It may be counter-intuitive, but the more positive online reviews a product gets may actually lead to a net negative profit for the retailer, new research has found.
A team of researchers from University of Groningen the Netherlands and University of Munster in Germany analysed more than two years of sales data from a major European online retailer -- a total of almost nine million page views and 631,063 purchase transactions for 2,164 different products in the electronics and furniture categories.
The information-rich dataset enabled them to examine the key characteristics of online customer reviews, or OCRs, available at the moment of purchase and return decisions over a relatively long term.
Whether the reviews were positive or negative and the volume of each type were the key factors in the authors' calculations.
For retailers, one of the down sides of online selling is its high return rate -- an estimated 30 per cent, costing retailers between $6 and $18 per return.
The authors reasoned that a preponderance of positive reviews about a product can raise customers' expectations and influence them to make a purchase that, when it arrives and is tested, disappoints them more than it might have had they had the opportunity to physically examine it.
Manipulating the data through a series of simulations, the authors found that a lot of positive reviews can raise sales, but at the same time, if there are not less glowing reviews to balance the raves, lead to more disappointment and hence more returns.
This effect is stronger for "novice" buyers, they wrote, and for cheaper products.
The result is a higher total return cost -- offsetting the gain in sales - and thus lower profits.
"Our findings encourage retailers to get a large review base that adequately reflects the performances of the product," the researchers concluded.
Retailers thus should actively stimulate customers to write a review after purchase, but for the retailer's own good, the reviews should fairly represent customers' experience of the product, negative as well as positive, the researchers said.
The findings will be published in a forthcoming issue of the Journal of Retailing.