Aren’t we all thinking of our next holiday? A quick online search invariably brings up a variety of online hotel booking options, but how is a consumer decision ultimately made?

A research paper co-authored by CEIBS Associate Professor of Operations Management Xiaoqing (Kristine) Xie, provides insight into customer preferences amongst three types of online hotel distribution channels – a regular full information online travel agent, such as Ctrip,  Expedia, Orbitz, or Travelocity; a fully opaque channel like Priceline’s name-your-own-price model which allows customers to place bids for their desired hotels; and less opaque websites like Hotwire or Lastminute, where the prices are being posted like regular full information channels. An example of opacity is the consumer not knowing the name of the hotel until after paying for the room. The aim of the paper was to quantify trade-offs consumers make when presented with these three options, which had not been previously researched, and through the findings, allow hotels to determine whether adoption of an opaque selling strategy would favorably impact revenues and if so, provide insight into the potential increments.

The researchers designed two choice experiments with one being the traditional format and the other being the menu-based format which allows for and reflects the flexibility and customization of purchases in real practice. A multinomial logit model was used to analyze the experimental data and measure consumer trade-offs between price and other product attributes. These preferences were then used to determine optimal channel selling strategies.

There were three important findings with regards to customer preferences: Firstly, while lower prices lead to more purchases, customers become more price sensitive as opacity of the online hotel channel increases (i.e. where less information is presented about the hotel). Secondly, when controlling for price, hotels with lower star ratings (versus those with higher star ratings) are more attractive to consumers on online hotel channels that present all the information, whereas the opposite is true for opaque websites, with consumers preferring higher star hotels. Finally, guest reviews do steer purchase decisions, particularly for opaque websites. The paper identified that consumers who purchase via opaque websites are very price sensitive and will seek higher star hotels with better review scores (i.e. better value) in an effort to offset some of the uncertainty in not knowing the hotel they are purchasing from until after paying for the room.

The optimal channel strategies illustrated under what conditions firms should add opaque distribution channels and the resulting optimal pricing strategies on each channel in order to achieve the most incremental revenue. Specifically, researchers found that adopting both opaque channels, and setting the posted prices at 70% and bidding thresholds at about 60% of regular full information prices allowed hotels to attract price sensitive customers, thus increasing demand and revenue, and minimize the revenue dilution or loss that could have otherwise been generated through selling a discounted product.

The results appear in the paper titled “Customer Preferences and Opaque Intermediaries”, which has been published by Cornell Hospitality Quarterly. Professor Xie’s co-authors are Chris K. Anderson and Rohit Verma, who are both from Cornell University’s School of Hotel Administration.

Read the paper here.