignore this [informed] consumer and target the uninformed consumer instead. Now, however, the informed segment is too large to ignore.”
Put another way, “It is not the presence of reviews per se that triggers a [hotel’s] reaction, but rather the recognition that consumers are responding to them,” the authors write.
Two other findings in the research: First, “Independent hotels respond to their ratings, but chains generally do not — except small non-luxury chains,” the study says. “This suggests to us that having a strong well-known brand continues to provide some immunity to reviews.”
Second, “When we examine how the ratings-advertising relationship operates in different markets, we find that less-differentiated markets — i.e., markets with hotels’ ratings tightly bunched together — show a stronger relationship,” the study says. This suggests that hotels “are more motivated to respond when ratings are more likely to be pivotal.”