How Online Reviews Influence Sales

How Online Reviews Influence Sales \ Evidence of the Power of Online Reviews to Shape Customer Behavior Data-Driven Insights on How Retailers Can Maximize the Value of Their Engagement With Consumers Through Online Reviews

\ Executive Summary Insights into How Online Reviews Affect Purchase Decisions QUESTIONS WE ADDRESS With nearly 95% of shoppers reading online In this research, we set out to answer • What is the upside impact of online reviews reviews before making a purchase, reviews two main questions: on sales? What’s the downside impact? have transformed the way consumers make purchase decisions.* But reviews are more • Do online reviews affect sales? • Are higher ratings always better predictors than just a way for shoppers to gather of increases in sales? information. Reviews are a powerful form of • If so, in what ways, by how much, consumer engagement. and under what circumstances? • Does familiarity with the product category Northwestern University’s Spiegel Research We have found that online reviews have alter the influence of reviews? Center has been at the forefront of answering a significant and quantifiable impact on questions about how consumers engage with purchase decisions – but the degree of that • Is there an optimal number of reviews? brands and how that engagement shapes impact depends on a number of factors, customer value since 2011. such as star ratings, the nature of the review If so, how many? content, the number of reviews, the price As part of Spiegel’s ongoing, multi-faceted of the item, and the source of the review. • Should brands prompt purchasers exploration of consumer engagement, These findings have powerful implications to submit reviews? we have spearheaded research into the for retailers and their suppliers as they financial impact of consumer engagement think about how to collect, manage, and via online reviews. promote online reviews of their products • Do reviews from verified buyers have and services. greater impact on sales than those from anonymous sources? In this report, we examine Spiegel’s groundbreaking research and provide recommendations for how retailers can use online reviews to drive increased *PowerReviews Internal Data customer value. 2 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu

\ Executive Summary About the Research The Spiegel research team partnered with PowerReviews to analyze ABOUT POWER REVIEWS millions of customer experiences from two online retailers featuring primarily lower-priced product categories and a third online retailer PowerReviews works with global brands and retailers of high-priced gifts. We looked at how customers’ exposure to and to collect and display customer ratings. PowerReviews interaction with online reviews affected their purchase behavior for partners with more than 1,000 global brands and up to a year. retailers to increase conversion and improve products and the customer experience with ratings and reviews • Lower-priced consumer products: Spiegel analyzed ratings and and Q&A software. reviews data in the consumer packaged goods industry from two online retailers; the research covered 22 product categories with a total of 111,460 SKUs. • High-end gift retailer: Spiegel analyzed approximately 15.5 million page views for 1,800 unique products from 7.8 million users over the course of one year, tracking the number of page views and sales as each product accumulated reviews. • Prompted vs. unprompted reviews: Spiegel analyzed 57,000 reviews from anonymous consumers and 65,000 reviews from verified buyers for about 13,500 unique products in a number of categories, including health and beauty, electronics, and home and garden. 3 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu

\ Executive Summary What we found: This research found that not only are reviews extremely valuable in influencing purchase decisions, but a number of circumstances factor into when and how reviews shape customer value. How star ratings, number of reviews, and price influence purchase behavior ! $ Online Reviews ... Especially for Perfect Ratings More is Not Matter — A Lot ... More Expensive ... and “Risker” Items Raise Questions Always Better How the source of the reviewer matters Verified Buyers Anonymous Reviews Verified Buyers Give Are Shaped Are Perceived Higher Ratings by Selection Bias as More Credible 4 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu

\ Impact on Conversion Behavior How Ratings, Number of Reviews, and Price Influence Purchase and Conversion Behavior WHAT WE FOUND: 1. Displaying reviews can increase Spiegel’s analysis of ratings and review data from multiple conversion by 270% e-commerce sites found that online reviews have the power to dramatically influence purchase decisions. But the degree 2. Reviews impact sales more for of this influence depends on many factors, including: higher-priced items … • Price of the product 3. … and for higher-consideration items • Degree of uncertainty or risk involved in the purchase 4. 5 stars is “too good to be true” • Average star rating • Presence of negative reviews 5. Initial reviews have the greatest impact • Number of reviews 5 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu

\ Variable: Presence of Reviews 1. Displaying Reviews Can THE FINANCIAL IMPACT OF Increase Conversion by 270% DISPLAYING REVIEWS It may seem intuitive that the availability of reviews will e make a consumer more likely to purchase a product. But s a the magnitude of that impact may surprise many people. re c n I Based on data from the high-end gift retailer, we found on i s r that as products begin displaying reviews, conversion rates e v escalate rapidly. The purchase likelihood for a product with on five reviews is 270% greater than the purchase likelihood C of a product with no reviews. 0 5 10 15 20 Number of Reviews Our research found that as products begin displaying reviews, conversion rates escalate. Having five reviews causes purchase likelihood to increase by a factor of nearly 4x. Askalidis, Y., and Malthouse, E. C. (2016). “The Value of Online Customer Reviews.” th RecSys 2016 - Proceedings of the 10 ACM Conference on Recommender Systems, 155-158. Association for Computing Machinery, Inc. 6 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu

\ Variables: Presence of Reviews and Price 2. Reviews Have a Greater Conversion HIGHER-PRICED PRODUCTS, HIGHER Impact for Higher-Priced Products CONVERSION IMPACT CONVERSION INCREASE FROM THE To better understand the conversion impact of reviews in various circum- INCLUSION OF REVIEWS stances, we looked at the impact of displaying reviews on higher-priced 400% versus lower-priced products. We found that reviews had a greater impact on purchase likelihood for higher-priced items than cheaper ones. 300% The data from the high-end gift retailer showed that this was true when 200% comparing high-priced vs. low-priced categories. And the research from 100% the lower-priced consumer products retailer showed that this was also true when looking at high-priced vs. low-priced options within categories 0% (e.g., regular cereal vs. organic cereal). ¢ Low-Priced Category ¢ High-Priced Category When the price is higher, there is more risk involved in the consumer’s decision. Having more information via reviews helps mitigate that risk. Based on data from the gift retailer, when reviews were displayed for a lower-priced product, the conversion rate increased 190%. However, for a higher-priced product, the conversion rate increased 380%. Askalidis, Y. and Malthouse, E.C.. “The Value of Online Customer Reviews.” RecSys ‘16 Proceedings of the 10th ACM Conference on Recommender Systems, 2016. Malthouse, E.C., Maslowska, E., and Viswanathan, V. “Do Customer Reviews Drive Purchase Decisions? The Moderating Roles of Review Exposure and Price.” Decision Support Systems, 2017. 7 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu

\ Variables: Ratings, Price, and Risk THE ENHANCED ROLE OF REVIEWS FOR 3. Reviews Have a Greater HIGHER-CONSIDERATION PRODUCTS: Conversion Impact For Cheap Slope Expensive Slope Higher-Consideration Items Most Likely Baby Food to Purchase Our research showed that reviews have a greater impact on purchase likelihood for high-consideration products than for low-consideration products. Least Likely to Purchase 1 2 3 4 5 Price is one of the primary factors that determines how Average Star Rating “risky” a purchase is, but it is not the only factor. Other factors that might cause a consumer to spend more energy evaluating a purchase decision—and hence rely Weight Loss more heavily on reviews—include: Most Likely to Purchase • How much the product affects health and safety • How much the product reflects the consumer’s personal identity Least Likely to Purchase • Whether the product is a recurring or habitual 1 2 3 4 5 purchase for the consumer Average Star Rating • Whether it is a recently introduced product or brand Star ratings have a stronger influence on purchase likelihood for expensive items than cheaper items in the same category. For both baby food and weight loss products, the slope of the purchase likelihood line was significantly steeper for expensive options than for cheaper options. 8 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu

\ Variables: Average Star Ratings FINDING THE SWEET SPOT The optimal star rating varied across product categories. But what is most 4. Five Stars is interesting to note is that in no category was the optimal rating 5.0. “Too Good to be True” Star Ratings’ Impact on Purchase Probability Light Bulbs Natural Hair Care Products 0.6 0 More stars equals more sales, right? It seems fairly intuitive 0.4 -1 that higher ratings would lead to higher sales. Our research 0.2 found that this is true—but only up to a point. -2 0.0 Across product categories, we found that purchase likelihood -0.2 -3 typically peaks at ratings in the 4.0 - 4.7 range, and then 1 2 3 4 5 1 2 3 4 5 Star Rating Star Rating begins to decrease as ratings approach 5.0. Put differently, products with an average star rating in the 4.7 - 5.0 range are Women’s Athletic Shoes Herbal Vitamins less likely to be purchased than those in the 4.2 - 4.7 range. 2 1.0 This suggests that shoppers see ratings at the far end of the 0 0.5 spectrum as “too good to be true.” -2 0.0 -4 -0.5 -1.0 1 2 3 4 5 1 2 3 4 5 Star Rating Star Rating High-end Gifts 0.2 0.0 -0.2 -0.4 Maslowska, E., Malthouse, E.C., and Bernritter, S. (2017), “Too Good to be True: 0 1 2 3 4 5 The Role of Online Reviews’ Features in Probability to Buy.” International Journal of Star Rating Advertising, 36(1) 142-163. 9 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu

\ Variable: Presence of Negative Reviews Negative Reviews Establish Credibility Previous PowerReviews research found that 82% of shoppers WHY NEGATIVE REVIEWS MATTER: specifically seek out negative reviews. This is consistent with our theory that near-perfect ratings undermine the credibility • Shoppers are skeptical of 1 Readers are skeptical of reviews that are too of the review. overly positive reviews positive and, in many cases, a negative online review is seen as more credible. • Most shoppers actively seek Additional research by social commerce specialist Revoo out negative reviews indicates that consumers spend four times as long on a site when they interact with negative reviews, with a 67% • The presence of negative reviews brings increase in conversion rate.2 authenticity to a site’s review content 1 PowerReviews (2014): The Proven Power of Reviews 2 RevooBlog, “Bad Reviews Are Good For Business” Maslowska, E., Malthouse, E.C., and Bernritter, S. (2017), “Too Good to be True: The Role of Online Reviews’ Features in Probability to Buy, International Journal of Advertising.” 36(1) 142-163. 10 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu

\ Variable: Number of Reviews 5. Initial Reviews Have the Greatest Impact DIMINISHING MARGINAL RETURNS It’s easy to assume that having more and more reviews will continue to help drive sales. Our research found that more e s reviews help, but only to a point — and that point is much a re c lower than many might assume. n I on i s Based on our research of the gift retailer’s website, we found r e that nearly all of the increase in purchase likelihood occurs v on Low Price within the first 10 reviews, and the first five reviews drive the C bulk of this increase. High Price 0 5 10 15 20 Number of Reviews For both low- and high-priced products, the marginal value of addi- tional reviews rapidly decreases. But the point at which the impact plateaus varies depending on price point. Higher-priced items need at least five reviews to see the greatest conversion impact, whereas lower-priced items only need 2-4 reviews to see a significant impact. Askalidis, Y. and Malthouse, E. C. (2016). “The Value of Online Customer th Reviews.” RecSys 2016 - Proceedings of the 10 ACM Conference on Recommender Systems, 155-158. Association for Computing Machinery, Inc. 11 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu

\ Putting Conversion Insights to Work 5 FOCUS ON FIRST FIVE The first five reviews for a product have the biggest conversion impact. Focus on collecting a baseline number of reviews, What This Means for Brands especially for higher-priced products. EMBRACE NEGATIVE REVIEWS The power of online reviews to influence Allowing negative reviews on your site helps build credibility with shoppers. Rather than trying to eliminate sales means that retailers have powerful negative reviews, monitor them and respond to them. incentives to develop effective strategies for collecting, displaying, and monitoring FOLLOW-UP BY EMAIL reviews on their websites. Reviews that are Prior research from PowerReviews shows that up viewed as representative and credible can 80% to 80% of reviews originate from follow-up emails be a significant competitive advantage. urging shoppers to review their purchases.* PRODUCT SAMPLE NEW ITEMS In addition to email prompts, product sampling can be an effective way to generate initial reviews, particularly for new products among first-time purchasers. STREAMLINE PLATFORMS Make the process of posting a review as simple as possible by allowing shoppers to submit reviews with just a few clicks. Also, *PowerReviews Internal Data make it easy for shoppers to read and post 12 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu reviews across all devices and platforms.

\ Prompted vs. Unprompted Reviews How the Source of the Reviews Impacts Ratings, Credibility, and Purchase Likelihood WHAT WE FOUND: 1. Verified buyers give higher ratings Are all reviews created equal? To answer this question, we looked at data related to reviews submitted by the two primary types of reviewers: verified buyers 2. Selection bias and social influence (i.e., prompted reviews) and anonymous reviewers (i.e., unprompted reviews). bias shape how people write reviews In analyzing this data, we explored three key questions: 3. Reviews from verified buyers are 1. Do star ratings vary depending on the source of the reviewer? perceived as more credible and have a greater impact on sales 2. If so, what causes the ratings to vary between the groups? 3. Does one type of review have a greater impact on shoppers’ purchase behavior? Verified buyer (i.e., prompted reviewer): For this study, verified buyers are considered consumers who make a purchase online and receive a post-purchase email asking them to review their purchase. Anonymous reviewer (i.e., unprompted reviewer): Anonymous reviewers are those whose purchase cannot be confirmed through an online sales transaction linked to a review prompt. 13 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu

\ Prompted vs. Unprompted Reviews 1. Reviews from Verified Buyers AVERAGE STAR RATING: Have Higher Ratings VERIFIED BUYERS VS. ANONYMOUS REVIEWERS We found that reviews from verified buyers are substantially 70 Anonymous Consumer more positive than reviews written by anonymous sources. 60 Verified Buyer The average star rating for reviews from verified buyers is 50 4.34, compared to an average star rating of 3.89 for reviews e written by anonymous reviewers. In addition, reviews from g 40 a t verified buyers contain a higher percentage of 5-star ratings, n rce30 while reviews from anonymous reviewers have a larger e percentage of 1-star ratings. P 20 These findings are consistent with the theory that people who 10 are self-motivated to write a review have more extreme, and often more negative reviews. We explore this selection bias in 0 1 2 3 4 5 more detail later in the report. Rating Verified buyers are more likely to give four- or five-star ratings than anonymous reviewers are. Conversely, anonymous buyers are significantly more likely to give one- and two-star reviews. Askalidis, Y., Kim, S.J., and Malthouse E.C. (2017), “Understanding and Overcoming Biases in Customer Reviews.” Decision Support Systems. 97 (May 2017), 23-30. 14 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu

\ Prompted vs. Unprompted Reviews 2. Selection Bias and Social Influence Bias Shape How People Write Reviews SELECTION BIAS: Shoppers who have had a negative experience The finding that anonymous reviewers typically give lower ratings is con- are more likely to make the effort of going to a sistent with our theory that “friction” causes selection bias when it comes site, creating an account, and posting a review. to reviews. When responding to an email prompt, verified buyers typically only have to make a few clicks to submit a review. Anonymous reviewers, on the other hand, must go to the review site and create an account before they can submit a review. Thus, we hypothesize that customers who are very unhappy with their purchase are much more likely to go to the effort to post an unprompted review. We also found that ratings from anonymous reviewers tend to decline over SOCIAL INFLUENCE BIAS: time while ratings from verified buyers remained steady, which suggests some degree of social influence bias is at work. Verified buyers are asked Verified buyers typically don’t see average star to fill out a review via email and are taken to a page where they don’t ratings when posting their reviews. Anonymous see any other reviews. Anonymous reviewers, on the other hand, have reviewers, on the other hand, do have this visibility to average star ratings and others’ reviews. Thus, anonymous visibility, which could influence their ratings. reviewers may be influenced by the product’s average star rating or the volume or tone of review comments. Askalidis, Y., Kim, S.J., and Malthouse E.C. (2017), “Understanding and Overcoming Biases in Customer Reviews.” Decision Support Systems. 97 (May 2017), 23-30. 15 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu

\ Prompted vs. Unprompted Reviews 3. Reviews from Verified Buyers Are Perceived as More Credible and Have a Greater Impact on Sales VALUE OF THE “VERIFIED BUYER BADGE” We examined whether consumers evaluate reviews from verified buyers differently than reviews from anonymous reviewers. That is to say, do shoppers place more Verified Buyer trust in a review if it’s written by a verified buyer? We found that displaying reviews written by verified buyers – identified by a “verified buyer badge” – has a positive impact on sales. This suggests that reviews written by those with direct experience using a product are considered more credible and trust- Purchase likelihood increases 15% when worthy. The verified buyer badge shows that the reviewer is a real consumer and not someone who was paid to write a review or someone who has an axe to grind against consumers are exposed to reviews written the company. by a verified buyer vs. an anonymous review. Because verified buyers typically provide more positive reviews than anonymous reviewers, having more reviews from verified buyers provides the dual benefit of higher ratings and increased credibility. Kim, S.J., Malthouse, E.C., and Maslowska, E. “Understanding the Role of Different Review Features in Purchase Probability” Submitted to International Journal of Advertising, 2017. 16 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu

\ Prompted vs. Unprompted Reviews ENCOURAGE VERIFIED BUYERS Implement a post-purchase email plan to collect reviews from verified buyers. Retailers can expect to see average star ratings increase by prompting What This Means for Brands buyers to submit reviews. OPTIMIZE DEFAULT SETTINGS Offer a “verified buyer only” default setting Having more reviews from verified buyers on your review platform so readers can view can help improve the value of the reviews only those reviews. in multiple ways. When developing their online review strategies, retailers should OFFER BUYER “BADGES” consider the various benefits of prompting In addition to fostering a representative sample reviews from customers. of reviews, retailers can improve the perceived credibility of their sites by including “verified buyer badges.” MITIGATE BIAS Retailers can play an active role in mitigating selection bias and social influence bias in the online review ecosystem by incentivizing reviews from verified buyers. BE TRANSPARENT Be transparent about incentives used to solicit reviews (e.g. entry into a sweepstakes) or consider non-prize incentives (e.g. stars or badges for frequent reviewers). 17 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu

In Review Data-Driven Strategies to Leverage the Power of Online Reviews Based on our extensive research into how online reviews influence purchase decisions, we recommend that retailers follow these six principles when developing an online review strategy. Display reviews Embrace negative Prioritize generating Further prioritize Overcome selection Identify reviews and ratings on your reviews reviews for products generating reviews bias to improve the from “verified product website with a low volume for higher-price and value of reviews buyers” of reviews higher-consideration products Displaying reviews Purchase likelihood The first five reviews Reviews are more A larger pool of Identifying purchasers can increase sales typically peaks when have the biggest impactful for higher- reviewers is not always with “verified buyer by 270% on average. the average star rating impact on purchase priced and higher- more representative, badges” enhances the Retailers that choose is between 4.2 and decisions. Rather than consideration particularly if it includes credibility of a review not to feature ratings 4.5 stars and starts to trying to generate products. There’s a a large number of and improves the odds and reviews risk losing drop as the star rating additional reviews for higher risk involved anonymous reviews. of purchase by 15%. customers to a site approaches a perfect all products, retailers with purchasing an Retailers can make Retailers should be that does. Hosting 5.0. While it may should focus their expensive item, a new their reviews more transparent in labeling mobile-friendly sites seem counterintuitive, efforts on making sure brand, or a product that representative of the verified buyers and any that make it easy to negative reviews all products have at affects personal safety. total universe of buyers tactics used to solicit view and post reviews can have a positive least a handful Retailers can help by encouraging verified their reviews. will help retailers impact because they of reviews. consumers overcome buyers to post reviews drive sales. establish credibility this risk by providing through post-purchase and authenticity. additional reviews for email prompts. these products. 18 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu

Review the Research PUBLISHED RESEARCH ON ONLINE REVIEWS The results and insights from the Spiegel Research Center’s research into how online reviews influence Branded Apps Research Team purchase decisions have been published in the The research supporting this report was led by the following journals and textbooks: following members of the Spiegel Research Center: JOURNAL PUBLICATIONS *Full papers available upon request Tom Collinger Executive Director and Associate Professor Askalidis, Y., and Malthouse, E. C. (2016). “The Value of Online Customer Reviews.” RecSys 2016 - Proceedings of the 10th ACM Edward Malthouse Conference on Recommender Systems, 155-158. Association for Professor of Integrated Marketing Communications Computing Machinery, Inc. Ewa Maslowska Malthouse, E., Maslowska, E., and Viswanathan, V. “Do Customer Assistant Professor and Research Associate Reviews Drive Purchase Decisions? The Moderating Roles of Review Exposure and Price,” Decision Support Systems, 2017. Rebecca Wang Maslowska, E., Malthouse, E.C., and Bernritter, S. (2017), “Too Assistant Professor and Research Associate Good to be True: The Role of Online Reviews’ Features in Probability Su Jung Kim to Buy, International Journal of Advertising.” 36(1) 142-163. Assistant Professor and Research Associate Kim, S.J., Malthouse, E., and Maslowska, E. “Understanding the Role of Different Review Features in Purchase Probability.” Yorgos Askalidis Submitted to International Journal of Advertising, 2017. PhD Data Scientist Askalidis, Y., Kim, S.J., and Malthouse, E.C. (2017), “Under- standing and Overcoming Biases in Customer Reviews.” Decision 19 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu Support Systems. 97 (May 2017), 23-30.

More Insights from the Spiegel Research Center Social Media Online Negative Consumer As the digital marketing communications Contests Word-of-Mouth Engagement Engine landscape evolves, we will continue to look How do the new ways for innovative ways to measure the impact Do consumers who engage Do negative posts in a that consumers engage of engagement on consumer behavior. in social media contests social media environment with brands affect buy more? impact purchase behavior? customer value? To dive deeper into Spiegel’s research into how engagement via mobile apps and other channels influences purchase behavior and customer value, we invite you to visit us online. LEARN MORE about the Spiegel Research Multi-Platform Loyalty Programs Branded App ROI Engagement Center’s research-driven insights on marketing communications by visiting: Do instant rewards drive What is the value of How does multi-channel purchase in a loyalty customer engagement via engagement affect purchase spiegel.medill.northwestern.edu program? branded mobile apps? behavior? 20 \ How Online Reviews Influence Sales \ spiegel.medill.northwestern.edu