How are purchase decisions influenced by digital media?

Itamar Simonson explains how digital reviews and recommendations mean that consumers are now better equipped than ever to determine the absolute value of any purchase

According to Simonson, Professor of Marketing at Stanford University, today's consumers have so many new sources of information it's much easier for them to assess the absolute value of things, in other words, to know their likely experience with a product or service.

Absolute Value is the title of a new book by Simonson written with Emanuel Rosen, ABSOLUTE VALUE: What Really Influences Customers in the Age of (Nearly) Perfect Information.  In it they argue that consumers today take advantage of three trends:

• 1. the rise of reviews from other users
• 2. unprecedented access to expert opinions
• 3. easy access to friends on social media.

In this interview we explore the new reality of the influence of digital media on purchase  and its far-reaching implications on everything from competitive strategy to communication and market research.

• Q. We hear so often about consumers’ irrationality. You’re saying that consumers are more rational today?

Yes. One of us (Itamar) spent much of his career showing that consumers tend to act irrationally and their preferences are highly malleable. But this is changing in the new reality. Many of the so-called 'irrationality' effects work best when the consumer is confined to information from the marketer, which is often no longer the case today. Contrary to what you frequently hear these days, customers are better able to evaluate products for what they are, rather than just how the products are described or how they compare with other options they happen to see.

• Q. Is there any experimental evidence that consumers are becoming more rational?

Years ago, Itamar demonstrated what he called the compromise effect:  if given a set of three cameras placed in front of them, for example, consumers tend to choose the middle or compromise in terms of price and features. Recently Itamar and a PhD student at Stanford, Taly Reich, tried to replicate this effect, but they found that the compromise effect was gone for participants who first saw what consumers see when shopping for a camera online (e.g. lots of options and reviews). Those participants were no longer biased in favor of the middle option.

• Q. Is this good or bad news for marketers and consumers?

It’s certainly good news for consumers because they will, on average, make better choices. It’s also good news for some marketers. Consider ASUS, the Taiwanese PC maker. Jonney Shih, ASUS chairman , told us how when he started, everybody warned him that he wouldn’t get far without brand awareness and heavy advertising. But in 2012, ASUS reached the fifth place in worldwide PC shipments.

When consumers don’t use brand as a proxy for quality, newcomers like ASUS who provide a high quality product, enjoy lower barriers to entry. Companies can also diversify more easily regardless of the skills consumers associate with a particular brand. (LG and Samsung take full advantage of this). Of course, the new reality is bad news to companies that don’t offer value.

• Q. How have review sites like Yelp impacted the revenues of restaurants, retailers and other businesses and why is this significant?

The owner of a small restaurant in Seattle—Machiavelli’s—told us that Yelp has helped them a great deal. Research shows that she’s not alone, a study from Harvard found that Yelp penetration in Seattle led to an increase in revenue for independent restaurants, but a decrease in revenue for chain restaurants. In the old days, big chains had an advantage over small restaurants because you always know what to expect when you dine at 'Applebee’s' or 'Olive Garden'. With the rise of review sites, people can also get a very good idea of what to expect at smaller restaurants.

• Q. With today’s almost perfect information, are branding, positioning and customer loyalty gaining or losing relevance to marketers? Why?

They are losing relevance. Think about selecting a hotel. Ten years ago you relied heavily on brand or on your past experience in choosing a hotel, so you tended to be loyal. Marketers still love to talk about consumer loyalty, but consumers often see their relationships with companies as an open marriage. A 2012 Deloitte study showed that only 8 percent of guests always stay at the same hotel brand. Yet we keep hearing that brands are more important than ever, or that investing in customer loyalty is the best long-term strategy. We argue that the opposite is true.

• Q. What is the Influence Mix, and how can it help businesses adapt to the approaching era?

The shift in the way consumers make decision doesn’t apply in the same way to cars and to toothpastes. It can also vary by segment or situation. The Influence Mix is a framework we offer in the book to help marketers develop better strategies that are based on the specific sources of information their customers depend on. The key question for marketers to ask is: to what extent do my customers depend on new sources of information in making a decision? We show how a company’s strategy should be driven by the answer.

• Q. What should a company’s communication strategy be in the new environment?

Your communication strategy should derive from your customers’ Influence Mix. If your customers base their decision on user and expert reviews, it’s pointless to use advertising or celebrity endorsement aiming to persuade them that your product is better. Similarly, using banner ads to create top-of-mind brand awareness is also less important because when it’s time to buy, these consumers rely on reviews, which usually overrides any residual effect of exposure to banner ads. Instead, marketers should generate interest in specific products and focus on promoting an ongoing flow of authentic content from users on retail sites.

• Q. How should market research change in this new reality?

Much of market research still measures consumer preferences in order to predict what they will buy in the future. But if your potential customers use online reviews as their main source of information, it becomes very challenging to predict their choices using traditional market research.

The reason is simple: when it’s time to buy, your customers increasingly base their decisions on information from user and expert reviews, not on their prior preferences. So you’re better off tracking these online sources directly. Market research is shifting from trying to predict consumer choices to tracking what is being said in the marketplace. 

• Q. What are some hot brands in the news today that are effectively profiting from the new reality?

In addition to ASUS (discussed earlier), other companies that now benefit from the new reality include Euro-Pro (vacuums), Roku (set-top streaming) and Box.com (online sharing and storage). These companies are competing with giants in their respective markets but manage to capture market share. There are potentially thousands of other companies that also benefit from this phenomenon.

• Q. What brands today are in most danger of losing market share due to today’s new environment of nearly perfect information?

Any brand that doesn’t provide high quality products (based on criteria used by reviewers and experts). It’s important to point out that this also applies to rising stars like ASUS, Box.com or Roku. In the new information environment, they can fall just as fast as they rose.

• Q. Why is branding more effective for some types of luxury brands than others?

In categories where prestige and emotional link to a brand play an important role, and where spec-based and performance quality is not a big issue, brand still plays a key role. When buying a luxury hand bag or a scarf you’re not likely to rely much on reviews from other users. In contrast, when buying a car, even a luxury car, you are still likely to rely on expert or user reviews. Branding and emotional connection still play a role in buying a luxury car but it is somewhat reduced.    

• Q. Aren’t fake customer reviews running rampant and doesn’t this denigrate their effectiveness and credibility?

Despite ongoing attempts to game the system, it’s actually harder than one thinks, especially as participation in rating systems grows, and review sites get better at fighting fake reviews. These sites have an economic incentive to curb manipulation: If they lose consumer trust, they’ll lose their audience and revenues. Marketers must understand that reviews are here to stay. Reviews are not perfect, but data from Nielsen shows that consumers trust them. They are certainly not going to replace reviews with information from marketers.

If consumers lose trust in certain review sites, they are much more likely to migrate to sites they do trust, to opinions of experts, and to recommendations from people they know on social media.

• Q.What are the first few steps a marketer for any size business could take to start applying this approach tomorrow?

The first step is to analyze the mix of information sources that consumers use in assessing quality. Marketers can greatly benefit from understanding their customers’ Influence Mix and the corresponding effective mix of tools and channels that fits the way their customers decide. Again, the key question marketers should ask is: to what extent do the customers we try to reach depend on user and expert reviews in making their decisions? If they do, then a company should re-examine everything from its market research program to its communication strategy, and take advantage of opportunities the new reality offers.