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book excerpt

Absolute Value by Itamar Simonson and Emanuel Rosen.

From Absolute Value What Really Influences Customers in the Age of (Nearly) Perfect Information by Emanuel Rosen and Itamar Simonson. Copyright 2014 by Emanuel Rosen and Itamar Simonson. Reprinted courtesy of Harper Business, an imprint of HarperCollins Publishers.

Back in February 2006, when a Yelp member named Brenna F. reviewed the Seattle restaurant Machiavelli, nobody thought twice about it. And if someone did, we doubt they imagined that it would have any impact on chain restaurants like McDonald's or Applebee's. Brenna gave Machiavelli three stars (out of five) and wrote: "Good pasta, reasonable prices, and cozy seating. Go here with friends, but not with a first date."

Ristorante Machiavelli is one of more than a thousand restaurants in the city of Seattle. You're unlikely to read about it in Gourmet magazine, and it doesn't have the advertising budget of a chain such as Olive Garden. But Yelp helped Machiavelli (and other small restaurants) gain something that, up until recently, was the exclusive asset of big brands.

After Brenna F. posted her review, it took almost two months before another person reviewed Machiavelli. Megan D. gave the restaurant four stars in April and pointed out that the portions were large. The third review was posted in August by Rachel B., who recommended the Caesar salad and the baked chicken. Slowly but surely, the trickle of reviews added up to create a clear picture of Machiavelli: You should expect a line (especially on weekend nights); the spinach ravioli is worth trying. So are the tuna carpaccio, the olive bread, and the penne with roasted red pepper. Overall: good, straightforward Italian food at very reasonable prices. Machiavelli today has around four hundred reviews, and reading through just a few of them, you get a good idea of what to expect.

And this is where big chains are impacted. In the past, having "a good idea of what to expect" was one of their important advantages over small restaurants. You always know what to expect at Subway or McDonald's. But when you know what to expect at small restaurants through Yelp or Zagat, brand names are becoming relatively less important. In the old days, consumers often had a hard time assessing quality before making a decision and had to rely on cues such as the affiliation with a chain. This gave rise to much of what we know as marketing. When quality was hard to predict, a brand was a simple shortcut that told you what's likely to be good and what isn't. But when you can quickly tell how good or bad something is, based on more reliable sources than just the name, brand has a reduced role as a quality signal.

To further examine the link between Yelp reviews and brand names, let's discuss some research by Harvard professor Michael Luca. Luca became interested in the impact of reviews on business a few years ago when sites such as Yelp just started to pick up. Many were skeptical about this phenomenon, seeing reviews as a niche activity of a small group of people. It wasn't clear at all whether sites like Yelp had any impact on the bottom line. Luca picked the restaurant industry as a good domain to study this. … Armed with revenue data for all Seattle restaurants, Luca got to work. Showing a correlation between ratings and revenues wasn't too hard, but this wasn't enough. The fact that restaurants that get high ratings also get high revenues isn't too surprising and may not be related to their presence on Yelp. He wanted to be able to demonstrate more than that.

To examine any causal relationship between Yelp reviews and restaurant revenues, Luca took advantage of the way Yelp displays its results. He knew that Yelp (like other review sites) doesn't display the actual rating average, but they round it up or down. For example, if a restaurant has a 3.24 average, Yelp rounds it down and users see three stars. If a restaurant has a 3.25 average Yelp rounds it up and users see 3.5 stars. So focusing on restaurants just around those rounding thresholds could be insightful. A restaurant with a 3.25 average is virtually the same as a restaurant with a 3.24 average. If its revenues are significantly higher, this may suggest that it's related to its 3.5-star rating that users see on Yelp.

Indeed, Luca's research showed exactly that. There was a jump in revenues that followed those discontinuous changes in rating. Overall, every additional star on Yelp was associated with about 5 per cent increase in revenue. Luca looked at the revenues of all restaurants in Seattle between 2003 and 2009, which allowed him to observe a market before and after the introduction of Yelp.

What's most interesting in our context is this: He found that Yelp had a large impact on revenues for independent restaurants like Machiavelli, but chains experienced a decline in revenue relative to independent restaurants in the post-Yelp period. "Higher Yelp penetration leads to an increase in revenue for independent restaurants, but a decrease in revenue for chain restaurants," he wrote. With the rise of an alternative source for information, brands became relatively less important.

There is another important effect of the growing reliance on experts, users, and various useful information services (such as price comparison sites) and the corresponding declining impact of brands. Brand names tend to exaggerate the real quality differences among products. If you focus on brand name when considering a headphone or even an artificial sweetener, your prior beliefs tend to categorize products with a broad brush and tend to amplify presumed differences between good and bad brands. And unless the brand you choose is extremely different from what you expected, you'll tend to confirm what "you knew all along" (consistent with the classic confirmation bias). User and expert reviews tend to level the playing field. True, reviewers may also be swayed by brand names to some degree. However, reviews are often based on actual experience. Moreover, to offer their target audience added value, reviewers may want to highlight things that differ from the layperson's expectations. In reality, quality differences are often much smaller than perceived brand differences would imply. Accordingly, reviews that are based on actual user experiences will likely reflect the limited quality differentiation among products. You may think that the music sound produced by Brand X is so much better, but reviews of Brand Y can cause you to rethink your brand-driven decision and take a closer look at Brand Y, which costs less and evidently sounds just as good.

Are we saying that this is the end of brands? Of course not. We're saying that the power of brand as a main cue for quality is diminishing. Brands still have some important roles that are not likely to go away, and as we discuss later, in categories such as those involving fashion, status, or little thought, the rate of change is likely to be slow. As David Aaker and other scholars have pointed out over the years, brand equity has four components: awareness, perceived quality, mental associations, and loyalty. Two elements out of the four are hit the hardest in the new era: perceived quality and loyalty (we discuss loyalty in the next chapter). And as we mentioned earlier, there are domains that are much less affected by the new information environment, and for those categories, all components of brands are still important. But for categories where consumers rely on the opinion of others, and especially where there's little ambivalence about things like features or performance, we expect this trend to reveal itself at full strength. In the age of full access, the impact of brand equity will diminish as a result of the growing reliance on more accurate quality information.