Operations

Study: Higher menu prices = lower ratings

We've suspected that increasing menu prices might have a less than glowing effect on restaurant ratings, but now we have proof.

Photo: iStock

February 3, 2021

Harvard and Washington University researches have revealed what many restaurateurs have long believed — that increasing menu prices for carryout or delivery food equates to increased negative reviews and a downturn in restaurant reputation.

Focused primarily on carryout and delivery, the authors analyzed online orders from 2013 to January 2019 on Yelp's Transaction Platform, to reveal that ratings were mostly based on price rather than quality. A price increase of just 1% led to a decrease of 3% to 5% in the average restaurant rating — a negative relationship between pricing decisions and reputation.

"This effect becomes increasingly important when considering the average price change is about 3%-9%," Washington University Assistant Professor of Strategy Oren Reshef and Harvard's Michael Luca wrote in their study, which is being published in the upcoming issue of "Management Science."

The researchers used item-level data on all food orders placed via the Yelp Transactions Platform. There, they could detect changes in ratings in response to price changes. They focused on narrow time bands around price changes — just days before and after restaurants updated their menu prices.

They also analyzed instances where certain platforms were quicker than others to update the price. Thus, they focus on short time spans in which the same item is sold at different prices — one at the old price and one at the new price.

"Our results amplify the negative effect of price on sales: Higher prices reduce demand today and demand in the long-run due to adverse effect on reputation," Reshef said in the release. "This is especially prominent in online markets, where consumers rarely know the prevailing prices and the time the review was given. This creates an additional incentive to maintain low prices, and perhaps even set lower initial prices in order to establish good reputation."

Their results hold more generally in the Yelp Star Rating, suggesting that ratings are a function of both quality and price — the cheapest restaurants achieve an average rating of 3.4 while the most expensive on average rate 3.6, despite the fact the latter group is four times as pricey. The researchers interpret this to mean that ratings are price-adjusted — or at least adjusted for the expected quality at whatever price.

"The results inform us about the value of rating mechanism and how to interpret them," Reshef said. "Online rating may not be capturing 'objective' quality, but rather the net value or surplus that the service or product generates. We believe that, in order to offer better platforms, managers should take this into account when designing reputation mechanism and recommendation systems on their platforms."

The authors discovered that the effect was greater for first-time restaurant consumers — suggesting that diners initially respond to prices, which set their expectations for the quality of food they've never tasted or ordered before.

The authors further attempt to disentangle other mechanisms that might impact consumers' rating behavior. They discovered the effect is greater for first-time restaurant consumers — suggesting that diners initially respond to prices, which set their expectations for the quality of food they've never tasted or ordered before. This also shows that the results are not driven by repeat customers using lower ratings as a punishment for raised prices.