There has been a radical shift in how consumers make decisions. Products are being evaluated more on their "absolute value" and brand names mean less.
Have you ever tried the Logo Quiz? It's an online game where brand icons flash up on the screen and you have to guess the company name that goes with it. Like most people, I can instantly identify hundreds of logos, sometimes even by a single letter or a fragment of the company's icon. It's a testament to the billions spent by companies building their brand recognition.
But, as the digital age rewrites the rule book on consumer behaviour, the selling power of mighty brands like Apple, Nike and Sony is under threat. Their potency is being sapped by the wealth of user reviews available online.
In the past, brands have thrived because most consumers had very limited information to evaluate the quality of a product before buying. The default was to rely on trusted brands, especially for major purchases like cars, white goods and electronic equipment. Brand loyalty was a way of reducing the risk of a bad purchase.
But researchers Dr Itamar Simonson, a marketing professor at Stanford University, and Emanuel Rosen, a former software executive, say brand loyalty is fading as new sources of information, such as reviews from other users and online product demonstrations, become available. This is causing a radical shift in how consumers make decisions. Products are being evaluated more on their "absolute value". Brand names mean less.
Simonson draws on two similar experiments conducted decades apart to back his claim. In the first experiment, conducted in the early 1990s, participants were asked to choose between three Minolta cameras: an inexpensive one, a mid-priced one and an expensive one. Most chose the middle one. Simonson called this "the compromise effect" because consumers tended to gravitate to the middle of the options presented to them – they compromise on price and features. Last year, he led a similar experiment but this time participants were allowed to spend a few minutes reading user reviews and other information about these and other cameras on Amazon.com. When the consumers were able to see online reviews written by other consumers, and glance at feature comparison charts, the compromise effect disappeared.
"Once consumers are better informed about the actual, absolute values of products and are not dependent on things like brand name or a small set of options in front of them," Simonson said.
The internet has given today's shoppers easy access to a wealth of independent research on whatever they want to buy. A survey of 28,000 internet respondents in 56 countries by the pollster Nielsen found 92 per cent of consumers trusted recommendations from friends and family above all other forms of advertising and 70 per cent said they trusted consumer opinions posted online. In Australia, nearly half of those making an online purchase in 2012 had consulted a product review site, a PricewaterhouseCoopers survey found. The rise of social media is bound to accelerate this trend.
What about review fraud? Won't those selling things be able to trick consumers with fake testimonials? Simonson and Rosen argue that, while fraud exists, the large numbers of reviews in the biggest forums crowds it out. Sites that weed out fraud most effectively will flourish, they argue in their book Absolute Value: What Really Influences Customers in the Age of (Nearly) Perfect Information.
Simonson and Rosen claim consumers are now making better choices, on average, and acting more rationally than in the past thanks to reviews and other product information available online.
Online reviews are also helping upstarts shake up markets dominated by big names. The rise of computer maker ASUS illustrates this. It was once a successful manufacturer of other companies' hardware but had virtually no name recognition among consumers. In 2007, an ASUS-branded product was introduced to the market and became a hit after getting stellar reviews by experts and users. By 2012, ASUS was the world's fifth best-selling brand of PC and, by early last year, its tablets were the third best-selling brand. According to Simonson and Rosen, the rise of ASUS shows how the growing availability of opinions from experts and users has diminished the importance of a brand name. ASUS was able to succeed despite the presence of giants like Hewlett-Packard and Dell.
Don't underestimate the power of all those user reviews.