A new study from the Harvard Business School proposes that price increases may have a negative effect on consumer ratings. This effect is seen in both high end and lower end of the market. This suggests that price can affect consumer perception of reputation on consumer rating platforms.
About the Study
A caveat to this study is that it’s a working paper. That means it is currently in draft form and not finalized. Nevertheless, the findings add to our understanding of pricing strategy and creating a positive reputation with consumers.
This research was conducted on restaurants on the Yelp Transactions Platform in the cities of New York City, Los Angeles, and Houston. They also used data from 2013 through January 2019.
Price and Ratings Effect is Across the Board
The researchers discovered that the average star ratings for high end restaurants were similar to the average ratings of low end restaurants. High end restaurants received an average score of 3.6 while restaurants at the cheapest levels received an average score of 3.4.
One would normally thing that high end restaurants would receive higher ratings in general than cheaper restaurants because of the perception of higher quality. But that doesn’t seem to be the case.
The researchers suggest:
“We interpret this as suggestive evidence that ratings area function of both quality and price.”
That means that a cheaper restaurant that has a four star rating isn’t necessarily better than a high end restaurant with a three star rating.
The rating is a reflection of the perceived quality for the price paid.
The Takeaway:
What this may mean to businesses is that there may be a relationship between the perception of value a customer receives for the price paid and that the value will be reflected in higher ratings if the ratio of value and price are favorable.
Price Increases May Affect Ratings
According to the research, it was discovered that price increases led to decreases in ratings.
This is how they described the effect:
“…we find that increases in prices lead to lower ratings. A 1% increase in price leads to a 0.05-0.14 decrease in rating on a scale of 1 to 3 (the scale used for delivery
purchases), which is approximately 2.5%-5% decrease for the average feedback.This effect becomes increasingly important when considering that the average price change is about 3%-9%.”
The researchers stressed that the rating changes were not small changes but were significant to the point that they could have an effect on a businesses reputation.
According to the research:
“These results are consistent with the cross-sectional evidence, and suggest that higher prices are in fact affecting a restaurant’s reputation, and that these effects are both statistically and economically significant.”
Why Ratings May Be Affected by Price
The research reviewed the data by splitting the consumer ratings between first-time buyers and longtime patrons.
What was discovered is that consumers who have not previously purchased from the restaurant tended to be affected by higher prices than consumers who had purchased there before.
This implied that new consumers who don’t already have an opinion will more likely factor the higher price as part of their rating than a return customer who has eaten there before.
An additional insight is that, because return customers don’t lower their ratings because of price increases, it could mean that lower ratings are not given as “punishment” for raising the prices, since the ratings aren’t affected to the same degree as the ratings of new customers.
The researchers wrote:
“We argue that ratings are negatively affected by price-level because consumers adjust their feedback based on prices.
We find that the effect is larger and generally more statistically significant for users who are ordering from a restaurant for the first time relative to people who have ordered before.
This suggests that consumers indeed respond to price levels rather than use low ratings as punishment for raising prices.
This finding also supports the notion that prices are, to some extent, used as a reference point or a signal to set users expectations for quality, as users who have not previously ordered from that business are likely to have the least prior knowledge of quality.”
The Trap of High Prices and Low Ratings
For businesses, the researchers suggest that price increases can carry a negative effect. The increased price can impact sales volume and affect the business reputation through lower ratings.
For consumers, the researchers argue that this may cause a lower user experience since the company’s ratings may not accurately reflect their reputation with consumers, it may simply reflect their reputation with new consumers.
Or, the high ratings may reflect their historic popularity with customers that was gained at a lower price point.
The researchers also suggest that this information might be useful for sites that display user generated ratings, that it may be useful to device a way to show different ratings based on whether they were given by a new or repeat customer.
Presumably the rating of a repeat customer might more accurately reflect the true reputation of a company.
Here’s what the research paper says:
“Our results suggest a trade-off to increasing prices—in addition to reducing immediate sales, price increases harm firm reputation.
…If consumers are unable to unpack the impact of historic prices on rating, then this puts a wedge between true quality and firm’s reputation.”
Trade-off of Introductory Prices and Long Term Ratings
The researchers warned that unscrupulous sellers might try to game their ratings by initially offering low prices.
Because consumers take price into consideration of the value they receive, the lower price will positively affect the ratings and result in better ratings and more sales which in turn feeds into additional higher ratings.
The researchers feel that this low price/high ratings feedback loop could be negatively offset in the long run by lower ratings from offering the product at higher prices later on.
This is how they put it:
“…strategic sellers might be tempted to take advantage of misguided consumers by setting low introductory prices. Initial low prices can mechanically boost ratings and allow some firms to eventually take advantage of their good reputation by increasing sales and prices.
More generally, our results point to a trade-off —price increases don’t just reduce present demand, but can potentially harm future demand by decreasing firm reputation.
We expect this negative effect to attenuate as the number of reviews grows larger.”
Explanation are Elusive
The researchers stated that they discovered consistent cause and effect in ratings and price increases. But they admitted that they did not have the data to accurately to explain the role of expectations on ratings.
The research paper concluded:
Lastly, in this setting the mechanism driving the adverse impact of prices on ratings is somewhat unclear.
…Unfortunately, we are unable to fully disentangle these to mechanisms in our setting. We believe that the effect is driven by a mixture of these two forces: On the one hand, we do find that repeating users are affected by price, which implies that deviations from expectations are not the sole mechanism driving the results.
On the other hand, new consumers seem to be more affected, so expectations seem to play some role.”
The research paper, which is a working paper, brings up some interesting information that may be useful to businesses that are considering a pricing strategy and are concerned about user ratings on platforms. This is of particular concern local type businesses but also has implications for businesses whose products are rated by users on sites like Amazon.
Citation
Download the Report: The Impact of Price on Firm Reputation (PDF)
