November 07, 2019
The Power of Suggestion: New Research Deconstructs the Impact of Recommender Systems in Online Sales
Research finds that recommendations boost overall sales, but can reduce choices.
Recommender systems for online retailers — the algorithms that tell you “customers who bought this item also bought” — are helpful for driving up overall sales figures, but also can lead to a narrower array of product choices, according to new research by Dokyun “D.K.” Lee, Assistant Professor of Business Analytics the Tepper School of Business, titled “How Do Product Attributes and Reviews Moderate the Impact of Recommender Systems Through Purchase Stages?” Moreover, the research finds that the effect of recommender systems is shaped by product attributes and customer ratings.
In related research, “How Do Recommender Systems Affect Sales Diversity? A Cross-Category Investigation via Randomized Field Experiment,” coauthored by Lee and Kartik Hosanagar of the University of Pennsylvania, the study breaks down the impact of the algorithms commonly used by online retailers such as Amazon, Walmart, or Netflix. Most analyze consumers’ purchase histories and browsing habits to create a composite of people with similar tastes, then recommend the products those people have bought.
Lee found that recommender systems do help people explore and buy more products — for example, Netflix might recommend a movie you might not otherwise consider, so the diversity of individual sales increases.
But recommenders tend to send an aggregate of consumers to the same product over and over, which winds up hurting market share for niche products. If Netflix keeps sending viewers to popular movies, the small art-house film won’t get as much attention, so there is less diversity in overall consumption. The end result, Lee explains, might be that studios will produce more of the types of movies that are popular, and invest fewer resources in the movies that aren’t benefiting from the recommendations.
A control group that had no recommender system had greater diversity, Lee notes: the bottom 80 percent of products accounted for 37 percent of sales in the control, compared to just 27 percent when a recommender system was in place.
While some products may be inherently popular, recommender systems can also create unintentional echo chambers. If a news outlet used them, the filters could significantly impact the way people consume information by driving the bulk of readers to the same stories. The same is true for consumer products.
Although Lee studied the effect of recommenders in retail, he notes that the findings are applicable to non-retail settings.
“Recommenders influence consumer purchase patterns across different stages of purchase funnel. This effect differs by stages and also across different product categories.” he says.
Lee’s research also examines the effect of recommenders on different stages of the sales cycle, and describes how that effect is impacted by other factors, such as the type of product or consumer ratings.
For example, he finds that recommender systems can help boost a product that has low consumer ratings, as well as “hedonic” products — things that are unnecessary, but that people might buy for pleasure, such as wine or perfume. The boost is lower for practical items, however.
By knowing the differences in impact, a retailer could modify its website to address any shortcomings, Lee notes: “If you have a niche product with mixed reviews, you could make the recommender signal more salient, which may bump up sales.”