How to measure the cost of a bad reputation?

Damage to an organisation’s reputation can have many causes – from a sniping online review of a disappointing product to a viral video of criminal activity by staff – and just as many effects, scaling from a dip in share prices to a slide into bankruptcy; or more subtle, insidious consequences, attaching negative connotations to that organisation for years to come.

What is a bad reputation?

A bad reputation is one of those things that everyone intuitively understands and yet it remains hard to pin down and perhaps harder still to agree on.

This is because with reputation we are dealing with perceptions – different perspectives, agendas and opinions, meaning we are firmly in subjective territory. In general, the reputation literature steers clear of good or bad definitions in its formulation because of this inherent subjectivity. It’s safer ground to think of a company, product or individual having a reputation for something with someone.

This means that a reputation is defined in relation to both a topic and a stakeholder.

Clearly different stakeholders have different priorities and expectations. A company’s stance on a given topic – say job cuts – may therefore engender different responses from different stakeholders depending on these priorities and expectations. Investors may be happy about the cost savings and impact of profits; employees and unions less so. In overly simplified terms therefore, the company would have a good reputation with investors on the subject of job cuts and a bad one with employees and unions.

The important point to keep in mind when assessing the cost of a bad reputation is therefore the stakeholder concerned and how much of a priority, they consider the topic to be.

As we shall see, not all reputational costs are directly financial

The financial cost of a bad reputation

Arguably one of the easiest effects to quantify is financial. Many companies ask themselves how to measure the cost of a bad reputation. At face value, the balance sheet can tell you the precise cost of damage to your reputation, while your share price tells everyone else in the world how a poor reputational standing is costing you money.

But there are more deeply rooted financial repercussions that run through an organization after its reputation has taken a hit. There is a warning for all in the example of international aid charity Oxfam, whose reputation prior to the Haiti scandal – in which staff was accused of sexual misconduct, bullying and harassment – was near unimpeachable.

For a non-profit dependant on donations backed by goodwill, the bad press surrounding the scandal had an immediate financial impact. A poll by Third Sector found that more than 60% of people were less likely to donate to Oxfam, while it also saw a 4% drop in regular, long-term givers cancelling subscriptions when the previous retention rate has been 99.6%.

For a charity, loss of trust among donors can be crippling – do-gooders can always choose to gift their money elsewhere. But what of businesses whose product appeal outshines any tarnish to their reputation? After United Airlines’ refusal to make reparation for damaging musician David Carroll’s guitar led to him composing a protest song, the bad publicity went viral alongside the YouTube video.

United received another blow when the staff was filmed dragging a customer off an overbooked plane; social media was quick to condemn, with some more impetuous posters vowing never to fly with the airline again. Tickets sales dipped and earnings for the company dropped 69%.

Then just when things looked like they couldn’t get any worse for the company, it inadvertently killed a puppy. Yet despite these constant knocks to its public persona, the deciding factor on whether or not people choose to fly with United has remained ticket price. After incident-specific dips, ticket sales have evened out, proving that some reputational crises can still be undercut by pricing strategy.

Even for small businesses, social media and online commentary can have a significant financial effect. According to research by Apex Global Learning, every additional star in an internet review leads to a 5-9% increase in revenue; while there is an 18% difference in revenue between three-star reviewed businesses and those rated five-star. Happy customers count.

A bad reputation also speaks to staffing, a major percentage of any business’s costs. Some 84% of employees would consider quitting in favour of an offer from a company with a great reputation, and research by the Harvard Business Review with ICM Unlimited found that a company with 10,000 employees and a bad reputation could be spending $7.6m in additional wages to counter it. That’s around $4,723 per hire.

The price of reputational damage can’t just be accounted for in profit and loss, of course.

The hidden costs of reputational damage

It’s no secret that bad reputation comes at a price – the rise and fall of share value can be directly linked to fluctuations in an organization’s public image, and as we discussed in our previous blog, there are tangible financial penalties for bad business behaviour. But what of the hidden costs? The wider, more subtle price that an organization pays for a bad reputation?

Although less immediately obvious than a stock market slump, there are pernicious consequences to reputational damage that ripple out from a negative event.

The non-financial cost of a bad reputation

Consumer memories can belong. The Nestlé effect is a case in point: the 1970s baby milk controversy – in which multinational milk companies were accused promoting bottle feeding over breastfeeding, leading to sickness and death among babies in poor communities – led to years of boycotts of its products, across the world.

It returned, negatively, to the spotlight in 2000 at the World Water Forum, for insisting that access to water is not a human right; and in the 2012 documentary, Bottled Life, was accused of extracting groundwater for its bottled brands at the expense of local communities. More recently, the company has been criticized for advertising unhealthy products linked to obesity.

The company’s reported sales of CHF91.4bn in 2018, an increase of 2.1% on 2017, show little sign of consumer reluctance, but one could ask, how much better might they be with a less tarnished reputation?

While Nestlé has battled a beleaguered reputation for decades, it’s just as easy for this century’s success stories to fall from grace. Take Google: once so a trusted source of information that its name became a verb, its founding promise to ‘do no evil’ has been compromised by poor practices, resulting in an employee walkout over sexual harassment and gender inequality; data breaches exposing 52.5 million Google Plus users’ personal info; and a Congressional hearing on antitrust and transparency. And in the face of all those targeted ads, who doesn’t worry about how well their privacy is protected?

Nestle and Google are short on goodwill, a fragile currency that is easily spent. Part one of this blog referenced Oxfam, and the thousands of regular donations it lost following the Haiti scandal. But as well as funds, it has also lost volunteers, in its shops, on the streets and in the disaster zones where it operates – an unpaid workforce that is vital to its mission. Individuals’ lack of desire to associate themselves with the charity will have ongoing repercussions.

And it is this breaking of the social contract that is the highest price of a poor reputation, and the most difficult to overcome.

Organisations are being judged on their net contribution to society and post-the 2008 financial crisis, the expectation is that businesses should do more than make a profit; they should do good. By putting the social contract back at the heart of what they do, rather than on the periphery, those organisations that have lost the trust and goodwill of their stakeholders can perhaps begin to win them back.