Are customers’ reviews creating value in the hospitality industry? Exploring the moderating effects of market positioning

TLDR

User‑generated reviews on social media heavily influence competition and customer choices in hospitality, yet little research has examined whether hotels can capture the economic value from these features. The study aims to determine whether hotels can appropriate the economic value of social media reviews by analyzing panel data from 2004–2012 on 240 small and medium‑sized hotels and 50,115 TripAdvisor reviews. The authors employ fixed‑effects panel regression on 2004–2012 data from 240 SMEs and 50,115 TripAdvisor reviews to assess profitability impacts. TripAdvisor ratings boost revenue growth but lower gross profit margins, shifting competition toward volume and occupancy and limiting net profitability, though higher‑rated hotels in less competitive, popular locations gain more gross and net profitability.

Abstract

Although user-generated reviews on social media are greatly influencing competition and customer purchase patterns in the hospitality industry, empirical research has so far marginally investigated whether hotels are able to appropriate the economic value that the use of social media features can bring. In order to fill this gap, this article uses panel data from 2004 to 2012 on a sample of 240 small and medium-sized hotels for which we have collected data on profitability and 50,115 user-generated reviews on TripAdvisor, one of the most popular and largest online community for travellers. The results from fixed effects regression models show that online ratings from user-generated reviews on TripAdvisor have a positive effect on hotel revenue growth that is outweighed by a negative effect on gross profit margins. Thus, the increasing importance of user-generated reviews in online communities for travellers is shifting hotel competition from unit profit margin to volumes and to higher room occupancy rates, with online retailers capturing most of the value created in online transactions through social media features and with a limited effect brought on net profitability. However, hotels with higher star-rating, with a lower degree of local competition and localized outside popular destinations were found to obtain more benefits from online visibility on their gross and net profitability. Based on these results, managerial implications discuss how hotels should use social media features according to a strategic view based on pursuing the horizontal and vertical differentiation of their services in an attempt to create more economic value from their online visibility and to protect profit margins from the intermediation in their customer relationships.