Hospitality

Every traveler who ends up in a bad hotel room (and is surprised by it) is a victim – a victim of an imperfectly functioning marketplace. Ponder what goes into such a flawed transaction that destroys the customer experience that is so valuable in the hospitality industry.

1. The vendor (hotel) sets a price that assures an appropriate (or higher) return for its capital and operating costs
   
2. He/she realizes that the actual room won't sell enough for the price he/she seeks
   
3. Some analysis is done about the demand for room quality that matches that price
   
4. Substitute visuals (usually stock images, or even old images of the same room and facilities) are chosen and descriptions are altered to suit the target market
   
5. The customer sees, and is promptly misled by, the listing at the OTA, booking site or travel agent while looking for a room
   
6. The customer finds the price to be suitable (or lower) for the facilities promised
   
7. The customer makes the booking, obviously without knowing what he/she was committing to
   

This is the process that usually ends in customers walking into their hotel room and immediately feeling cheated. A prevalent quick fix solution to the problem (which an economist would attribute to the problem of information asymmetry) is to publish customer reviews for each hotel, although there is no foolproof method to avoid the bias inherent in such reviews. Each customer is entitled to his/her opinion, and except in case of greatly damaging reviews which can be proven to be false, there may not be much respite for a hotel. Those who read the reviews have no clue about the identity of such reviewers, what their background is, and what they are comparing this latest experience with. Bias is inherent in such a platform. At the same time, fake positive reviews can be used to tip the scales unfairly in favor of hotels which aren't worth the money they charge. In other words, the quality assurance model based on non-curated publishing of customer feedback is broken in many ways.

​Clearly, we need better data points that can be easily measured, are not open to interpretation, cannot be manipulated and above all, are universally valid (or across some reasonable area) for comparison. One possible answer to this question lies in repeat bookings – that is, how many customers are willing to spend their money on the same brand (presumably for the same experience) multiple times across the customer lifetime. Every company loves repeat business. For a hotel, if a customer keeps coming back, even in the presence of competitors which fall in the same quality category, there is a clear differential advantage for this one brand. The data to be used here may reside with OTAs, rather than the hotels/chains themselves, so there is a tremendous opportunity for a third party service which provides such an objective rating. Especially when it comes to promoting a hotel's quality of service to business travelers, a logical extension of this would be identifying (from actual data) the preferred hotels for different types of companies and highlighting this when a business booking inquiry comes in. It doesn't call for generating new data; just utilizing what's available or can be easily made available with an intelligent data analytics strategy.

Repeat business is also a good platform for upselling, given there is a viable proof that the customer is satisfied with the base product. However, rather than the raw metric of how many times a customer booked with the same hotel or chain again, we would also need information about how many trips the customer made to the same city since the first booking, and what kind of hotel he/she actually stayed at during those other trips. Also, the influence of loyalty programs is another factor that must be taken into account when analyzing the reason for repeat business.

Of course, enrolling in a loyalty program (often just a matter of filling a short form during your first check in) does not automatically imply that the customer is actually using it. Deloitte reports that the average high frequency customer has a membership in 2.6 loyalty programs, 89% of which are active, but only just over half the time does he/she actually stay at his/her most preferred brand of hotel. This shows a marked contrast with the bigger world of retail, where a study by the Center for Retail Management at the Northwestern University estimates that "only 12-15% of customers are loyal to a single retailer, but they represent between 55 and 70% of total sales" as reported by Social Annex. One could interpret this as an example of the famous Pareto principle. But more importantly, it shows us that merely having a loyalty program doesn't necessarily win you repeat bookings unless the quality of the customer's experience is maintained at a good level. The report from Deloitte also states that a good 75% of millennial travelers would continue to stay with their preferred hospitality brand even if they lose their loyalty benefits. This clearly implies that real loyalty (that translates into repeat business) is earned through providing a good experience.

A notable exception is a hotel that competes exclusively on price. Price is seen to be a dominant attribute when it comes to governing demand, which means a customer who is willing to choose the most inexpensive room available may not be swayed much by quality differences. Therefore, repeat business for such hotels will keep happening until and unless a cheaper alternative becomes available. In such a case, repeat booking is not a reliable indicator of quality. However, the value proposition in such a business is very much vulnerable because other brands may innovate and start competing with them on price, leading to a price war that will end up becoming unsustainable if the supply keeps on growing. At the same time, these brands will find it tough to improve their value proposition on account of facilities and customer experience because this will put them in different segment of the competition where they have no prior expertise.

So to summarize, why is repeat business a better indicator than customer reviews for a hotel's quality of service? Customer reviews are just words coming from a customer (whether real or fictional), while repeat business involves putting money where your mouth is!