Determining guests’ willingness to pay for hotel room attributes with a discrete choice model

Abstract

Hotel managers need to understand the marginal utility customers associate with a specific attribute of a hotel in order to effectively set up rate fences and to price their rooms accordingly. This study adopted a stated choice experiment and discrete choice modeling method to obtain hotel guests’ willingness to pay (WTP) for a specific set of room attributes within a single hotel property. The attributes include room views, hotel floor, club access, free mini-bar items, smartphone service, and cancellation policy. The study discovered that leisure travelers versus business travelers, and first-time visitors versus repeat visitors, perceive different WTP values for various attributes. These findings provide valuable information for hotel managers to segment their market and conduct revenue management practices in order to maximize revenue and profit. The results also demonstrate the value of discrete choice modeling in obtaining WTP for hotel room attributes.

Introduction

On a daily basis, hotel managers and revenue managers face these questions: how much are our guests willing to pay for a higher floor room? How much should we charge for a room with an ocean view? The answers to these questions can help the managers set up appropriate rate fences and hopefully maximize the hotel’s revenue and profit. Many times, hotel managers rely on personal experience, trial-and-error, benchmarking with competitors, or rule-of-thumb to determine the degree of variations in price (Coltman, 1992). As a result, their decisions may not be theoretically sound nor generalizable.

Picking a hotel room is usually an intrinsically complex and idiosyncratic task (Pan et al., 2013): one guest may prefer a soft bed while the other may like a hard one. However, certain attributes are almost universally desirable by all guests – larger room space, free services, a quieter room, etc. Knowing customers’ perceived utility of these attributes, hoteliers can up-sell rooms, cross-sell other products, offer product bundling, or add free service to attract more guests.

A technique to obtain marginal values of hotel and room attributes adopts hedonic regression models on room rates (Monty and Skidmore, 2003, Chen and Rothschild, 2010). Although abundant studies have been conducted on pricing issues in the hospitality literature, only relatively limited studies focused on the relationship between hotel attributes and hotel room pricing from a customer’s perspective. Other past studies in the hospitality field mostly focus on the selection of hotels among a number of alternatives (Chan, 1998, Chu and Choi, 2000, Law and Hsu, 2005, Lewis, 1985, Zins, 1998). To the best of our knowledge, no published studies have addressed the choice of a hotel room within a specific property.

In this study, we used stated choice experiment and discrete choice modeling to investigate the marginal utilities of several hotel room attributes applicable to a specific hotel in Hong Kong. By manipulating attributes associated with hotel rooms’ floor level, room view, club access, free mini-bar items, smartphone service, and cancellation policy, and presenting different attribute combinations to the guests, we modeled the utility contribution of each attribute. In addition, we combined the choice of hotel rooms with trip characteristics to analyze and reveal different utility values between leisure versus business travelers, and first-time versus repeat visitors. The study is the first of its kind in investigating hotel room attributes with a discrete choice modeling technique. Individual hotel managers can also use the method to determine appropriate levels of prices and rate fences for their services and products.