CAMBRIDGE, Mass., December 17, 2008 — Firms that demonstrate consistency in product quality are more likely to see higher sales compared to firms that are hit or miss when it comes to quality, according to P.J. Lamberson, a visiting professor at MIT's Sloan School of Management. He found that "being consistently mediocre is better than being inconsistently amazing” because consistent customer reviews and recommendations — "positive feedbacks” — lead to higher market share.
These feedbacks, both positive and negative, are available on just about every online retail Website these days which post customers' product reviews, rank products based on top sellers, and even provide a breakdown of what shoppers ultimately purchased among competing products. Lamberson noted that these types of positive feedbacks drive the adoption of virtually every new product, particularly new technologies.
In “Better Late than Variable: The Strategic Advantages of Consistent Positive Feedbacks,” Lamberson and his coauthor, Scott Page from the University of Michigan, studied which factors related to customer feedback lead to the largest market share. “Is a firm better off targeting a product towards a small population of early adopters to get the ball rolling or investing in a product that creates smaller but more broadly based feedbacks?” he asked.
Lamberson and Page found that the advantages gained by establishing an early lead through strategies like deep discounts, heavy advertising and rapid expansion were not as effective in increasing market share as ensuring the quality of products, which will result in a higher number of positive customer reviews. “[I]ncreasing the magnitude of positive feedbacks is the most durable source of long-run competitive advantage followed by decreasing the variation of feedbacks,” he wrote.
These findings run counter to much of the existing literature on the topic, which recommends rapid expansion as a means of establishing an early competitive advantage. However, Lamberson concluded that “the product with the highest feedbacks always wins out. … [I]ncreasing market presence proves to be a weak strategic lever relative to increasing the level or certainty of positive feedbacks.”
In a second paper, “(Localized) Increasing Returns and Market Share Distributions,” Lamberson explains why when it comes to market share, online retailers aren't likely to see a winner-takes-all outcome, but instead markets that are shared by multiple firms.
For example, Lamberson noted that while Microsoft Internet Explorer controls 75% of the web browser market, Firefox and Safari maintain 17% and 6% market shares respectively. The same model applies to books and music where many products are sold to a relatively small number of people, but combined those products account for a large share of the market — a phenomenon referred to as the “Long Tail.”
He wrote that “[w]hile the Internet provides consumers with more information on product popularity, pushing markets towards winner-takes-all outcomes, it also provides them with more choices and more information on product characteristics. These last two features pull markets away from the winner-takes-all domain of global increasing returns and into the power law world of localized increasing returns.”
Lamberson concluded, “By making more product characteristics accessible, the Internet facilitates the screening process, enabling 'the formation of consideration sets that include only those few alternatives best suited for a consumer's personal taste.'” His model of consumer choice demonstrates why a market with increasing returns may not lead to a winner-takes-all outcome and can even support a “Long Tail” of small share products.