A study of over a million review site transactions and a survey of over 12,000 consumers may show that licensing credentials matter less than ratings and reviews.
Thus, it may not be enough to be The Best when customer satisfaction expressed through ratings and reviews matter most to consumers.
This may have implications for how all businesses can cultivate more sales.
Reviews and Prices
The research was conducted by an MIT researcher. The goal was to identify if licensing laws result in a measurable increase in consumer satisfaction versus transactions in areas with less restrictive licensing requirements.
The study was conducted on a home improvement recommendation site and with a survey of over 12,000 consumers who had recently contracted home improvement services.
The results indicated that licensing requirements did not result in higher customer satisfaction rates. The study further discovered that licensing status was less important to consumers when hiring a home improvement professional.
What did matter was the contractor’s reviews and the price.
The researchers concluded:
“Our work suggests that, at least for the setting of residential home improvement services, consumers pay much more attention to reputation measures than licensing signals and more stringent licensing laws impose costs on consumers in terms of higher prices, without corresponding benefits in terms of customer satisfaction.
…we find no effect of the licensing signal on the hiring choice…
We do find significant positive impacts for each of the reputation measures (average rating and number of reviews) and significant negative effects of prices.”
Licensing Credentials Matter Less to Consumers
When it comes to getting hired, the transaction data from over a million users of a recommendation site and surveys of over 12,000 consumers clearly show that a contractor’s reputation matters more than the status of their license.
The report states:
“…there is no significant impact of displaying the verified license signal.”
Licensing did have an effect on hiring, but the effect was very low.
The research study calculated that the licensing signal had the same effect as a price drop from $200 to $197 (1.5% price drop) and had the influence of half of a percent of a ratings star.
That means that the license signal had a positive effect in conversion rates but that the positive effect was very small.
This is how the study explained it:
“…for the sake of comparison, taking the 1.47 point estimate of the license verified effect… at face value and comparing it to the price effect (-0.617) suggests that the licensing signal is
worth a drop in price from $200 (the median in our sample) to about $197.
And comparing to the average rating coefficient (0.254) suggests that the licensing signal is worth about 0.06 of a star.”
Top Reasons Why Consumers Make a Choice
Surveyed consumers used the following words when describing their top 3 reasons why they chose a particular company.
- price (50%)
- cost (14%)
- quality (14%)
- review (13%)
- recommend (13%)
- friend (12%)
Less than 1% of survey respondents listed licensing credentials as one of the top three reasons for hiring a home improvement professional.
The important takeaway is the importance of cultivating a positive reputation. That’s a proactive and pragmatic business stance.
Businesses focused on cultivating satisfied customers will be able to take advantage of this trend toward rewarding businesses with best reviews and customer ratings.
The research was focused on home improvement businesses. However it may be an indicator of how consumers overall are choosing professionals, services and business software as well.
If this is the case then ratings and reviews may be more important now than at any time in the online shopping ecosystem.
Consumer Protection in an Online World: An Analysis of Occupational Licensing (PDF)