Word of mouth used to be just that - what your friends told you about a book, a movie, or a restaurant. Today, we not only have friends to turn to for such information but also thousands of strangers, who are posting their opinions online and leading the rest of us this way or that. This new public reservoir of advice and first-hand experience is leading to a major shift in the relationship between consumers and commerce, creating new opportunities for some companies - and a fresh source of risk.

Not so long ago, consumers made many purchasing decisions based only on the recommendation of a trusted friend. But today, thanks to the Internet, you can also get the benefit of the experience of thousands of people you don’t know. Online reviews now make it possible to do everything from buying a book to booking a hotel room, all informed by the wisdom of strangers.

Most of the time, the reviewers’ judgment seems on target. As an old American song puts it, “Fifty million Frenchmen can’t be wrong.” For consumers, having these opinions available is generally helpful. For business, it’s creating a variety of new opportunities, but maybe even more challenges.

Although online reviews are available for almost any product or service, travel may be the industry in which it has had the most impact.

In the United States, 49 percent of those who responded to a 2010 survey of travelers who make plans online said comments of other travelers were very important to them in their decision-making. Another 18 percent said comments were somewhat important, according to the survey, led by Ulrike Gretzel, director of the Laboratory for Intelligent Systems in Tourism at Texas A&M University.

With 40 million reviews of 450,000 hotels and 700,000 restaurants worldwide, and 21 new reviews added every minute, TripAdvisor has grown into many people’s go-to site for travel information. The site “has been a real game-changer,” says Jay Karen, president of a bed-and-breakfast trade group, the Professional Association of Innkeepers International, based in Haddon Heights, New Jersey.

The review site has been a boon in particular to bed and breakfasts that previously depended more on guidebook listings and personal referrals. “TripAdvisor has allowed B&Bs to compete on a fairly level playing field with hotels,” Karen says. “Properties in our industry that otherwise might never have been noticed can shine brightly due to guests telling the world about their experiences.”

But Karen says there’s also a downside. “Every guest who walks through the door has the potential to write very negative things for the world to read. Sites like TripAdvisor still see too many instances of fraud and embellishment, which can cause serious damage to a good business.”

The Power of Negativity
Deserved or not, the impact of negative comments can be huge. For one thing, most people believe what they read: only 13 percent of TripAdvisor users say they doubt the veracity of their fellow users’ comments, according to the Texas A&M survey. For another, online consumers tend to act on the criticism: Convergys, a customer service company, found in one survey that two-thirds of consumers pass on buying a product or service after they have read negative online reviews.

Although the managers of the establishments selected by TripAdvisor for its annual rankings of the ten dirtiest hotels probably deserve what they get, other innkeepers complain that they have been harmed by false and slanderous reviews.

TripAdvisor maintains that four out of five posted reviews are positive, but that fifth review rankles many hoteliers. In the United Kingdom, as many as 700 B&B owners and hoteliers who claim to have had problems with fraudulent or exaggerated reviews are considering bringing a suit against TripAdvisor, charging that their businesses have been damaged. Other U.K. hotels are fighting back in a different way online by building a database of “nightmare guests.”

But mean guests may just be part of the problem. “I get calls from hotel owners who complain to me that the hotel owner across the street from their property is posting false comments on TripAdvisor to lure guests to their property,” Gretzel says.

Hoteliers, however, do have some remedies in this virtual court of public opinion. Managers are allowed to post responses to reviews, says TripAdvisor spokeswoman Laurel Greatrix. They can also report a suspicious review.

Once a review is flagged as suspicious by readers or by the company’s own screening software, quality assurance specialists review the questioned post, and remove it if it doesn’t meet the site’s standards. Profanity, threats, personal insults or ALL CAP reviews are among the reasons a posting may be spiked.

“TripAdvisor has more than 40 million trusted reviews and opinions from millions of travellers across the world and we constantly monitor what is being posted; if there is any suspicion a review is fraudulent, it will be taken down in accordance with our zero- tolerance approach,” says Greatrix.

In any case, marketing researchers also say that angry innkeepers shouldn’t overreact. “The consumer studies show that a single review will not make a difference,” Gretzel notes.

Nor will a low score. A number of researchers have found that people are less influenced by the number of stars that reviewers award than by individual comments. People are usually generous with stars, but more critical in their comments. “[O]ur studies confirm that people evaluate the content in detail rather than the overall rating,” Gretzel says.

Here, too, that’s not necessarily bad news. Although one test conducted by Gretzel’s team found that readers were able to detect fake reviews only about 60 percent of the time – not much better than pure chance — the longer the review, the easier it is to detect something fishy. In particular, she says, people tend to disregard extremely positive and extremely negative reviews.

The one way in which low scores do hurt, eventually, is that the affected properties won’t come up on the first pages of a search. “The top-rated hotels . . . get more exposure because the positively reviewed hotels are usually ranked first,” Gretzel says.

Also, the impact may be different at different ends of the market. High-end travelers tend to be less concerned about negative reviews than budget travelers, according to Chrysanthos Dellarocas, an associate professor of management information systems at Boston University. High-end searchers are more concerned with determining whether the atmosphere of a hotel, for instance, will suit their tastes, while budget shoppers may be more susceptible to negative reviews because they are concerned about whether the hotel will meet their basic requirements.

Which Customer Is Always Right?
For marketers, online reviews create a variety of new challenges and opportunities.

In the hotel industry specifically, the positive part is that hoteliers have much more feedback than ever before, and some are using it to improve their service. For example, Gretzel says that many hotel managers are compensated in part on the basis of their TripAdvisor ranking.

Online reviews also make it easier to identify opinion leaders, Dellarocas says. Some social media marketing firms are learning how to seek out and identify people who have an outsize influence with their friends or an online community. Once these “influencers” are found, he says, the firms try to affect their opinions by inviting them to special events, sending them gifts, or suggesting they try some new products.

For quantitative market researchers, however, online reviews present a challenge. The biggest is that much of the information is fairly “noisy.” Unlike earlier crowd-sourced information, such as Zagat’s restaurant guides, which rely on the numerical ratings of thousands of participants, online commentary tends to be valuable to consumers for the same reason it’s sometimes dangerous for businesses – its anecdotal nature.

The distribution of the reviews also tends to cluster toward extremes. As most reviewers write only when they are feeling very positive or very negative, the people who thought the hotel room was adequate or the book just O.K. tend to be underrepresented. “If you think the movie is a ‘three,’ you don’t really have the incentive to rate [it],” says Michael Zhang, an assistant professor at the Hong Kong University of Science and Technology. “You only rate a movie if you love it or you hate it.”

Of course, marketers can adjust for these kinds of biases. Dellarocas, Zhang, and Neveen Awad of Wayne State University in Indiana have even built a model that can predict the volume of movie ticket sales using comments from the Yahoo! Movie site. By looking at what they call the three Vs – the volume of reviews, the valence or score the reviewers give, and the variance between positive and negative reviews – and combining that information with traditional movie industry variables such as the marketing budget, they can predict ticket sales with 91.5 percent accuracy for any given week following the opening weekend. “We can actually plot the trajectory of sales and we can predict at what week the movie will be out of the cinema,” Zhang says.

Facing Facebook
But the value of these kinds of models may be short-lived. As the Web grows ever more social, the time we spend communicating with strangers is decreasing. More and more, word of mouth is back to where it began – with our friends.

That’s a problem for analysts because people tend to mirror their friend’s opinions. If one friend gives five stars, others tend to follow suit. “People are heavily influenced by their friends,” Zhang says.

Here, quantitative analysts confront an apparently insurmountable problem, one that can’t be corrected or massaged with statistics: it’s impossible to measure the degree of social bias, according to Zhang. Only you know how far your own real opinion differs from the opinion of your friend – and maybe even you don’t have that clear an idea about it.

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