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How Ratings and Awards Do (and Don’t) Benefit Companies
In fine dining, a Michelin star is commonly seen as the ultimate certification that a restaurant meets a particular standard of excellence. As a result, Michelin stars attract diners willing to pay hundreds of dollars per person. What most industry outsiders don’t appreciate, though, is just how much is involved in achieving and maintaining a star rating.
For instance, chefs complain that Michelin prioritizes “consistency,” which means that Michelin-starred chefs must forgo the opportunity to experiment. In addition, Michelin expects restaurants to maintain certain standards of decor, a long menu, a well-stocked wine cellar, and a large staff, all of which can be ruinously expensive. As a result, restaurants can feel that the increased demand attracted by Michelin stars is not worth the additional expenses and constraints, and some have even gone as far as returning their stars.
Many other industries — from automobiles to consumer electronics to banking to wine — are also substantially affected by “judgment devices” like the Michelin star. These devices range from a consumer review on Yelp to a formal review in Consumer Reports, and provide information about the industry, its products, and its firms. They include things like rankings, reviews, ratings, certifications, and awards.
Judgment devices have the obvious function of presenting information in a predictable format and with consistent frequency. But what is often underappreciated is that judgment devices don’t just describe the market, they shape the market. Judgment devices intervene in the industries they depict and ultimately become constitutive of what they measure. Firms can and do benefit by orienting their behavior not only to quality in an objective sense, but just as much to quality as measured by the judgment device.
What does this mean in practice? An eBay seller can provide high-quality goods and prompt shipping, but for the seller to get a coveted high number of positive reviews, it can be just as important that the seller send follow-up emails reminding customers to rate the seller’s service. More generally, a firm can try to appeal to a judgment device not only through straightforward tactics, such as running specialized promotional campaigns targeted at the device (“get a free dessert if you review us on Yelp!”), but also by changing relevant product characteristics, the timing of new product releases, or even by advocating for changes in how the judgment device is calculated. Every firm needs to understand how their products can be shaped to appeal to judgment devices, or even how judgment devices can be shaped to positively evaluate their products.
It may seem like we are suggesting all firms would be well advised to reorient strategy to cater to the industry’s judgment device. But that’s not always the sensible thing to do. Companies can lose money by unsuccessfully devoting significant resources to this issue. They key is knowing when to engage with a judgment device and when to leave it alone, which requires careful consideration of different aspects of the judgment device, its place in the market, and what would be required of the firm to appeal to it. This also requires considering if the judgment device is “granular,” like a ranking or rating, or if it is “lumpy,” like a prize or certification.
How Ratings and Awards Do (and Don’t) Benefit Companies
If appealing to the judgment device is trivial then it almost always makes sense to do so. But many judgment devices require significant expenditures or are otherwise costly to pursue, and these costs may outweigh the benefits. If a judgment device is difficult to target but has minimal effect on consumer demand, obviously it should be ignored.
The tricky question is what to do when the judgment device is both costly to appeal to and greatly shapes consumer demand. Under these circumstances, consider if the judgment device is granular in nature (like a rating) or if it is lumpy (a prize). If the device is granular it oftentimes makes sense to pursue since just as having 5 stars on Yelp is better than having 4.5 stars, so is having 4.5 stars better than having 4 stars, etc.
If the device is lumpy, it may be better to leave it alone since one runs the risk of expending resources to pursue the judgment device but not achieving it. For example, consider a film studio that designs a film’s release and marketing strategy around the Oscars, which it ultimately fails to even be nominated for. Under such risky conditions, the firm should only pursue the judgment device if it either has a comparative advantage in appealing to the judgment device or can identify a way to game the device that competitors have thus far ignored.
Firms may choose to pursue a diversified approach, targeting a judgment device with some divisions or product lines and ignoring it for others. In such a portfolio approach, the firm would go through a decision tree for each product, recognizing that some of their products may be good candidates for appealing to the judgment device whereas others are better off leaving it alone and appealing to consumers on dimensions of quality that the judgment device ignores.
For instance, many winemakers in Tuscany choose to produce some wines that follow strict DOC/G guidelines while foregoing this certification with some of their other wines, thus only partially complying with the government’s quality classifications system while still offering products outside that system. Likewise, most Hollywood studios make both films that are targeted at the Oscars and films targeted at filmgoers who just want to sit down with their popcorn and watch explosions.
Managers have to be attentive to both the potential and costs of judgment devices and carefully evaluate whether pursuing favorable rankings, ratings, reviews, credentials, and prizes is worth the often considerable risks. It’s worth remembering that a manager’s decision is not that her firm should appeal to judgment devices or not, full stop, but that this product line, but not that product line, may be well suited for targeting favorable rankings, ratings, reviews, credentials, or prizes.
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