As consumers increasingly shift purchases to digital channels, businesses need to manage an increasingly diverse set of purchase drivers. The top levers at a firm’s disposal are classic promotional offers like price discounts and free shipping as well as cultivation of positive online reviews. While most online retailers focus on optimizing these investments independently, this approach overlooks nuances in consumer decision making that could be harming their bottom line.
A recent study, “Dynamic interplays between online reviews and marketing promotions,” was published in the Journal of the Academy of Marketing Science, which explores how online customer reviews interact with marketing promotions to influence consumer purchasing decisions. University of Alabama Professor of Marketing Clay M. Voorhees, Yufei Zhang, the lead author on the paper who will be joining the Culverhouse College of Business as an assistant professor of marketing in August, and G. Tomas M. Hult, examine the combined effects of customer reviews, price discounts, and free shipping on online sales.
Rather than looking at the effects of these drivers independently, the authors jointly model their effects and find important interplays that can dramatically impact retailer margins. Using a combination of experimental and real-world e-commerce data (spanning 25,000 product-day observations from fast-fashion retailers), the research finds that the effectiveness of promotions like discounts depends heavily on the number of product reviews as well as their valence.
One key finding is that price promotions no longer affect sales once a product has accumulated enough reviews, thus, sustaining a promotional schedule once a product has a substantially large number of reviews may erode margins without boosting sales.
“As you start accruing reviews, promotions no longer affected demand. In our fast fashion sample, once products hit 85 reviews, price promotions were no longer effective. The product has been validated through social proof and people are going to buy it. If you continue to discount once you get that critical mass, you’re just giving away margin. If the companies in our sample had cut off promotions once they hit that threshold, their total profit would have improved by 7%. Given that fast fashion firms often operate on a margin of 16%, these savings are significant.”
They also find downsides to these interplays. When a product’s reviews are consistently negative, they found that price discounts and free shipping offers weren’t enough to spur demand, as the damage was done.
“With negative reviews, we find they create a strong floor that is hard to recover from,” Voorhees said. “In our data, if firms launched and quickly received negative reviews, free shipping and standard promotions (25% in our data) were not enough to encourage sales. If you do have negative reviews, you essentially need to go to extreme discounting to try to overcome them and hopefully get your reputation turned around organically.”
The study emphasizes the importance for e-commerce managers to consider both the quantity and quality of product reviews when planning promotional activities. Understanding the dynamic relationship between reviews and promotions can help in crafting strategies that enhance sales without unnecessary profit sacrifices.
While customer reviews and marketing promotions are both influential, their combined effect is complex. A nuanced approach, taking into account the volume and sentiment of reviews, is essential for maximizing the effectiveness of promotional efforts in online retail.