In my last blog post I looked at
the recent Instagram Terms of Service debacle as a case study of how getting
the balance wrong between satisfying your shareholders versus your other key stakeholders
can lead to major reputational damage and, ultimately, lost shareholder value.
At the end I introduced the term Reputational Elasticity of
Demand (RED). Anyone who’s studied economics will be familiar with the concept of
price elasticity of demand
— the idea that demand for some products decreases as their price rises
(referred to as being elastic, with a price elasticity of demand score above 1),
while for others demand is less affected, if at all (referred to as being
inelastic, with a price elasticity of demand below 1).
It’s easily seen that usually non-essential goods (like
expensive cameras or world cruises) have a higher elasticity than basic needs,
such as food. Although I would add the caveat that elite luxury goods appear to
be fairly inelastic as the kind of people who buy Bentleys and Impressionist
paintings are less bothered by price increases than most buyers as their wealth
stays constant enough to allow more consistent consumption of such things.
Applying this notion of demand being influenced by a
factor, it’s also easily seen that a company’s reputation can have an influence
on its sales. You only have to look at past examples of major PR failures to
see how a reputational hit can influence revenue, profitability and sometimes
the whole existence of the company. Think Ratners, Arthur Andersen and The News of the World.
More recently, we’ve seen Starbucks change its UK Corporation Tax policy after an
outcry over its perfectly legal but unpopular use of international transfer
charges to minimize its UK tax bill and comedian Jimmy Carr pulling out of a controversial tax avoidance scheme,
again because of the public reaction when his involvement was revealed.
They clearly feel their services are reputationally elastic
(Starbucks may have seen its sales fall), but other companies clearly think
theirs are reputationally inelastic. Amazon and Google were also named as UK tax
dodgers by the same parliamentary committee that named and shamed Starbucks,
but they didn’t respond in the same way. In fact, the reaction of Google chairman
Eric Schmidt was to say he was “very proud” of their
tax avoidance scheme — “It’s called capitalism.” He’s clearly been taking PR
lessons from Michael O’Leary of Ryanair!
So why can one company’s demand be more resilient to dents
in its reputation than those of another? The simple answer is each will have
their own Reputational Elasticity of Demand (RED).
So how do you measure yours and allow it to inform your
future decision-making?
First you have to understand the factors which influence
how elastic your RED is and how they can be measured.
I would suggest the following factors and metrics can be used
in calculating your brand’s RED:
- Market share —
the higher yours is, the more inelastic it’s likely to be if the barriers to switching are also high and/or your industry has
low competitiveness e.g. Google in search.
- Competitiveness of your market — measured by its concentration ratio and/or Porter’s Five Forces.
- The importance of reputation in your industry
— high in art auctions, universities and used car sales, lower
in petrol or gas sales where the product is closer to being an identical
commodity. Measured by quantitative market research.
- The importance of ethical behaviour to your key
customers (an idealism score) — measured by qualitative market
research.
- Likelihood of your key customers to act on
core ethical values — measured by qualitative market
research.
- Your brand’s rhetoric on the importance of
ethics to your company — everyone hates a
hypocrite more than an honest stonewall capitalist e.g. Starbucks and Apple
versus Ryanair, banks, oil firms, arms companies. Measured by an ethical rhetoric
score.
- The expectation of ethical behaviour in your
industry — more so in charities, but less so in the arms industry.
Measured by quantitative market research.
- Barriers to switching from your brand to a
rival, including transaction costs (hassle) to do so — i.e.
coffee lovers in cities can easily use another outlet, but someone in a village
with only one bank will find it harder to switch. Similarly, Facebook enjoys a
high barrier in terms of the time and effort it would take a user to move all
their friends and content to another social network.
Depending on your industry, there may be more, but this is
a basic list to start with.
So once you have your RED figure, is it elastic or
inelastic? That can be worked out by measuring the RED of a number of companies
like Starbucks and Google which clearly enjoy elastic or inelastic RED figures
and finding which you are closest to. With enough comparisons you should be
able to find the figure which represents the point of transition from reputational
elasticity to inelasticity.
Once done, you would need to monitor your RED score
regularly as the factors which make it up will vary over time.
So how can you use it to inform your management
decision-making?
You could use an equation to do scenario analysis to weigh
up the effect of the future options being considered on sales, but to do so
would be make the same fundamental reputational error that Ford in America made
in the 1970s with the Pinto — where
management calculated the cost-benefit of recalling and fixing the fault on the
car which caused fires in accidents over versus the cost of potential lawsuits.
It would be a PR own goal if found out, more likely in the increasingly
transparent online and socially networked world we live in.
Whatever you do, you need to take into account two factors:
- How personal the proposed unpopular conduct
is to customers — e.g. Instagram seemed to be
threatening to sell users own pictures, while Starbucks was not paying the Government,
not us directly, and Apple’s use of Chinese workers with comparatively bad pay
& work conditions to make its products seems more distant.
- How unpopular the proposed conduct is with
your customers — measured by qualitative market
research.
So what’s the solution? I’d say that you need to set out
your ethical stall in line with your RED, communicate it clearly via your
marketing communications to manage the expectations of your current and future
customers and then act accordingly.
If you’re going to be a hard-nosed capitalist, say so. For
example, no-one any longer acts surprised when Ryanair takes a tough legal-contractual
line over an unpopular policy because they have a long and well-publicised history of being
that way. So, for various reasons including the price sensitivity of their
customers, their RED is clearly inelastic.
Conversely, don’t project ethical whitewash and then act
otherwise, especially if your RED is highly elastic. Brands like Apple and Co-operative Bank
have seen the reputational damage of failing to live up to their ethical rhetoric.
Ultimately, using your RED to influence your brand
management is about using your judgement, informed by the knowledge of your brand’s RED elasticity, to make the
business decisions which will help maintain a high reputation and in the medium
and long-term maximise
the returns and value to your shareholders.
It all started with what could and should have been a
fairly reasonable change to their privacy policy…if you believe their
explanation.
On December 18 Instagram announced via its blog
that it was proposing changes to its privacy policy and Terms of Service which
would take effect on January 16 2013. Briefly, it said that unless users deleted
their account by then they had by default agreed to allow the company to share
information about them with Facebook, its parent company, as well as other
affiliates and advertisers.
So far, so fairly usual in the online world. The problem
was what they wanted to share and on what basis.
The terms proposed Instagram being able to send on users’ username,
likeness, photos (along with any associated metadata), and/or actions they had taken
for use, “in connection with paid or
sponsored content or promotions, without any compensation to you”.
Basically, passing on their personal photos and dats for possible use in conncetion
with ads without being given a penny.
The backlash wasn’t long coming and was vehement. Here’s how the BBC
website reported it. Before long there were threats of mass account closures
from regular users and, importantly, power
users followed by many others, especially celebrities
for whom control of their image is a major financial and PR consideration. So
basically it was an online PR firestorm of their own creation.
Within 24 hours Instagram had seen the furore and realised it needed to
try to reassure its users or it would have a lot fewer of them to monetise. So co-founder
Kevin Systrom posted this
fresh blog post saying they aren’t planning to sell users’ photos, anyone who
thought that had unfortunately misread the legal language, but it was
Instagram’s fault that it wasn’t clear from the start.
Importantly, he also said they were listening to the
feedback and were going to modify specific parts of the terms to make it more
clear what would happen with users’ photos. He went on to detail their
intentions and the reason for them.
Did this extinguish the firestorm? Sadly not. Why? By now
users’ mistrust of the company was so high that the reaction of many key
players, including power user National Geographic, was to say ‘fine, but we
want to see the detailed changes before we trust you again’. Some, including National
Geographic, suspended posting their accounts as a sign of their continued
unhappiness.
So Instagram went away again to have another think. Sooner
after it announced
that it was reverting to the original terms of service and if in future it planned
to change them it would consult with users about the proposed changes before putting them in place.
So everybody’s happy now? No, not really. Why? Because their
trust in the brand has been seriously dented. And, as we all know, trust, like
reputation, is easily lost and rebuilt slowly and with difficulty.
Instagram,
of course, wasn’t the only brand to suffer reputational damage in 2012.
Barclays, RBS, HSBC, Starbucks, Amazon, Apple and Google were among the
high-profile companies affected by events entirely of their own creation.
Self-inflicted and entirely avoidable injuries.
Instagram’s
was one of the worst because they failed to take sufficiently into account how personal
the service they provide to their users actually is — its place on what marketers call the ‘my continuum’
(i.e. a hairdresser provides such a personal service that you refer to them as “my
hairdresser” while, say, an online retailer is more distant and impersonal, so
not referred to as “my”).
Users
trust Instagram with their personal photos, some of them very personal — like shots of their newborn baby or wedding — so in threatening to hand on these photos to third
parties it was inadvertently making a threat to very personal possessions of
its users.
It also
failed to take into account quite how competitive its market had become and how
low the barriers to exit are for users. Though clearly the dominant player, it
quickly found how loosely tied users felt to it (compared to,say, Facebook
versus the threat of Google+) and how quickly they were prepared and able to
take their custom to rivals.
I suspect this misjudgment may have been by
Facebook managers, who are used to the cosy notion that without the ability to
easily download and move the data and friends Facebook users have spent years adding to the
site they feel compelled to stay simply by the thought of the massive ‘transaction
costs’ (hassle) of shifting it all to a rival).
It was a
similar sudden appreciation of how competitive its market was and how low
the barriers to exit (switching) were that forced Starbucks in the UK to change its policy
on paying UK Corporation Tax.
A Parliamentary Committee named and shamed it
among several international companies which generated large revenues in the UK
but didn’t pay much, if any, Corporation Tax because of their use of indefensible transfer
charges to export profits to jurisdictions with lower rates of tax on them.
The root
cause which links these and all the other PR disasters cited above is an
imbalance in their perception of the correct balance between meeting the needs
of shareholders (who they have a corporate fiduciary legal duty to) and their
other key stakeholders, in particular their customers, who perceive that they are
owed a moral duty extending beyond any legal-contractual one.
Balancing their often-competing needs is not always easy,
but it’s easily seen that if you work exclusively in the interests of
shareholders (i.e. by maximizing profits) you can easily be working against
their long-term interests as customers may defect to rivals, reducing sales and
ultimately profits. Equally, if you only do what customers want, your profits
may be few and far between and shareholders will take their capital elsewhere.
So how to find a balance?
Part of the answer, I suggest, is in discovering what your
Reputational Elasticity of Demand (RED) is and how far that allows you to
consider your shareholders versus your customers.
So what is RED and how is it made up and measured? That and
more will be in my next blog post.
