Why does reputation matter? Consumers
Updated: May 19, 2020
As a reputation consultant, often I am brought into a boardroom or committee where not everyone is on the same page about how much reputation matters. Sometimes even my direct client is interested in measuring reputation not because they see it as a priority but because their boss asked for it. Scepticism abounds. This series is for you sceptics and for the people who need to convince them. In each blog, I will be explaining how reputation impacts the relationship that you have with one key stakeholder group: employees, investors, consumers, regulators, and so on. Each of these provides compelling reasons to care about the reputation of your organisation; taken together it would be disastrous to ignore.
Last time we focussed on the humans who run our organisations – today we turn to the people who buy from us. Does reputation matter to consumers? Don't they care more about branding and value and all that jazz? Let's see...
Reputation, recall and likelihood to buy
Researchers from the management and marketing fields have been fascinated by the role of company reputation for a long time. Luckily for us, that means we have plenty of evidence at our disposal and while it sometimes lacks in rigour, the literature makes up for that in the startling consistency of the findings. Across the world, looking at myriad case studies, across at least three decades, researchers have found that the abstract concept of ‘company reputation’ impacts not only market valuations (which one might expect to be affected by more subjective feelings) but also real world outcomes such as brand recognition and purchasing decisions.
Back in 1993, Yoon, Guffey and Kijewski were able to show that a customer’s existing view of company reputation was reflected in their buying decisions. We now have a clearer idea of why that is and it goes right back to our ability to recognise brands and remember information about them. For example, researchers from the London Business School and University of Missouri found that when companies with a good reputation handed out flyers at a university careers fair, students had greater recall of the details on the flyer than they did for comparable companies with worse reputations. A further study by academics working in the field of fashion and textiles found “significant effects of brand awareness and perceived quality on brand attitude and purchase intention.” And, perhaps most importantly, purchase intentions were reduced when subjects were given information on negative corporate reputation.
A good reputation makes consumers more likely to remember your brand and facts about your product and then also makes them more inclined to buy the product once they have remembered it. That sounds valuable and indeed it is. Consider Volkswagen: after VW admitted to using illegal software to fool emissions tests into approving their diesel cars as road-worthy, sales fell through the floor. Nothing had changed about the cars or the customer service that consumers experienced, but months of bad press coverage; lawsuits from countries, consumers and investors; and the general air of dishonesty was so bad that nobody wanted to buy a VW. In fact, the scandal was so bad that it even reduced sales of diesel cars produced by other brands. Volkswagen expects the costs of the affair to top £25 billion once the loss of sales and all of the settlements, fines and legal fees are taken into account.
So pervasive is the impact of your corporate reputation that it can even persuade existing customers that they are more satisfied with your service or product. Researchers from the US and Germany found that a good company reputation increases customer satisfaction and that when a good reputation and satisfaction are both present this in turn fuels customer loyalty. So reputation isn’t the be all and end all – you still need to offer a good customer experience – but without a good reputation, customer experience can only get you so far and your attempts to create a loyal customer base will be hobbled.
Reputation and price
Of course we know that plenty of companies find way to sell to consumers, even with a bad reputation holding them back. But even if you do manage to battle past lower recall of your products, reduced likelihood to buy, lower customer satisfaction and reduced loyalty, there is another hurdle to jump: price.
It is now almost trite to point out that we live in a highly connected world where information flows speedily and allows consumers to find the best prices in a way that was impossible on a decade or so ago. In this world you might expect that competition would drive the majority of brands down to the lowest possible price, in order to lure customers. In fact, here too reputation has a mitigating effect that is remarkably consistent between products and marketplaces.
Perhaps the first study of this kind was carried out by some clever researchers who spotted the possibilities presented by Ebay’s seller ratings system. First they persuaded an established vendor of vintage postcards to help them out…
“He prepared matched pairs of auction lots, and a random device then determined which lot was sold under his established, extremely high reputation identity, and which lot was sold through newly created, unknown sellers. Roughly similar web sites were prepared for all sellers. Other factors, such as shipping, billing and payment procedures were constant across our sellers.” Full paper here
This experimental design allowed the team to measure how much more customers were prepared to pay – just for the reassuringly high reputation score of the vendor. The answer? “The difference in buyers’ willingness-to-pay was 8.1% of the selling price.”
You may be wondering how relevant this is to your global corporation. Ebay can be a pretty peculiar place and who even knew that the vintage postcard market was so large, eh? So let’s look at another study, carried out over a decade later by a team at University of Technology Sydney who wanted to know “does corporate reputation really affect consumers when they are evaluating products? Or do consumers care more about the features of the product?”. To find out, they asked consumers shopping for televisions to read summaries about relevant corporations and then make decisions about the value of particular products and features. Here is what they found: “A company evaluated by consumers to be one standard deviation better in its corporate reputation that its competitors, allows it to command a premium of 8.7% for its products.” A remarkably similar figure to the Ebay study.
What those researchers also found was that for products produced by higher reputation companies, the consumers were less price sensitive in general and willing to pay more for extra features. This went beyond a ‘halo effect’ of making the customer feel better and meant that they actually ascribed a higher value to the feature.
Reputation as insurance
If you are one of the lucky ones, running or working for an organisation that already has a stellar reputation, great brand awareness, high customer satisfaction and loyalty and can always achieve price premium for your products: congratulations! Why should you care about measuring and improving your reputation? It seems like you have it figured out already.
You need to care about this because it isn’t possible (or safe) to build a sprinkler system during a fire. Reputation creates a ‘benefit of the doubt’ shield where consumers more swiftly forget or discount mistakes by a company with an existing strong reputation. You can think of a great reputation being like an efficient sprinkler system: if little fires emerge, the sprinklers come to life and damp them down. A well-loved brand can apologise, call upon years of excellent behaviour and ask forgiveness. They are left soggy but essentially intact. Big brands with a great history may be tempted to rest on their laurels and take that reputation for granted but that is akin to stopping the maintenance on your fire safety system. Not a good plan.
In contrast, consider firms or sectors with a terrible reputation like banks in the UK or health insurance providers in the US. With no good reputation to shield them, these organisations are the equivalent of a straw house with no sprinklers. Even a tiny spark of suspicion, or the heat from a neighbour’s fire, is enough to start a blaze.
Management researcher Ronald Hess watched this process in real time by recruiting bored airline passengers to be served in a restaurant that had either an average or excellent reputation. Hess and his team then simulated a customer service failure: the waiter was rude. After the experiment, customers were asked to rate their satisfaction and likelihood of visiting the restaurant chain again.
For the restaurant with an average reputation, even a small customer service failure significantly reduced customer satisfaction, with little differentiation between slight and extreme failure. The restaurant with an excellent reputation saw minimal impact from the smaller failure and was even shielded from the impact of the more disastrous interaction. But why did the customers react so differently? The researchers found that in the case of the restaurant with an excellent reputation, customers were less likely to think that the employers was responsible for the actions of the waiter and also less likely to think that the experience would be repeated. Put another way: when an organisation has a good reputation it is less likely to be blamed for situations that may or may not be within its control and will be given the benefit of the doubt that this was a one-off problem. Crucially, despite experiencing the same service failure, customers at the excellent restaurant were significantly more likely to say they would come back to the restaurant.
For anyone out there resting on their laurels, however, there remains an important moral to this tale: an excellent reputation did not have any impact on the customers’ likelihood to spread negative word-of-mouth reviews about their experience. A few slip-ups will be tolerated but it will undoubtedly be dangerous for your longer-term reputation if too many such stories circulate in your target audience group.
A healthy reputation helps consumers to remember your brand and recall facts about your products.
Customers are more likely to buy from an organisation with a better reputation and more likely to be satisfied with their experience.
Organisations with better reputations create stronger brand loyalty – as long as customer experience remains good.
Consumers are willing to pay a premium when they purchase from a company with a great reputation. They are also less price sensitive and more likely to perceive additional features as providing value.
Consumers perceive customer service failures as less bad when committed by organisations with excellent reputations, are less likely to blame the company itself and more likely to give you another chance – but a good reputation won’t stop them from telling their friends about the problem.
Find the whole of this series here
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