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Extension > eMarketing: Practical and Useful Research > Online reviews - the new word-of-mouth

Online reviews - the new word-of-mouth

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First of a series of fact sheets on "Online reviews and your business," presented in partnership with the EDA Center at the University of Minnesota Crookston.

Author: Adeel Ahmed

The Internet has changed the way consumers expect to get information. Shoppers don't just get tips from their family and friends anymore. Now, customers can easily go online to get information about businesses, rate products and exchange opinions about consumer experiences across a vast, geographically dispersed group of people. This makes the Internet the new "word of mouth" for consumers, and small business owners are advised to pay attention.

Research on consumer behavior shows that online reviews are a key resource for shoppers trying to decide where to go and what to buy. That's why it's important for small business owners to understand the potential effects of customer opinions on their operation--and learn how to manage online reviews.

Summary

Online reviews have taken center stage among information people consider as they make buying decisions. A far greater percentage of consumers trust online reviews than don't. Small businesses should probably be thankful when they get reviews because, even if the reviews are not entirely positive, they raise awareness of a business. In making decisions, consumers generally look most at the number of reviews and the overall rating. They read individual reviews to get other consumers' assessments of the product.
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This fact sheet is designed to summarize what current research says about the impact of online reviews on business.

Why consumers use online reviews

Consumers seek information from online reviews for multiple reasons. They want information from other consumers about a product or service. They want to find ways to keep costs down, reduce the risk of wasting money on a poor product, or avoid losing money as a victim of a fraud. Consumers also care about what's popular with other consumers as a gauge for their own preferences.

Additionally, consumers have myriad reasons to write online reviews. Some reviewers are altruistic in that they aim to share a personal experience about a product or service in order to recommend, warn, or provide detailed first-hand information. Others aim to vent negative feelings and attract the attention of companies in order to find redress for their grievances. In fact, almost 60 percent of online complainants expect a response from a company when they post an online review on a public site such as Twitter or TripAdvisor (Van Noort & Willemsen, 2012). Unfortunately, some online reviewers are actually working on behalf of a competitor. They are posting comments to damage the reputation of other businesses and exaggerate the positive image of their business.


Growing popularity, growing trust

A 2012 report from market research firm Nielsen highlighted the current effect of online reviews on consumers. Nielsen reported that, considering many forms of advertising media, peoples' trust for "consumer opinions posted online" is second only to personal recommendations (See Figure Two below). The Nielsen report indicated that now 70 percent of people trust "consumer opinions posted online". This is an increase of 15 percent in four years. The other 30 percent of people "don't trust much at all" consumer opinions posted online. The Nielsen findings match up with past research (Cheung, Lee and Rabjohn, 2008) demonstrating that electronic word-of-mouth is more effective than traditional marketing tools among the many forms of advertising and marketing media.

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Figure 2. Nielsen Global Trust in Advertising Survey, Q3 2011. Retrieved from httpL//www.fi.neilsen.com/site/documents/NielsenTrustinAdvertisingGlobalReportApril2012.pdf


Managing customer complaints

Before the era of online customer reviews, researchers examined customer complaints and their effect on business reputation. The statistics most often cited with respect to consumer complaints include these (Albrecht and Zemke, 1990):


  • Less than 5 percent of dissatisfied customers actually voice their complaints;

  • When complaints are resolved satisfactorily, they lead to a 54-70 percent retention rate of customers. Complaints resolved quickly can lead to a customer retention rate of up to 95 percent;

  • Complainers typically tell more than 20 acquaintances about their problem.

In the online era, the gist of these statistics hold true, although one might expect that a higher percentage of customers will publicly voice complaints and more people will hear about them. Research suggests that both customer retention and loyalty are enhanced when complaints are handled well (Johnston and Mehra, 2002). The research points to the importance of both listening to customer complaints and encouraging customers to voice their complaints to management. That means it is imperative that businesses develop internal channels through which customers can take complaints directly to someone who has the authority to address them, rather than having the customer take their complaint public.

The above advice can be applied to managing online complaints. But when it comes to online complaints it is also important for businesses to respond appropriately and quickly to reviews that get posted. A process to respond to online reviews should be considered within the businesses' overall customer service strategy. In other words, online responses should simply be considered an extension of how businesses serve all customers. Later in this series, we will describe the "art" of creating responses to online reviews.

Responding to reviews

Research in the travel and lodging industry can be used as an example to track consumers' interactions with online reviews. This research found that online reviews, both positive and negative, increase consumer awareness of hotels. So don't panic if your business gets a few bad online reviews. Keep in mind, though, that if your establishment is not a recognized brand name, a review could be the only information your customer receives about your business. The negative impact is stronger for lesser-known hotels (Vermeulen and Seegers, 2009). Although conducted for the lodging industry, this research may be cautiously generalized for other "experienced" based industries and product types.

Idea: Prominently display an email address, phone number, and comment cards in your business and on your website. Tell customers who they can call or write about issues and complaints. Monitor phone messages and email accounts vigilantly so complaints can be responded to quickly.

Generally, people reading online reviews are savvy enough to not base their judgment on just a few good or bad reviews. They are looking for stories and details about the product. They are checking other review websites, and they are asking their social networks what they know about companies, products and services.

A Q&A about online reviews

Q: Do positive reviews increase revenue?

Studies show that buyers seriously consider online reviews when making purchasing decisions. They are even willing to pay more for products with good reputations. But positive reviews do not automatically increase a firm's revenues (Johnston and Mehra, 2002).

More typically, there is a domino effect. A popular item attracts more reviews, which fuels further sales. Often, people will buy a product based more on its popularity than what the reviewers are saying about the product. The reason for this behavior is that online reviews have both a persuasive effect and an awareness effect. Persuasive effects shape consumers attitudes and evaluation of products and ultimately influence buying decisions.

Reviews also have an awareness effect -- they increase knowledge of the existence of the product and thereby put it in the choice set of consumers. One study on the impact of Yelp.com restaurant reviews found that a one-star increase in Yelp rating led to a 5-9 percent increase in revenue (Luca, 2011). This effect is driven mostly by independent restaurants. It appears that ratings do not influence the performance of restaurants with chain affiliation. Other findings show that chain restaurants have declined in market share as Yelp penetration has increased.

Q: Do negative reviews hurt business more than positive reviews help?

There is ongoing debate about this question. We know that consumers who are more familiar with a particular business are less affected by negative reviews. We also know that the effects of negative reviews appear to be more pronounced for "experience goods" (e.g., resorts, movies) than for tangible goods (Park & Lee, 2009). Consumers tend to act on reviews based on how comprehensive and relevant they are more than on the positive or negative tones embedded in the reviews. Further, consumers consider both popularity and user ratings when they select a product. For example, on the software download website CNET.com, 38 percent of users sorted product options based on "download counts"; 22 percent on "user ratings," and 19 percent on "expert ratings" (Duan, Gu and Whinston, 2009).

Q: What is the influence on product performance by reviews from professional critics?

Regarding reviews by professional critics, the old adage still holds true: "Any publicity is good publicity." Usually, popular new products or a product from a well-known company attract professional critics. Ratings by professional critics are predictors of sales but do not influence sales. Negative reviews by experts have been found to be the least persuasive (Vermeulen and Seegers, 2009). This may be because the average consumer expects expert reviewers to be critical of issues that are of little interest to them. However, continuous negative publicity and reviews, especially when badly managed, can be highly damaging.

Conclusion
This brief summary of research on the impact of online reviews is designed primarily to help business owners better understand how online reviews may be affecting their business and motivate them to devise a strategy to take action and better manage their online presence. Future fact sheets in this series will describe best practices to manage online reviews, such as the art of responding to online reviews and increasing the number of positive reviews. Other fact sheets also will examine the particulars of managing online reviews on popular platforms like Google Plus, Yelp, Trip Advisor, Facebook, and Twitter. To access these future articles, go to http://blog.lib.umn.edu/vitality/emarketing-guides/.

References

Albrecht, K., & Zemke, R. (1990). Service America! Doing business in the new economy. New York: Warner Books.

Cheung, C. M., Lee, M. K., & Rabjohn, N. (2008). The impact of electronic word-of-mouth: The adoption of online opinions in online customer communities. Internet Research, 18(3), 229-247.

Duan, W., Gu, B., & Whinston, A. (2009). Informational cascades and software adoption on the Internet: An empirical investigation. MIS Quarterly, 33(1), 23-48.

Johnston, R., & Mehra, S. (2002). Best-practice complaint management. The Academy of Management Executive, 16(4), 145-154.

Luca, M. (2011). Reviews, reputation, and revenue: The case of Yelp. com (No. 12-016). Harvard Business School.

Park, C., & Lee, T. M. (2009). Information direction, website reputation and eWOM effect: A moderating role of product type. Journal of Business Research, 62(1), 61-67.

Van Noort, G., & Willemsen, L. M. (2012). Online damage control: The effects of proactive versus reactive webcare interventions in consumer-generated and brand-generated platforms. Journal of Interactive Marketing, 26(3), 131-140.

Vermeulen, I. E., & Seegers, D. (2009). Tried and tested: The impact of online hotel reviews on consumer consideration. Tourism Management, 30(1), 123-127

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2 Comments

Yousuf said:

Great research and statistics based synopsis of online reviews and their impact on businesses.
I found it very useful.
look forward to future articles.

Great article, and the references are also very useful.

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