Good news, consumers: those online reviews you’ve been posting make a difference.
New research from Professor Sridhar Moorthy, recently published in Marketing Science, reveals how online reviews, which continue to grow in popularity, are becoming substitutes for traditional advertising.
Moorthy, who is the Manny Rotman Chair in Marketing at the Rotman School of Management, has a specific interest the effects of emerging technologies on marketing practices. For this latest study, he was curious — as a consumer and academic — about the impact of online reviews on businesses.
“I’m a compulsive reader of reviews. I don’t think I have bought anything recently without consulting reviews first,” admits Moorthy. “I knew I couldn’t be the only one, and this made me question how reviews might be changing the way firms do business.”
He and his collaborators from the University of California Los Angeles and the University of Southern California decided to investigate the idea further.
For this study, they examined the hotel industry, where consumers are known to rely on word-of-mouth and independent reviews to make decisions.
The researchers analyzed 14 years (between 2002 and 2015) of TripAdvisor reviews on more than 80,000 different U.S.-based hotels. They also consulted other databases to see how much these hotels spent on advertising (in print, online and on TV and radio) during this time period.
Moorthy and his colleagues found a link: hotels with strong online ratings on TripAdvisor tended to reduce their advertising spending, while those with low ratings increased their spending. And there was a substantial difference: on average, a half-star rating boost on TripAdvisor meant about a 9 per cent reduction in monthly ad spending.
“Customers are speaking up, and firms need to sit up and take notice.”
—Sridhar Moorthy, Professor of Marketing
“Reviews have become a substitute for traditional ad spending,” explains Moorthy. “But the implications go beyond that. Effectively, firms with different review endowments are targeting different types of consumers. Those with strong reviews are targeting ‘informed consumers’ while those with weak reviews are targeting ‘uninformed consumers.’”
The researchers noted that the effect of online reviews appeared strongest for independent hotels — likely because large, established chains with solid branding have some immunity from bad reviews.
“In the early 2000s, when sites like TripAdvisor were still new, few people were turning to the internet for recommendations, and the hotels might not have cared so much. By the end of 2015, TripAdvisor had become a dominant site and firms had to react,” says Moorthy.
In addition, the researchers observed that effect of TripAdvisor reviews was more pronounced towards the end of period they studied (2015), compared to the start of this period (2002).
While their study examined the hotel industry specifically, Moorthy suspects that the insights they unearthed might apply to a range of organizations.
“Online reviews are here to stay,” he says. “Customers are speaking up, and firms need to sit up and take notice.”
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