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What's the real impact of online reviews? Add to ...

With the Web offering more opportunities for customers to share their assessment of products and services, the question arises: What impact do these reviews have on sales? Harvard Business School Professor Michael Luca has some tentative answers, based on restaurants in Washington state, where he was able to compare state records on revenues with the average ratings on Yelp.com.

In a working paper, he reports that a one-star increase in the Yelp rating led to an increase of 5 per cent to 9 per cent in revenue for independent restaurants. That increase suggests a service such as Yelp.com helps to compensate for the lack of information potential customers have about those eateries, compared with higher-profile restaurants with higher marketing budgets. An increase in the ratings had almost no impact on chain restaurants’ revenues, and he found that chain restaurants have declined in market share as Yelp penetration has increased.

Prof. Luca learned that the more reviews of a restaurant – and hence the more information for consumers – the greater the market response to a change in its rating. As well, reviews written by elite members on Yelp – reviewers viewed as high quality – have nearly double the impact of other assessments.

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