ESSA

ESSA

The economics of the tourist rip-off


Olivia Robins

By

March 30th, 2014


Olivia Robins uses game theory to explain how one small Belgian café’s costs have been changed by globalisation.


Last year, I travelled to Bruges, Belgium with my parents. After exploring the city for an entire morning, we were ravenous. Strolling into one of Bruges’ most prominent squares, we searched for a restaurant and finally found one that looked pleasant.

We sat down and studied the menu. The scenery outside was remarkable. We quickly ordered. But as the food arrived we realised the ramifications. My smoked salmon was slimy, my mother’s carbonara looked like creamy sludge and my father’s lasagne resembled a cheesy soup. Nauseous, we forced down our food. When we got the bill, the price was astounding!

It is of course, the classic tourist trap: a beautiful backdrop behind extortionately-priced food. How is it, we asked, that such a restaurant could survive when so many others surpass it?

Consider this from the perspective of the supplier: they will lose close to 100% of customers regardless of their experience (tourists have to go home, after all). The marginal cost of giving my family a good meal eclipses the marginal benefit. The costs associated with producing quality food include fresh and expensive ingredients, excellent kitchen infrastructure, and undoubtedly, talented chefs. Rent in tourist hotspots is extremely high. With little opportunity to establish a loyal customer base, is it worth creating a good quality service?

Thirty years ago, this was the reality: tourists had little knowledge buying a meal at the world’s most popular sites. Written reviews of the best restaurants were only in a few guide books. Many lacklustre cafes easily flew under the radar,;[OR2]  that is how they survived.

To understand why this is, we can use a simple sequential game.

Game One

Looking at the game above, assuming that customers want to share their stories the outcome will likely be number 3., and there are little or no repercussions for the restaurant.

Here’s why.

A recent study shows that 87% consumers with positive customer service experiences will share their stories, but 95% with bad experiences will tell others[i] And 54% will tell more than five people[ii]. But as detrimental as these anecdotes may be, the people who are told could live on the other side of the world! They may never come near the restaurant in their entire lives (you will probably never eat in my Bruges café). The restaurant finds little reason to spend costly amounts for better services. The high tourist turnover will ensure that customers always come in.

Or will they? Nowadays, there’s a bit of a problem: it’s called the internet. Or more specifically, TripAdvisor. I looked up reviews for that particular restaurant we happened upon in Bruges. It ranked in the bottom 20% of 506 Bruges restaurants. My favourite review was titled: ‘One of the worst meals I’ve ever had! AVOID!” ()[iii]. If only we had known this before – or looked at TripAdvisor! 45% of customers will share their bad experiences online and 88% of consumers are influenced by online reviews[iv] . News travels fast.

So we need to modify our game.

Game Two

In this new game, assuming that giving online feedback is satisfying to customers, the most strategic move for the restaurant is to provide a good quality experience (outcome number 1). With the aid of perfect information, restaurants with poor write-ups will be avoided. Many are beginning to realise this, but some do not understand the severity of TripAdvisor.

So, in the 21st century, can my little Bruges café survive? I think not.

 

References

[i] “The impact of customer service on customer lifetime value”, last modified April 2013, http://www.zendesk.com/resources/customer-service-and-lifetime-customer-value

[ii] “The impact of customer service on customer lifetime value”

[iii] “Bruges Restaurants”, http://www.tripadvisor.com.au/RestaurantSearch?geo=188671&pid=&q=Bruges%2C+Belgium&cat=&src=

[iv] “The impact of customer service on customer lifetime value”

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • Joey Moloney

    Nice work Olivia, great read. Having just traveled around Europe for three months I can definitely speak of the growing importance of Trip Advisor. My girlfriend was pretty much a learned scholar of it and not a single step was taken without first consulting it. In fact, many guides, shop and restaurant owners, upon hearing that we enjoyed our experience, implored us to share it on TA.

  • razi pilli

    Improved information*

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