LEVERAGING HOTEL PERFORMANCE BY CONSUMER REVIEWS

Abstract

This study quantifies the business value of consumer reviews and discusses its wider implications to hotel performance, specifically to delineate the unique effects of the User-Generated Content (UGC) components on room sales. In contrast to earlier studies that take consumer reviews as an exogenous factor, this study finds empirical evidence that consumer reviews both influence and are influenced by room sales through a dynamic framework. In consideration of the endogeneity in consumer reviews, this study uses a dynamic generalized method of moments (GMM) model to address the reviews/sales relation and illustrates why other commonly used estimation that ignore the dynamic relationship between current reviews and room sales may be biased. A longitudinal panel-data sample of 56,284 hotel reviews on a daily basis, along with quarterly hotel performance over a ten-quarter observation window, is used for the empirical modeling. This study finds that room sales are significantly influenced by the review volume, suggesting the importance of awareness effect. Specifically, a 1% increase in the average quarterly number of reviews received would result in a 0.10 units increase in the average revenue per available room. Compared to paid or owned traditional marketing channels, the earned consumer reviews' business value can be justified by the marginal costs of producing extra copies of reviews by consumers and providing social media service by hotel managers. Nevertheless, this study shows that the rating of consumer reviews and its variation does not have effect on hotel room sales after accounting for the endogeneity, indicating that online reviews have little persuasion effect on consumer purchase decisions. Thus, this study considers the awareness effect of Word-of-Mouth (WOM) as the primary effect in the dynamic mechanism between consumer reviews and room sales. From the theoretical perspective, this study represents a comprehensive understanding of consumer reviews by integrating both awareness and persuasion effects. By identifying strategically important review components and their effects, the study adds to the prior literature by providing a positive reconciliation of the mixed findings about the effect of consumer reviews. From the managerial perspective, the awareness effect of consumer reviews suggests that businesses should embrace and facilitate WOM activities. However, consumers are not influenced by the persuasion effect of online WOM, thus presenting a challenge to businesses that try to influence sales through "planting" positive product reviews. Hotel managers shall therefore focus more on the mechanisms that facilitate dispersion of underlying word-of- mouth exchange rather than try to influence online ratings. From the methodology perspective, this study contributes to the hospitality literature by providing econometric justifications for the use of dynamic panel data estimation, discussing the conditions under which it improves inference beyond the traditional pooled OLS and traditional fixed- effects estimates. This study shows that dynamic effect is likely to be particularly important in hospitality research since much of our research seeks to determine the effect of different stimulating variables (e.g., consumer reviews, pricing strategy, customer relationship management, etc.) on hotel performance, an aspect of research that is particularly susceptible to biases that may arise by ignoring the effect of historical performance on current stimulating variables. The empirical attempt initiated in this study welcomes replications of future research.