Recommended for you - the effect of word of mouth on sales
This research explores the role word of mouth recommendations play in influencing the way consumers discover and purchase products, and their impact on the concentration of sales.
Word of mouth can be tremendously influential in how consumers discover products, particularly within categories such as music, film, books, and video games. This research explores the role word of mouth recommendations play in influencing how consumers discover and purchase products, both offline and online.
The online retail environment in particular has become an important area where consumers obtain product recommendations that inform their purchasing. Accessing the recommendations of others has become ever more common with the growth of online retailers such as Amazon, thanks to the consumer feedback on products they present on their pages.
This paper presents a model of consumer search to explain the impact of product recommendations on consumer product discovery and the concentration of sales.
The model explains a firm's incentives to increase the efficiency of word of mouth, namely to reduce the cost of accessing recommendations and to improve matching between consumers and the products.
The model also explains the consequences of such improvements for consumers and for the concentration of sales within the firm's product range. We find that both are intrinsically linked. When consumers with more prevalent preferences are the main beneficiaries of these improvements, the concentration of sales increases, generating a "superstar" effect. This increases the performance of bestselling products.
When consumers with less prevalent preferences, such as niche items, are the main beneficiaries, the concentration of sales is reduced, generating a long tail effect. As a result, products representing a small share of total sales (located in the tail of the sales distribution) perform better in the online sales channel.
The model reconciles lower sales concentration in online retail with the firm's logic for profit maximisation, and informs the design of marketing strategies to exploit consumer word of mouth.
Implications for competition are worthy of note. Firms with a large customer base will profit the most from online word of mouth and recommendation systems. These systems benefit from a large stock of consumer feedback to improve their accuracy and exhibit a learning curve to identify the preferences of new customers. Consumers will receive less accurate recommendations when switching purchases across firms and, in general, when patronising smaller firms. Both factors suggest that the firm can exploit consumer word of mouth to grow its customer base and outperform competitors over time.
To our knowledge this is the first theoretical work to explore the links between word of mouth and sales concentration.
A final author version of the research paper is available for download at the link below.