Keywords: Effect of Word of Mouth on Sales, Online user reviews, word-of- mouth communication, positive reviews, Judith A. Chevalier, Dina Mayzlin, Yale School of Management
The Effect of Word of Mouth on Sales
Online user reviews have become an important source of information to consumers, substituting and complementing other forms of business-to-consumer and offline word-of- mouth communication about product quality. Consequently, many managers believe that a Web site must provide community content to build brand loyalty (see, e.g., Fingar, Kumar, and Sharma 2000; McWilliam 2000). Despite this widespread belief, to our knowledge, there is no literature documenting that community content plays any role in consumer decision making. It seems that such a finding is a necessary prerequisite for content provision to be a profitable strategy.
There are many reasons to suspect ex ante that creating a forum for community content could be a poor strategy. First, it is not clear why users would bother to take the time to provide reviews for which they are not in any way compensated. Second, competing retailers can free ride on investments in recommender systems; there is nothing to stop a consumer from using the information provided by one Web site to inform purchases made elsewhere. Third, by providing user reviews, a site cedes control over the information displayed; unfavorable reviews may depress sales. This may be less of a threat to a retailer that sells many different brands than to a manufacturer. Similarly, because interested parties can freely proliferate favorable reviews of their own products, positive reviews may not be credible and may not function to stimulate sales.2 Finally, online user reviews may not be useful and may not stimulate sales because of the sample selection bias that is inherent in an amateur review process. That is, a consumer chooses to read a book or watch a movie only if he or she believes that there is a high probability of enjoying the experience. In the presence of consumer heterogeneity, this implies that the pool of reviewers will have a positive bias in their evaluation compared with the general population. Thus, positive reviews may simply be discounted by potential
buyers.
[...] Our findings suggest that, on average, reviews tend to be positive, especially at bn.com. We show that the addition of new, favorable reviews at one site results in an increase in the sales of a book at that site relative to the other site. We find some evidence that an incremental negative review is more powerful in decreasing book sales than an incremental positive review is in increasing sales. Our results on the length of reviews suggest that consumers actually read and respond to written reviews, not merely the average star ranking summary statistic provided by the Web sites.
THE EFFECT OF REVIEWS ON SALES
Cross-Sectional Analysis
In this subsection, we assume that there are no sitespecific fixed effects and examine the relationship between a book’s customer reviews and its sales rank across sites (see Equation 3). Table 3 presents the estimation results for this sample. Table 3, Column 1, presents the results for a regression in which no review variables are included, only prices at both sites and the shipping dummies. The price coefficients reflect a combination of own- and cross-price elasticities at both sites. The price coefficient for Amazon.com is positive and statistically significant, suggesting that when prices rise, sales ranks at Amazon.com become larger (i.e., sales fall). The price coefficient is negative for bn.com. This is as expected; recall that the ... Read more
Judith A. Chevalier is William S. Beinecke Professor of Finance and Economics, and Dina Mayzlin is Assistant Professor of Marketing at Yale School of Management.
