Amazon first started allowing consumers to post product reviews in 1995. Ever since then, product reviews have steadily been gaining traction as a business performance metric. Every department of a B2C product company can use the information gained from measuring reviews:
- Sales teams push the products reviewers love into sales channels, knowing they will be making a bigger splash.
- Marketing updates marketing messaging and SEO data based on consumer language.
- Product Development fixes, improves or discontinues products based on global consumer feedback trends.
- Purchasing improves factory quality control by reporting consumer complaints and praises about products.
- Customer Service is armed with appropriate responses to recurring issues.
- Executives receive the true consumer voice from product reviews and gauge its impact on the brand and revenue.
WSJ: Investors Should Pay Attention to Product Reviews, too
Last month, The Wall Street Journal published an article based on a research paper by Jiekun Huang titled “The Customer Knows Best: The Investment Value of Consumer Opinions“. The paper analyzes 6 million product reviews and concludes there is a positive correlation between reviews and stock returns.
The paper is part of a larger research project into “serendipitous information”, a term first coined in 1999 by Subrahmanyam and Titman. It refers to information investors can glean from everyday activities. They say serendipitous information can be noisy, but that it in aggregate it can provide useful signals of a firm’s value.
The upshot? Brands and investors can gain an edge by analyzing global product reviews as a predictive stock indicator.
Online Product Reviews as a Predictive Indicator
The paper cites Nielsen’s 2015 ‘Global Trust in Advertising Survey’ when it states that 69% of those that trust online consumer reviews say they always or sometimes take action on these opinions. This suggests that product reviews can and do influence consumers’ purchase decisions on a large scale.
“69% of those that trust online consumer reviews say they always or sometimes take action on these opinions”
So just why are reviews a predictor of revenue and earnings?
- Product reviews are a sample set of the broader opinion of your customer base. Maybe only 10% of your customers write a review. If 2% of them are negative, it can be assumed that 2% of your customers are generally unsatisfied. You can assume those same percentages of customers share the message in other mediums (word-of-mouth, social media, etc.), precluding strong or weak future sales.
- Aggregating a large data set of reviews from many different sites can ensure that individual errors and anomalies get canceled out, making this an accurate data set.
- Sophisticated hedge fund managers are starting to use product review analytics to identify “abnormal customer ratings”. They buy up stocks that are predicted to perform well, or sell off those that are not.
- There is somewhat of a lag between when the information is conveyed by consumers and when the stocks actually start to rise or fall. This makes reviews a good metric for predictability and action.
- Consumers are the most important non-financial variable for businesses. Being able to analyze their insights via product reviews is of significant value to the market.
Real Life Example: TurboTax’s Product Review Saga
Intuit experienced this phenomenon first hand with its TurboTax software back in 2003. Long time TurboTax users became irate over software changes that removed the ability to use the program on more than one computer. The company failed to account for the fact that customers had multiple devices – such as a work computer, a laptop and a home machine.
Customers were highly irritated over the change to say the least. The product review average for TurboTax went from a 4.5 star rating to a 1.5 star rating on Amazon.
As a result of the software change and subsequent product review disaster, Intuit’s earnings were $100 million lower than predicted to analysts.
Luckily, Intuit was an agile enough company to fix its mistakes, quickly removing the single-device stipulation and issuing an apology to users. Had Intuit been able to analyze its reviews back then, they may have had a much quicker indicator that there was a problem.