Advertising strategy in the presence of online reviews
Advertising strategy in the presence of online reviews
13 DECEMBER 2018 9:26 AM

Research shows that a positive online review of a hotel correlates with a reduction in advertising spending for that property, which suggests that reviews have become a fundamental part of marketing strategy.

Over the last 15 years, one of the major developments in the consumer’s shopping environment has been the growth and proliferation of online review platforms such as TripAdvisor and Yelp, providing independent quality information on experience goods. According to the Pew Research Center, in 2016, 82% of U.S. adults read online reviews occasionally or regularly before purchasing a product for the first time; 40% did so almost always.

The ready availability of reviews from past users can affect the demand for the businesses reviewed. Indeed, past research has shown that higher ratings have a positive effect on sales and revenue in many settings, including in the hotel industry. This is because reviews carry important quality information about the businesses reviewed that consumers take into account at the time of making a buying decision.

What in the past could have only been achieved through promotions and advertising today can be achieved through (positive) online reviews. This raises many questions, among them:

  • How does this affect the advertising strategy of firms?
  • What is the relationship, if any, between the information on quality revealed in online reviews and firms’ advertising spending decisions?
  • And how has this changed over time?

In our study, we examined these questions in the context of the hotel industry.

To do so, we combined a dataset of TripAdvisor reviews with other datasets describing these hotels’ advertising expenditures, and a dataset of hotels attributes from STR. (STR is the parent company of Hotel News Now.)

To measure the causal impact of ratings on advertising spending, we employed a regression discontinuity design that exploits the fact that TripAdvisor rounds ratings to the closest half- or full-star rating. Thus, for example, a hotel with an average rating of 3.74 is shown as a 3.5-star hotel, while a hotel with an average rating of 3.75 stars is shown as a 4-star hotel. By comparing advertising expenditures of hotels close to such “discontinuity,” some of them below and some of them above, we can effectively measure the impact of TripAdvisor star-ratings on advertising.

Our main results suggest that the quality information embedded in reviews has a causal impact on advertising spending and that this effect is negative. Hotels with higher ratings spend less on advertising than hotels with lower ratings. Specifically, we found that a half-star increase in TripAdvisor ratings reduces hotels’ ad spending by about 7%. This suggests that hotels treat TripAdvisor ratings and advertising spending as substitutes, not complements.

Further, we found the relationship between ratings and advertising is stronger for independent hotels than for chain hotels and stronger in markets in which ratings across hotels are more similar than markets in which ratings across hotels are very different. The former suggests that a strong brand name continues to provide some immunity to reviews and the latter that the advertising response is stronger when ratings are more likely to be important.

Finally, we show that the relationship between TripAdvisor ratings and advertising has strengthened over time just as TripAdvisor has become more popular among users and reviews have become an important part of the consumer decision-making process.

Our study demonstrated that online reviews and ratings are becoming a fundamental part of the marketing strategy in the context of the hotel industry, and that hotels are taking this information into consideration when it comes to making important decisions such as advertising.

Brett Hollenbeck is an assistant professor of marketing at UCLA Anderson School of Management. Prior to that, he earned a Ph.D. in economics from the University of Texas at Austin. He teaches customer analytics at UCLA and conducts research on firm and consumer behavior in the hotel industry and on online platforms.

Sridhar Moorthy holds the Manny Rotman Chair in marketing at Rotman School of Management, University of Toronto, and is also a senior consultant at Charles River Associates. He received his Ph.D. from Stanford University, and has taught previously at Rochester, Yale, INSEAD, UCLA, and Wharton. Moorthy is an expert in the application of economics to marketing problems. His current research focuses on strategic issues in branding, advertising and retailing, particularly the impact of the Internet on marketing practices. He is an associate editor (and past co-editor) of Quantitative Marketing and Economics, associate editor of Management Science, member of the editorial board of Journal of Marketing Research, and coauthor of the textbook Marketing Models (Prentice Hall). Moorthy has served as a vice president (education) of the INFORMS Society for Marketing Science and provided expert testimony in a number of legal cases.

Davide Proserpio is an assistant orofessor of marketing at University of Southern California Marshall School of Business. In his research, Proserpio seeks to measure and quantify the impact of digital data and platforms on industries and markets, and most of his work focuses on the empirical analysis of a variety of companies including Airbnb, TripAdvisor and Expedia.

This article is based on academic research, submitted in partnership with STR’s SHARE Center, which provides support and data resources to professors and students in hotel and hospitality fields of study at colleges and universities worldwide. The assertions expressed in this article do not necessarily reflect the opinions of Hotel News Now or its parent company, STR, and its affiliated companies. Please feel free to comment or contact an editor with any questions or concerns.

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