How elastic is your brand’s reputation? Find out with this metric.

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.

MIT may be inventing future technology, but it’s up to us to decide how we use it

Once again I’m indebted to the print edition of Wired UK for news of a couple of things which will be a real boon to people in the world of marketing.
The November issue (sorry, no link as its content isn’t online to avoid cannibalizing sales of the print edition) is entirely devoted to the work of the MIT Media Lab, which the cover headline rather grandly describes as “inventing the future”. Hyperbole aside, it’s come up with some cool stuff over the years — from e-ink (think Kindle) and Lego Mindstorms to the XO Laptop.
Among the latest things its team of world-leading researchers have developed are two pieces of technology of particular interest to marketers.
The first, Video Response codes, are basically like the QR codes we’ve seen in print for a number of years, but are instead embedded invisibly in video displayed on screens.
The idea is that you use your smartphone to take a photo of the screen and the software grabs the VR code, decodes it and links you to text, images, coupons, whatever, to be downloaded to your phone. Presumably, as the codes are imperceptible to anyone watching the screen, the video will have to have some kind of ‘snap this for cool stuff’ message included so you know there’s a VR code there to be captured.
Straight off the top of my head I can imagine this being used to create interactive cinema and TV adverts (QR codes have already been tried on TV, but there’s been a mixed reaction to them from consumers for various reasons). Or embedded in YouTube videos to link to other Web-based content.
As with so many technologies, their use is limited only by your imagination.
The second technology is Affdex. Originally developed in the Media Lab, it’s been spun off into its own company, Affectiva.
Put simply, the software tells you what the emotional state is of the person your camera is looking at by measuring key parameters on their face.
The original algorithm was built on autism research to help sufferers read the emotions of other people, It was first used to create “Mindreader” spectacles which told the wearer, via a tiny LCD screen, whether the person in front of them was happy, sad or whatever.
Rosalind Picard and her team took it further by training it recognize the emotions of more people from around the world by showing it videos. The goal — so a computer could recognize their emotional states.
It’s now so successful that marketing research giant Millward Brown has partnered with Affectiva to use it to get accurate real-time feedback from consumers and research subjects on TV adverts. The result is more accurate data where subjects may feel socially constrained from saying how they feel — not everyone’s comfortable telling someone their ad sucks.
But, as with almost any technology, the other possible uses are huge. Imagine having it for when you Skype a key journalist about whether they’re going to use a story you’ve pitched (think lie detector!) or are following up a business pitch with a potential customer (are they really as interested as they say?)
Unsurprisingly, pollsters are already excited about Affdex’s potential for more accurately judging voters’ reactions to candidates’ TV ads and debates. And the US National Security Agency has already expressed interest in using it for obvious reasons, although Affectiva aren’t keen to licence it for military use.
As much as we may legitimately want to know what others really feel in certain work circumstances, we also sometimes want to keep our own emotions private.
The article quotes other possible uses including allowing Facebook or YouTube to read your emotion (via your laptop webcam) as you watch a video (e.g. of a friend’s baby) and post your reaction online automatically. But what if you’re secretly jealous of your friend’s joyful event but don’t want to upset her? What if you don’t really think your friend’s new outfit is lovely?
Do you really want Facebook and YouTube, or your government if you live in a repressive country, to know how you truly feel about certain articles or videos online?
Clearly this technology has great potential for ethical uses, but given its claimed ability to get behind social barriers in the communication of feelings it has to be used within a strict set of opt-in guidelines and licenced carefully.
MIT may be inventing technologies of the future, but it’s up to us to decide how they’re used.