A poor company reputation is expensive. For United Airlines, one incident rang up at about $180 million. After the airline damaged musician David Caroll’s guitar and refused to pay for it, he wrote a song titled United Breaks Guitars. It was a runaway hit with more than 15 million views. This one video cost the company $180 million in shareholder value when United’s stock fell by 10%.
The Cost of a Bad Company Reputation
Business is more difficult and expensive to conduct with a bad company reputation. Whether a tarnished image is the result of a corporate scandal or poor customer service, you’ll notice the impact on your balance sheet. Just about everything from CAC, customer churn and employee turnover can increase due to negative media coverage. This results in higher business operating costs, poor margins and devalued stock prices.
It’s tough to place an actual value on the cost of a bad online reputation. Yet one fact sheet estimates the annual cost of unhappy customers at more than $537 billion. This figure is an estimate of lost revenue in the U.S. consumer market due to customers who switched brands because of poor experiences. In addition to the lost revenue, businesses will also need to spend as much as seven times more find new customers vs selling to existing ones.
It’s no coincidence that companies with the best reputations are market leaders. According to Yahoo! Finance, Samsung and Apple make the list of top 10 companies with the best reputations. Another example: Microsoft and Sony, also in the top 10, make the world’s two most popular video game consoles.
Let’s look at exactly how a negative company reputation affects business.
How Bad Reviews Affect Business Reputation
Customer reviews are among the most obvious signs of a positive or negative business reputation. With review sites available for practically every type of business, customers are now able to publicly praise (or shame) any company. Sadly, while consumers trust reviews to guide their decision, they aren’t always accurate. In fact, as much as 60% of reviews may even be fake. This is why it’s essential to learn how to remove fake Google reviews, and respond to negative ones.
A Harvard University study found that Yelp reviews can have a serious impact on restaurant revenue. Researchers discovered that for every one star increase in Yelp rating, restaurants saw up to a nine percent increase in revenue. While that’s great news for restaurants with a high rating, it’s frustrating for eateries with bad Yelp reviews.
Using the above statistics, the revenue difference between a restaurant with three stars and a restaurant with five stars on Yelp can be as much as 18%. That represents about $180,000 in lost sales each year for restaurants earning about $1 million annually.
It’s not just restaurants that suffer financial losses from a bad online reputation. We’re now seeing hotels adjust their prices based on social media reviews. A new data product from IDeaS Revenue Solutions tracks hotel reputations on social media and uses this information to influence pricing recommendations.
The effect of negative reviews can be highly damaging. Most people (80%) will not buy from a business with negative reviews. Furthermore, it takes between 10 to 12 positive reviews to offset a single bad one.
Lost Revenue Over a Bad Company Reputation
In one study, researchers found that a whopping 80% of consumers will change their mind about making a purchase due to negative information online.
Let’s quantify that for a $30 product. Assuming you typically sell five products each day (and are now losing four), you’ll miss out on $120 in sales daily. That adds up to $43,800 in lost sales per year — and this is a small scale example. For companies with more valuable customers or higher volumes, the cost of a bad online reputation can reach into the millions, even billions, annually.
If you have to put a round number on it, consider Christopher Dietz and Dietz Development, a small business specializing in residential construction services. Dietz was awarded $750,000 for a client who made defamatory remarks about him and his business on Yelp and Angie’s List that paralyzed his ability to attract new clients.
Corporate Reputation Impacts Hiring and Retention Costs
Hindered talent acquisition and employee turnover could have an even greater impact on company revenue than lost sales dollars. If you’re unable to attract quality talent for your business, then productivity will suffer. Further, you may miss out on more sales opportunities if competitors are able to hire better employees.
Losing out on top talent doesn’t just hurt today: missing those great employees can be damaging for decades as you fail to capitalize on the great work they can offer.
Reputation is important to job seekers
Corporate Responsibility Magazine‘s survey shows just how important reputation is to job seekers, even those who are unemployed. Some of the findings from this survey include:
- 76% of people are unlikely to accept a job offer from a company with a bad reputation — even if they are unemployed.
- Half (50%) of applicants said they would accept a job offer from a company with a bad reputation if they received a significant pay increase.
- Older, more experienced workers are less likely to accept an offer from companies with a bad reputation.
- 93% of those currently employed would leave their current job to start working for a company with a good reputation
This means that not only do companies with a bad reputation struggle to attract quality job candidates for new jobs, they may also lose their top talent to other companies. They’ll also have to pay more than companies with a good reputation to hire and retain candidates.
Following a scandal or corporate crisis, your company may become a hunting ground for recruiters hoping to snap up great candidates at a discount.
Increased training costs
This struggle to attract and retain job candidates can make an already expensive process more costly. Investopedia found that it costs about $3,500 to hire an $8/hour employee. Add in annual training, and that figure jumps to $4,700. However, we’re talking average costs here. When a company struggles with a bad reputation, these costs can rise due to additional time and money spent recruiting, advertising and interviewing.
Ultimately, LinkedIn has found that the cost per hire is more than two times lower for companies with strong employer brands. Further, companies with excellent reputations will have 28% lower turnover rates. A strong employer brand is also key to attracting highly valuable passive candidates. You’ll be the one stealing talent from the competitors!
Even more difficult to quantify are the losses to major corporations who have experienced serious crisis management situations. British Petroleum (BP), for example, made a multi billion dollar settlement for the 2010 Deepwater Horizon oil spill. However, that figure is just the tip of the iceberg.
In addition to the settlement for the spill, BP incurred costs for reputational advertising and lost sales. The corporation even lost credibility as a safe and containable offshore drilling company. Experts say this reputational debt will last for decades.
BP has faced a maximum fine of $13.7 billion for violating the Clean Water Act. The company has also already paid $42 billion in claims, cleanup efforts, fines, and victim compensation.
Following the incident, BP lost 55% of its shareholder value. Ultimately, by 2013, BP dropped from the second largest oil company to the fourth. But the brand’s soured reputation extended far beyond its stock price. BP gas stations also reported lower sales due to company backlash — even though many aren’t even owned by BP.
While BP’s example is extreme, it’s clear that a tarnished brand image can ripple through a business for decades. According to the Corporate Responsibility Magazine study, the most damaging sources of a bad corporate reputation include criminal acts, failure to recall defective products, workplace discrimination, and environmental scandals.
Building a Positive Company Reputation
A bad reputation is clearly a cost that companies will want to avoid. But once the damage is done, how can you make it better?
Invest in corporate social responsibility (CSR)
For many companies, the answer may be in corporate responsibility. These powerful corporate social responsibility examples can send a message that your company cares about making a positive difference in the world. This can help to support recruiting efforts and can influence customers, investors, and other stakeholders as well.
In one survey, researchers found that 72% of people want to work for a company that places a priority on corporate responsibility or environmental issues. Another study found that 68% of workers expect their employers to support volunteerism.
Specifically, employees are looking for companies that offer workplace giving programs, matching gifts, volunteer activities, and the ability to use work time to volunteer. Offering these opportunities to your employees can help improve recruiting efforts and costs while you’re working to improve your corporate reputation.
Solve reputation problems
While investment in corporate responsibility can help with perception, ultimately, you’ll need to get to the root of the problem. In fact, a company that engages in CSR, but does not fix serious problems within the company appear disingenuous.
To fix a negative corporate reputation, you’ll need to take on the critics. Directly address negative comments on employer reputation and rating websites. Consider how you can solve the root problems. But don’t overlook internal solutions as well.
In addition to fixing what’s wrong, take time to highlight what’s going right. Use your public relations department to point out what the company has been doing well. Share corporate wins and positive employment stories from employees who are happy working with the company.
Making Customers Happy
The easiest way to improve your reputation is to invest in customer service. How powerful is great customer service? Research tells us that among hotel and wireless businesses, those that improve customer experience scores by 10% will typically exceed $1 billion in aggregate revenue. If you’ve already got happy customers, learn how to get Google reviews from them. If you’re still struggling with bad reviews, we’ve got some tips to handle customer complaints too.
Importance of Company Reputation
Consider these facts about why a good business reputation is important:
- United Breaks Guitars cost United Airlines about $180 million in stock value
- The annual cost of unhappy customers: more than $537 billion
- The opportunity cost of satisfied customers: totally satisfied customers will contribute 2.6 times more revenue than somewhat satisfied customers
- The cost to acquire a new customer: between six to seven times more than simply retaining an existing one.
- For every one star increase in Yelp rating, restaurants experience a five to nine percent increase in revenue (which can represent $180,000 or more in lost revenue annually)
- 80% of customers will not buy from a business with negative reviews
- Businesses with a three star rating or higher on Google receive 87% of the clicks
- Four out of five consumers will change their mind about making a purchase due to negative information online
- A contractor was awarded $750,000 for reputational damage on Yelp
- 76% of people are unlikely to accept a job offer from a company with a bad reputation — even if they were unemployed, and almost half would require a significant increase in pay
- 93% of those currently employed would leave their current job to start working for a company with a good reputation
- The cost per hire is more than two times lower for companies with strong employer brands
- Companies with stronger employer brands will have 28% lower turnover rates
- BP lost 55% of its shareholder value and dropped from the second largest oil company to the fourth following the Deepwater Horizon scandal
- Hotel and wireless businesses that improve their customer experience scores by 10% will typically exceed $1 billion