What’s the cost of a bad reputation? For United Airlines, one incident rang up at about $180 million.
After the airline damaged his guitar and refused to pay for it — even though he witnessed them manhandling it — musician David Caroll wrote a song, United Breaks Guitars. It was a runaway hit, and has more than 15 million views. The cost of this video? $180 million, as United’s stock fell by 10% in the weeks following the video’s release.
When a company has a bad reputation, whether it’s earned by a corporate scandal, poor customer service, or unhappy employees, business is simply more difficult to conduct, increasing the cost of doing business. Often, it’s more difficult to retain customers and employees, shareholders, and other important stakeholders, making the costs of doing business significantly higher. Having a bad reputation can make business operations more difficult every step of the way.
It’s tough to place an actual value on the cost of a bad online reputation, but one fact sheet places the annual cost of unhappy customers at more than $537 billion. That includes the amount of money up for grabs in the U.S. consumer market that businesses miss out on due to customers who have switched due to poor experiences that were preventable.
On the flip side, consider the opportunity cost of satisfied customers: totally satisfied customers will contribute 2.6 times more revenue than somewhat satisfied customers. And keep in mind that acquiring a new customer typically costs between six to seven times more than simply retaining an existing one.
And while the cost of a bad reputation can reach into the billions, there’s a clear benefit to maintaining a great reputation. It’s no coincidence that often, companies with the best reputations will also be leaders in their markets. Yahoo! Finance points out, for example, that Samsung and Apple are among the top 10 companies with the best reputations — and they are also the number one and two sellers of smartphones in the world. Another example: Microsoft and Sony, also in the top 10 for reputation, make the world’s two most popular video game consoles.
How much is a bad reputation costing your company? Let’s consider the cost of bad reviews, hiring with a negative reputation, reputational debt, and more.
The Impact of Bad Reviews
One of the most clear cut signs of a positive or negative reputation is in customer reviews. With review sites available for practically every type of business, customers are now telling it like it is, and companies are feeling the impact of what they’re saying — often, in the bottom line.
A Harvard University study found that online reviews on Yelp.com can have a serious impact on restaurant revenue. Researchers found that for every one star increase in Yelp rating, there was a five to nine percent increase in revenue. That’s good news for restaurants with a high rating, but of course, bad news for those who have earned a poor reputation on Yelp.
Harvard’s research indicates that the revenue difference between a restaurant with three stars and a restaurant with five stars on Yelp can be as much as 18%. For a restaurant with $1 million in revenue annually, that represents about $180,000 in lost sales — every year.
It’s not just restaurants that are so deeply impacted by reviews (and negative ones in particular). We’re now seeing that hotels may adjust their prices based on their reputation on social media. A new data product from IDeaS Revenue Solutions tracks hotel reputations on social media and uses this information to influence pricing recommendations for hotels when they’re setting their best available rates. Hotels can adjust their prices based on comparisons of their online reputation and the reputations of their competitors.
For all businesses, the effect of negative reviews can be highly damaging. Most people (80%) will not buy from a business with negative reviews. And according to Google research, businesses that have a three star rating or higher will receive a disproportionate number of clicks: 87%.
Want to turn it around the impact of negative reviews? You’ll need to ask for more positive reviews. It takes between 10 to 12 positive reviews to offset a single negative review.
The Impact of Lost Business Due to a Bad Reputation
In one study, researchers found that a whopping four out of five consumers will change their mind about making a purchase due to negative information online. This can be incredibly damaging, as it represents roughly eighty percent of customers — assuming that most customers will look online to learn more about your reputation (and they do).
If opinion turns on your business or product and your reputation becomes negative, you stand to lose four out of five (almost all) of your potential customers. 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.
How a Bad Reputation Influences Human Resources
Lost sales and missed opportunities with potential customers are bad news, but possibly even more troubling is the fact that you can miss out on hiring top candidates because of a bad reputation. If you’re unable to attract quality talent for your business, productivity, and ultimately, quality and the bottom line will suffer — and you may further miss out on sales opportunities if potential customers aren’t excited about what your employees bring to the table. And 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.
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 were unemployed.
- If they would accept the job offer from a company with a bad reputation, almost half would require a significant increase in pay (at least 50%).
- 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 that can offer a better reputation. And there’s more — they’ll have to pay more than companies with a good reputation to hire and keep candidates. Following a scandal or other major corporate reputation blow, your company may become a hunting ground for recruiters hoping to snap up great candidates who are open to opportunities with companies that have a better reputation.
This struggle to attract and retain job candidates can make an already expensive process more costly. It costs about $3,500 to hire an $8/hour employee. Add in annual training, and that figure jumps to $4,700. And remember: we’re talking average costs here. When a company struggles with a bad reputation, you can expect to spend even more as more recruiting advertising, time, and turnover will be experienced.
Ultimately, LinkedIn has found that the cost per hire is more than two times lower for companies with strong employer brands. And on top of that, companies with stronger employer brands will have 28% lower turnover rates. A strong employer brand is also key to attracting highly valuable passive candidates, convincing them to switch jobs even when they’re not actively looking for one.
Even more difficult to quantify are the losses to major corporations who have had more than just bad reviews and unhappy employees, but serious crisis 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 had costs including reputational advertising, lost sales, and ultimately, a hit against its core competency: safe and containable offshore drilling. 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. And BP gas stations in the U.S., many of which are not actually owned by BP, reported sales lowered between 10% and 40% due to company backlash.
While BP’s example is an extreme one, it is a clear warning for businesses of any size, as a serious violation can have a ripple effect that can cripple a business for decades. According to the Corporate Responsibility Magazine study, the most damaging sources of a bad corporate reputation include public exposure of criminal acts, failure to recall defective products, public disclosure of workplace discrimination, and public disclosure of environmental scandals.
Reputation Cost Damage Control
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?
Corporate Social Responsibility
For many companies, the answer may be in corporate responsibility. While it won’t wash away major wrongdoings, a strong corporate and social responsibility program can send a message that the 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 feel that it’s important to work for a company that’s led by a CEO who places a priority on corporate responsibility or environmental issues. Another study found that 68% of employers report that their employees expect them 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.
Solving Reputation Problems
While investment in corporate responsibility can help with perception, ultimately, you’ll need to get to the root of the problem: turning around a negative corporate reputation. In fact, a company that engages in corporate social responsibility, but does not take responsibility for solving serious problems within the company may be seen as disingenuous — and employees, customers, and other interested parties may simply see CSR as a patch that does little to actually improve the company.
To fix a negative corporate reputation, you’ll need to take on the critics. What are they saying? Is there truth to what they’ve pointed out? Directly address negative comments on employer reputation and rating websites and consider how you can solve their root problems. Of course, you should look internally as well, asking internal stakeholders to address room for improvement.
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, sharing corporate wins and positive employment stories from employees who are happy working with the company.
Making Customers Happy
You can improve your reputation by investing in corporate responsibility, fixing corporate problems, and better supporting employees, but ultimately, what can really make a difference is simply improving on your customer service. Want the bottom line on that? Research tells us that among hotel and wireless businesses, those that improve their customer experience scores by 10% will typically exceed $1 billion in aggregate revenue.
We’ve written extensively on customer service in our 2015: The Year of Customer Service expert series. Visit the series to learn how you can offer great customer service, break down roadblocks to happy customers, and capitalize on the benefits of maintaining positive customer relationships.
The Bottom Line on a Bad Reputation: Just the Facts
Consider these facts on the cost of a bad reputation:
- 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