It seems pretty easy to just say what you do and do what you say, right? And while some are shining examples of getting this right, not everyone has it completely figured out. So what happens when you get called out for not sticking to your word as a business?
Having a good or bad reputation may seem like something highschoolers should worry about, but it has never been more prevalent or more meaningful than it is today - especially when it comes to businesses.
The Reputation Scale
It’s easy to classify the way you think about most companies. There are companies that you absolutely love, companies that you like, companies that you begrudgingly use and, of course, companies that you downright despise.
All of these companies can be positioned on a reputation scale and it’s easy to pinpoint where on the scale they’re currently sitting. The companies that you love sit at one end, having given you nothing but great service and amazing products. The companies that you hate sit at the other end, having given you absolutely no reason to trust them. And the ones you like and begrudgingly use are situated somewhere in the middle.
The interesting thing is that a company’s position on this reputation scale is not a fixed point. It slides up and down with every great action and every shady dealing. You may love a company one day and then a single incident can slide them right back down to the lower end of the scale. Think about certain big-name social media companies. They were regarded favourably for many years. Then a sudden data scandal caused them to slide down the reputation scale considerably.
So why should a big, strong company care what people think about it? Whether they’re top or bottom, they’re still making money, right? Well, the position that a company is given on this reputation scale by the market has become considerably more important in recent years, as it can now affect businesses in a number of ways.
On the furthest end of the scale, reputational damage can be so severe that a company has to completely shut down. But even a smaller amount of reputational damage can still have far-reaching effects:
Damage to word of mouth
Word of mouth is possibly the most valuable form of marketing for a company. In an age where consumers are inundated with marketing, most people find the only opinions they can trust are from, well, people they trust. In fact, a study done by Nielsen concluded that 92% of consumers believe suggestions from friends and family more than advertising.
While a leading automobile manufacturer suffered reputational damage from spontaneous combustion and the denial thereof, companies like Tesla have managed to gain the trust of the public through open and honest communication.
One theory - that makes complete sense to us - is that users need to feel as though they relate to the values of the company in question. This is often the difference between believing a company is entirely motivated by profit and believing that they are motivated by adding value to society. Needless to say, the aforementioned leading automobile manufacturer managed to alienate much of their market by not admitting to their errors.
Behaviour of customers
“Well if they’re going to behave that way, why shouldn’t I?”
It’s no secret: if a customer thinks your company is shady, they probably won’t find it difficult to justify taking advantage of your services.
A simple example is the free refills at a restaurant chain. Who doesn’t love a free refill? People enjoy not having to think about how much they’re drinking. But if customers don’t respect the restaurant, it’s easy to abuse the system, leading to policing the refills or even stopping them all together. This reduces the quality of the product and the restaurant inevitably takes a hit.
The same principle applies to insurance. “Soft fraud” is a major expense to insurers. This is the fraud that not many people lose sleep over. If you’re claiming following a break-in, what’s the harm in claiming that your TV was a couple of inches larger than it actually was? The big, faceless insurer profits off of finding loopholes in contracts to deny claims, so they deserve to be duped out of some of their unearned profits, right? This thinking leads to insurers reacting with more red tape at claims stage, passing this cost on to the policyholders through higher premiums and a miserable experience.
It may seem simple to most, but an insurer can largely sidestep this by making sure not to give policyholders a reason to hold that negative sentiment in the first place, right?
Leg-up to new players
If people use your product, but aren’t happy about it, it may, quite likely, be due to a lack of alternatives. The specific business model that makes users feel icky towards the banking industry is ubiquitous in most of the big players. The same goes for the insurance industry and even social media sites. Enter a company like Bank Zero. Without needing to do much in the way of marketing, Bank Zero has seen a large number of consumers who can’t wait to join them - simply because they offer an alternative. By scoring poorly on the reputation scale, a company is actually giving their new competition a leg-up.
Why are bad reputations on the rise?
The sensitivity of the reputational scale is on the rise in some industries. You only need to look at the headlines to realise the severity of it. Whether it’s vehicle manufacturers with falsified emission data, massive holding companies inflating profit and asset values or, well, basically anything linked to the Guptas, companies are being forced to show their true colours.
Considering the amount of dirty dealings being uncovered in recent years, we think that it is getting more likely that shady dealings will come to light, and when they do, the company in question is likely to move even further down the reputation scale than before. There are a number of reasons for this sudden increase:
It’s simple: nowadays everyone has a voice and more importantly, a platform on which to house it. For many decades, if you wanted to uncover a scandal, you had to work through some or other form of media outlet. This was a barrier even if you had the juiciest story around! But if you only had a small portion of the story, or if the story would only raise a couple of eyebrows, this barrier would easily become a solid brick wall. Nowadays, anyone can share any grievance they have with a company. This means that no individual has to collect all the pieces of the story before telling their part, instead the full story can reveal itself as everyone involved shares their specific pieces. And small grievances don’t go unpublished.
On top of this, the phenomenon of internet uprisings is on the rise. These arguably have more power than traditional protests and boycotts and can snowball into something that does some real damage.
There is reason to believe that people care more about shady dealings than before. These days people want free range eggs, they want to only use recycled plastic, they want to see companies putting purpose over profit. What they don’t want to see are large retail groups knocking off a smaller business’s designs and claiming them as their own without compensation.
Continued rolling of the die
Some industries have been protected from scandals by a communication barrier. Before the 2008 financial crisis, bankers were highly respected by the general public. It took a financial crisis and the loss of pensions to properly communicate the risks that these bankers were taking all along. Once something like this is communicated to the public, the industry in question is put onto a far more fragile reputation scale.
This rise in sensitivity could mean that a new equilibrium will be reached in terms of how the companies allow themselves exposure to this risk. That’s really what should happen, right? But the strategy of asking for forgiveness instead of permission has served a number of companies too well. Just do what you want and when or if you get caught, pay for whatever PR you need to get your reputation back up to where it was.
Because of the increased sensitivity of the reputation scale, the number of times you get caught is expected to increase. And the damage done when you do is expected to go up as well. These companies, when weighing up how to deal with these new risks, will hopefully come to the conclusion that, frankly, it’s just more economically viable to simply line up what you tell customers you do, with what you actually do.
So where to from here?
The good news is that many companies - Naked included - are striving to really practice what they preach. Easy to say, right? Less easy to prove. Thankfully our business model is explicitly designed to address the lack of transparency in the industry. Traditional insurers make more money by mistreating clients, which is why Naked's legal structure - in which we transparently pay ourselves a fixed portion of premiums, and pay any surpluses to charity - ensures our profit doesn't depend on squeezing customers through shady dealings. We’ll never try to dictate where we rank on your reputation scale, but we hope our actions do it for you.