FTC fines company $250,000 for sock puppet reviews

Guitar

More than $5 million in guitar-lesson purchases were made through illegal ads, according to the FTC settlement filed today. Image: Flickr / tabithahawk / CC-BY-SA

When shopping online, the reviews of a product often play an important role in decision-making. In a landmark case, the Federal Trade Commission has fined a company $250,000 for creating false online reviews. Legacy Learning Systems reportedly paid affiliates for false endorsements that resulted in $5 million in sales.

FTC ruling on online reviews

In 2009, the Federal Trade Commission issued a set of guidelines about online advertising. These guidelines require anyone advertising online to fully disclose their relationship to the seller. Reviews and testimonials, according to this ruling, also count as advertising. The FTC believes that any review or online testimonial posted could have a direct effect on the sales and income of a particular product, be it installment loans or baby toys. When a company creates fake reviews or hires another company to fabricate reviews, those false pieces of advertising are called “sock puppet reviews.”

Legacy Learning Systems charged $250,000

Legacy Learning Systems is a company that creates and sells the “Learn and Master Guitar” program. Retailing for $249 or more each, these guitar lessons are popular online sellers. The FTC started investigating the company when it discovered that the company made more than $5 million in sales through an online affiliate program. Many of these affiliate links were not attached to a disclosure that revealed the person posting the link or review would make a commission if the product was purchased from that space. The FTC also found that the company paid a service that created false online reviews of their products.

What this means for your wallet

With one of every four online customers seeking out reviews and 87 percent of customers reporting that online reviews influence their purchase, reviews are big business. Customers have also been shown to be willing to pay up to a 20 percent premium for well-reviewed services. The estimation is that online sales will pass $279 billion in sales by 2015. These hefty fines and increased oversight by the FTC could be one more step in increasing the real value of what you get for your money — or they could end up just re-directing marketing dollars. Either way, remember that the way you purchase online — be it through an affiliate link, a display ad, or directly through the company website — has a big  effect. A purchase through online advertising means that the ad was successful, so only purchase through the kinds of ads you would like to see again.

Sources

WalletPop
UConn.edu (PDF)
TechCrunch

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