How You Miss the Point of Online Reviews

SMITH BRAIN TRUST -- Websites like Epinions.com and apps like Yelp have made ours a glorious era for the amateur reviewer: Anyone can instantly broadcast his or her evaluation -- of books, restaurants, cars, fitness bands -- to the wider world. This might sound like nothing but good news for companies that make excellent products, and bad news for peddlers of shoddy goods. But the dynamics of word-of-mouth, including online opinions, are much more complicated than that, according to research by Yogesh Joshi, an associate professor at the Smith School, and coauthor Andrés Musalem, of Duke University’s Fuqua School of Business.

In a working paper, Joshi and Musalem found that in a world awash in word-of-mouth opinions, high-quality firms might want to, counterintuitively, increase their spending on traditional advertising. The conclusion of the paper, "Word of Mouth Bias and Optimal Communication Strategies,” stems from psychological quirks in the ways people evaluate word-of-mouth opinion.

For a variety of reasons, consumers are more likely to share negative opinions than positive ones. This is partly because disappointment in a product or service causes stronger emotional reactions than satisfaction does; in other cases, consumers may take good service for granted, and therefore too trivial to mention, but feel differently about bad service. How many people tweet that their plane left on time?

If that were the end of the story, it still might make sense for good companies to reduce advertising as word-of-mouth reviewing becomes more prevalent, as the better companies would still generate the better reviews, on average. But when consumers are aware of the biases of word-of-mouth opinions, and many are, they tend to discount negative reviews (they assume the complainers have the biggest mouths). In fact, they may well discount bad word of mouth to such an extent that the advantage high-quality firms enjoy in that arena is essentially erased.

Therefore, the old-fashioned technique of signaling quality through mainstream advertising remains relevant. (One way advertising works is to demonstrate that you generate enough profits to spend money on publicity.)

Many managers struggle with how to think about communications strategies in areas in which there is a lot of word-of-mouth. "The study suggests you should not drop the ball on advertising," Joshi says.

And there’s a related lesson if you’re a consumer: Not all of those one-star ratings of the auto-mechanic were penned by overreacting gripers.

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“Word of Mouth Bias and Optimal Communication Strategies,” by Yogesh V. Joshi, an associate professor at the Robert H. Smith School of Business at the University of Maryland, and Andrés Musalem, of Duke University’s Fuqua School of Business, is a working paper.