Online user reviews have become an important source of information to consumers

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.

The Concept of the Marketing Mix

Keywords: marketing manager, marketing mix, day-to-day marketing

Marketing is still an art, and the marketing manager, as head chef, must creatively marshal all his marketing activities to advance the short and long term interests of his firm.

By NEIL H . BORDEN - Harvard Business School

When building a marketing program to fit the needs of his firm, the marketing manager has to weigh the behavioral forces and then juggle marketing elements in his mix with a keen eye on the resources with which he has to work. His firm is but one small organism in a large universe of complex forces. His firm is only a part of an industry that is competing with many other industries. What does the firm have in terms of money, product line, organization, and reputation with which to work? The manager must devise a mix of procedures that fit these resources. If his firm is small, he must judge the response of consumers, trade, and competition in light of his position and resources and the influence that he can exert in the market. He must look for special opportunities in product or method of operation. The small firm cannot employ the procedures of the big firm. Though he may sell the same kind of product as the big firm, his marketing strategy is likely to be widely different in many respects. Innumerable instanees of this fact might be cited. For example, in the industrial goods field, small firms often seek to build sales on a limited and highly specialized line, whereas industry leaders seek patronage for full lines. Small firms often elect to go in for regional sales rather than attempt the national dis tribution practiced by larger companies. Again, the company of limited resources often eleets to limit its production and sales to products whose potential is too small to attract the big fellows. Still again, companies with small resources in the co,smetic field not infrequently have set tip introductory marketing programs employing aggre,ssive personal selling and a "push" strategy with distribution limited to leading department stores. Their initially small advertising funds have been directed through these selected retail otitlets. with the offering of the products and their story told over the signattires of the stores. The strategy has been to borrow kudos for their products from the leading stores' reputations and to gain a gradual radiation of distribution to smaller stores in all types of channels, such as often comes from the trade's follow-the-leader behavior. Only after resources have grown from mounting sales has a dense retail distribution been aggressively so tight and a shift made to place the selling burden more and more on company-signed advertising.

The above strategy was employed for Toni products and Stoppette deodorant in their early marketing stages when the resources of their producers were limited (cf. case of Jules Montenier, Inc. in Borden and Marshall, 1959, pp. 498-518). In contrast, cosmetic manufacturers with large resources have generally followed a "pull" strategy for the introduction of new prodticts, relying on heavy (ampaigiLS of advertising in a rapid succes,sion of area introductions to induce a hoped-for, complete retail coverage from the start (cf. case of Bristol Myers Company in Borden and Marshall, 1959, pp. 519-533). These introductory campaigns have been undertaken only after careful programs of prodtict development and test marketing have given assurance that product and selling plans had high promise of success.

Long vs. Short Term Aspects of Marketing Mix

The marketing mix of a firm in large part is the product of the evolution that comes from day-to-day marketing. At any time the mix represents the program that a management has evolved to meet the problems with which it is constantly faced in an ever changing, ever challenging market. There are continuous tactical maneuvers: a new product, aggressive promotion, or price change initiated by a competitor must be considered and met; the failure of the trade to provide adequate market coverage or display must be remedied; a faltering sales force must be reorganized and stimulated; a decline in sales share must be diagnosed and remedied; an advertising approach that has lost effectiveness must be replaced; a general business decline must be countered. All such problems call for a management's maintaining effective channels of information relative to its own operations and to the dayto- day behavior of consumers, competitors, and the trade. Thus, we may observe that short range forces play a large part in the fashioning of the mix to be used at any time and in determining the allocation of expenditures among the various functional accounts of the ... Read more

Decisions required in implementing a segmentation strategy

Keywords: segmentation strategy, global markets, business strategy, market segmentation, marketing strategies, global economy, financial needs, investment needs,business decisions, Yoram (Jerry) Wind, David R. Bell

While poor segmentation can result from flawed thinking or conceptions of segmentation, it is our experience that many segmentation efforts fall flat because of poor execution and implementation.

By Yoram (Jerry) Wind and David R. Bell

All markets are heterogeneous. This is evident from observation and from the proliferation of popular books describing the heterogeneity of local and global markets. Consider, for example, The Nine Nations of North America (Garreau, 1982), Latitudes and Attitudes: An Atlas of American Tastes, Trends, Politics and Passions (Weiss, 1994) and Mastering Global Markets: Strategies for Today’s Trade Globalist (Czinkota et al., 2003). When reflecting on the nature of markets, consumer behaviour and competitive activities, it is obvious that no product or service appeals to all consumers and even those who purchase the same product may do so for diverse reasons. The Coca Cola Company, for example, varies levels of sweetness, effervescence and package size according to local tastes and conditions. Effective marketing and business strategy therefore requires a segmentation of the market into homogeneous segments, an understanding of the needs and wants of these segments, the design of products and services that meet those needs and development of marketing strategies, to effectively reach the target segments. Thus focusing on segments is at the core of organizations’ efforts to become customer driven; it is also the key to effective resource allocation and deployment. The level of segment aggregation is an increasingly important issue. In today’s global economy, the ability to customize products and services often calls for the most micro of segments: the segment of one. Following and implementing a market segmentation strategy allows the firm to increase its profitability, as suggested by the classic price discrimination model which provides the theoretical rationale for segmentation.

Effective segmentation strategy requires detailed answers to the following sets of questions:

1. How to segment the market?
2. What research procedure to use to develop a segmentation strategy?
3. What segment(s) to target?
4. How to allocate resources among the segments?
5. How to implement the segmentation strategy?

Segment identification decision

The determination of which set of variables – basis – to use for segmentation of the market is critical. Conceptually, the guiding principle is fairly obvious. A good segmentation variable is one that explains variation in use of the firm’s products and services. If a proposed segmentation variable has no correlation to choice or other important behaviours, it is clearly of little value. Practically, the approach is quite involved and requires consideration of the following issues. Should we segment on product usage patterns (e.g. users versus non-users or heavy versus light users)? Should we segment based on benefits sought (e.g. product performance versus convenience versus price sensitivity)? Should we use some other measure of consumer response to marketing variables (e.g. likelihood of buying a new product concept, response to price promotion, participation in a loyalty programme)? The ‘best practice’ in this area suggests three propositions:

1. An effective basis for segmentation should allow one to differentiate among segments based on their response to marketing variables; thus buyers versus non-buyers or price sensitive versus nonprice sensitive are possible bases for segmentation. Age, sex, marital status, psychographic characteristics or other general characteristics of the consumer may not be good bases for segmentation since they do not assure differential response to marketing variables.
2. The selected basis for segmentation should be directly related to the strategic purpose of the segmentation effort. In general, there are two types of segmentation with two different underlying rationales:

• A general segmentation of the market which allows the organization to organize itself around the selected target segments. As an increasing number of companies shift from a product management organization to a market-driven organization or a matrix organization of product by market (as might be implied by the PSM analysis), it is critical to identify relatively stable and large segments which could serve as strategic business units. Examples of such segments, in the case of a financial service firm, are the ‘Delegators’ – individuals who prefer to have a money manager take complete control over the management of their financial affairs, and the ‘Electronic DIY’ – who prefer to do it themselves using direct computer trading. To reach these two segments effectively the firm needs distinctly different strategies. Members of each of these strategic segments share some common financial/investment needs, yet each of these segments may still be quite heterogeneous with respect to other needs and, thus, could benefit from further subsegmentation into more homogeneous groups.
• Specific segments for specific marketing and business decisions. For example, in the introduction of a new product, this may mean a focus on the segment that has the highest likelihood of buying the product. In the launch of a new online electronic shopping service, it could involve a focus on time-constrained individuals with high-speed Internet access at home. Other specific segments and their associated characteristics can be developed for each of the marketing mix decisions. Notice that in the following examples the ... Read more

Children as Consumers: Advertising and Marketing

Keywords: Children consumers, Sandra L. Calvert, marketing strategies, advertising leaders

By Sandra L. Calvert*

Summary

Marketing and advertising support the U.S. economy by promoting the sale of goods and services to consumers, both adults and children. Sandra Calvert addresses product marketing to children and shows that although marketers have targeted children for decades, two recent trends have increased their interest in child consumers. First, both the discretionary income of children and their power to influence parent purchases have increased over time. Second, as the enormous increase in the number of available television channels has led to smaller audiences for each channel, digital interactive technologies have simultaneously opened new routes to narrow cast to children, thereby creating a growing media space just for children and children’s products.

Calvert explains that paid advertising to children primarily involves television spots that feature toys and food products, most of which are high in fat and sugar and low in nutritional value. Newer marketing approaches have led to online advertising and to so-called stealth marketing techniques, such as embedding products in the program content in films, online, and in video games.

All these marketing strategies, says Calvert, make children younger than eight especially vulnerable because they lack the cognitive skills to understand the persuasive intent of television and online advertisements. The new stealth techniques can also undermine the consumer defenses even of older children and adolescents.

Calvert explains that government regulations implemented by the Federal Communications Commission and the Federal Trade Commission provide some protection for children from advertising and marketing practices. Regulators exert more control over content on scarce television airwaves that belong to the public than over content on the more open online spaces. Overall, Calvert concludes, children live and grow up in a highly sophisticated marketing environment that influences their preferences and behaviors.

During the 1920s, U.S. advertising leaders began to see that a consumer society would create larger markets for the surplus fruits of mass production.1 Aware that people might not buy enough goods fast enough on their own, advertisers adopted a strategy of exploiting consumers’ feelings of inadequacy and sought to market products as a means of alleviating consumers’ negative self-image. Their strategy succeeded beyond their greatest expectations.

Crucial to their success was the emergence and eventual dominance of television in U.S. homes.2 As the medium of television developed, advertisers quickly realized that they could use it to bring products to the attention of mass audiences, both young and old, and thus deliver an enormous supply of children and adults to businesses.

Today, marketing and advertising permeate children’s daily lives. Many products marketed to children are not healthful and promote obesity. Younger children often do not understand the persuasive intent of advertisements, and even older children probably have difficulty understanding the intent of newer marketing techniques that blur the line between commercial and program content. Relatively little government regulation protects children from this highly commercialized environment.

In this article, I first examine trends that have made children and youth an ever more attractive audience for ... Read more

*Sandra L. Calvert is a professor and the chair of the Department of Psychology at Georgetown University. She is also the director of the Children’s Digital Media Center.

Why American jobs have a higher risk of automation than jobs in Germany, the UK, and Japan

Keywords: technological advancement, automation

You’ve been warned before—robots are coming for your job. The speed of technological advancement, particularly in smart automation, has sprung countless economic studies and political warnings about how many people are likely to lose their jobs to this rise of the machines. But it’s not an easy number to peg down; estimates range from 5% to 50%.

The latest predictions from PricewaterhouseCoopers (pdf) survey the damage for specific countries. Analysts at the consulting firm said that by the early 2030s, 38% of US jobs are at a high risk of automation, more than in Germany, the UK, and Japan.

PwC revisited two notable studies on the topic. The first was from 2013, in which Oxford University researchers said that 47% of US jobs would be lost to computerization in the next few decades. Those results were based on whole occupations that could be at risk from automation. The other study was from 2016, in which OECD staff said the figure was actually closer to 10% when analyzing the specific tasks within jobs that were likely to be automated.

The PwC analysts took the task-based approach a step further. In addition to breaking down occupations into manual tasks, routine tasks, computation, socials skills, and literacy skills, they included some details about the workers doing the jobs, particularly the education and training required.

Then, focusing on the UK, PwC looked at the industries with the highest risk of automation, taking into account the proportion of jobs at risk within each sector and its employment share in the overall UK labor market. They found that the wholesale and retail trade sector was most at risk. It’s an industry that employs 15% of the workforce. If PwC is right that 44% of retail jobs are at risk, then 2.3 million jobs just in the UK are on the .... Read more

Rural America: Unemployment, Poverty, and Population Decline

Keywords: Economic recovery, employment, poverty rates, rural unemployment, rural America

Overview

An important indicator of economic recovery is employment. After several years of stagnation, the pace of employment growth in rural areas increased in 2014. Employment gains were significantly higher over the past year compared to previous years in the recovery period, although rural employment remains below pre-recession levels. Rural areas continue to experience population loss, higher poverty rates, and lower educational attainment than urban areas.

Slow Growth in Rural Employment

Rural employment has started to recover from its recessionary low

Employment grew more than 1 percent in rural areas during the year that ended in the second quarter of 2015.1 This is a marked improvement from previous years of very slow growth or decline. Nonetheless, rural employment in mid-2015 was still 3.2 percent below its pre-recession peak in 2007. In contrast, urban employment rose nearly 2 percent in the past year, continuing a trend of consistent growth since 2011, and is now well above its pre-recession peak. In both urban and rural areas, employment growth is running slightly ahead of population growth.

Local Area Unemployment Statistics (LAUS) data, seasonally adjusted. The LAUS program produces employment, unemployment, and labor force data for census regions and divisions, States, counties, metropolitan areas, and many cities, by place of residence. Note: LAUS data from 2007 through 2009 were adjusted to account for revised population growth estimates for that period. National employment was also benchmarked to match the Current Population Survey’s research employment series, for all years.

Rural employment gains in 2014 and early 2015 after 2 years of stagnationEmployment Index (2008 Q1=100)

Source: USDA, Economic Research Service analysis of Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS) data, seasonally adjusted. The LAUS program produces employment, unemployment, and labor force data for census regions and divisions, States, counties, metropolitan areas, and many cities, by place of residence. Note: LAUS data from 2007 through 2009 were adjusted to account for revised population growth estimates for that period. National employment was also benchmarked to match the Current Population Survey’s research employment series, for all years.

Rural unemployment continues to decline

The unemployment rate has fallen considerably and fairly consistently in both rural and urban areas over the last 5 years. Unemployment rates fell by a full percentage point or more in each of the last 2 calendar years in both rural and urban areas. The parallel declines in rural and urban unemployment rates reflect the fact that in rural areas population and labor force growth are near zero, while employment is growing slowly, whereas in urban areas, population and labor force growth are positive, and employment growth is higher.

The share of adults who are working is lower than pre-recession levels

While urban employment levels have now recovered from the 2007-09 recession, the share of adults who are working (total employment as a share of residents age 16 or older who are not on active military duty or in institutions such as nursing homes or prisons) remains 3 percentage points below its level prior to the recession in both rural and urban areas. Part of the decline in this ratio since 2007 reflects the aging of the population, with a larger proportion of adults advancing into ages where most are retired. But retirement does not fully explain the persistence of low employment rates: the share of the prime working-age adult population (25-54) that is employed also dropped, from 80 percent in the first quarter of 2007 to 75 percent in the first quarter of 2010, before recovering to 77 percent in September 2015.

Population Decline Continues in Rural America

The number of people living in rural counties stood at just over 46 million in 2014—nearly 15 percent of U.S. residents. However, the population of rural America has declined by 116,000 over the last 4 years, with losses of about 30,000 people in each of the last 2 years. While these declines are small, 2010-2014 is the first period of overall population decline on record for rural America as a whole, and stands in stark contrast with the urban population, which continues to grow by more than 2 million per year. Not all rural areas have experienced population loss in recent years. Some rural counties have seen population growth, with nearly 700 growing rural counties together adding over 400,000 residents between 2010 and 2014. These counties are concentrated in scenic areas such as the Rocky Mountains or southern Appalachia, or in energy boom regions such as in the northern Great Plains. The 1,300 rural counties losing population since 2010 are widespread in regions dependent on farming, manufacturing, or resource extraction......Download the report

Is Economic Despair What's Killing Middle-Aged White Americans?

Keywords: Middle-aged white Americans without college degree, Alana Semuels, Anne Case, Angus Deaton

Two Princeton economists elaborate on their work exploring rising mortality rates among certain demographics.

ALANA SEMUELS 

Two years ago, the Princeton economists Anne Case and Angus Deaton published an alarming revelation: Middle-aged white Americans without a college degree were dying in greater numbers, even as people in other developed countries were living longer. The husband-and-wife team argued, in a study in the Proceedings of the National Academy of Sciences, that these white Americans are facing“deaths of despair”—suicide, overdoses from alcohol and drug, and alcohol-related liver disease.

The paper caused a stir in academic circles and in the media, and has remained in the public discourse following Donald Trump’s win partly on the strength of his support from these same middle-aged white Americans (the alive ones, to be clear). The paper, however, couldn’t answer the question everyone had: Why was this demographic in particular struggling? It couldn’t be purely the economic pain they faced in the wake of globalization; after all, European countries are also affected by globalization, and their residents are getting healthier and living longer. And non-whites in the U.S. are living longer than they used to as well, and they are subject to the same economic forces as middle-age whites and are struggling, at least in economic terms, even more.

As I wrote yesterday, the poor health of middle-aged white Americans is having an impact on the labor force. Men aren’t working or looking for jobs because they’re sick, on pain pills, or abusing alcohol or drugs, research suggests. Just why they’re so sick was not something that Case and Deaton elaborated on in their 2015 paper.

Now, in a new paper, the economists explore why this demographic is so unhealthy. They conclude it has something to do with a lifetime of eroding economic opportunities. This may seem like a circular argument, when put together with previous work: Middle-aged Americans aren’t working because they’re sick, and middle-aged Americans are sick because they’re not working. But Case and Deaton argue that it’s not just poor job opportunities that are affecting this demographic, but rather, that these economic misfortunes build up and bleed into other segments of people’s lives, like marriage and mental health. This drives them to alcoholism, drug abuse, and even suicide, they say, in a new paper released Thursday in advance of a conference, the Brookings Panel on Economic Activity.

“As the labor market turns against them, and the kinds of jobs they find get worse and worse for people without a college degree, that affects them in other ways too,” Deaton told me.

What differentiates Case and Deaton’s paper is this idea that as people get older and their fates deviate more and more from those of their parents, they struggle to keep their lives together.  The very act of doing worse than their parents’ generation—what Case and Deaton call “cumulative disadvantage”—is ... Read more