An elastic reputation
Wednesday, October 16, 2013
One of my favourite old jokes came to mind today: heaven is where the chefs are French, the engineers German, the policemen British, the lovers Italian and the whole place is run by the Swiss. Hell is where the chefs are British, the engineers French, the policemen German, the lovers Swiss and the whole place is run by the Italians.
I’m not sure what Anglo Saxon vocabulary Gordon Ramsay would use to refute the once poor reputation of British chefs. I also speculate what former government Chief Whip Andrew Mitchell thinks of the British police force. National stereotyping notwithstanding, it made me think about reputation and whether some of our long held convictions would stand firm in the face of damaged reputations?
Extending the joke to its inevitable limit, the Italians do not have a monopoly on economic incompetence. The Greeks and, perhaps more surprisingly, the cash-strapped Americans have received some knocks to their reputations in recent months. There is an economic principle which relates to reputation and the ‘elasticity of demand’. With conventional price elasticity, there is a decline in sales correspondent to an increase in price. But in this case it infers that an institution can lose out financially if its reputation is damaged, but only in proportion to its usefulness to others. This is where the elasticity bit comes in. Those whose services cannot be readily replaced can retain customers, even when their reputation is damaged, but where there are easily available alternatives customers will switch on the basis of a poor reputation.
Consider Starbucks, Amazon and Google which were named and shamed by the HMRC at the turn of the year for failure to pay ‘adequate’ levels of UK corporation tax. Their reputations were damaged, although the resulting impact differed depending on the ‘reputational elasticity’ of each company.
Rather than a variation in price reducing Starbuck’s coffee sales, it was a variation in their reputation that did it. Because of negative publicity, the British public boycotted their services. Starbucks is the most ‘elastic’ of these examples because easy alternatives are so readily available. Anyone can walk down any High Street and buy a cup of coffee at Costa or Café Nero instead if they feel the need to protest.
Less elastic is Amazon’s reputation. It holds such power that people encounter practical difficulties if they forego its services. In spite of strongly worded sentiments at the time, few actually wanted to give up their Kindles or replace online shopping with a trip to the nearest town centre. And in the end, the ubiquitous Google was the last to feel any shift in demand, with people so reliant on the service that a mass migration to Bing never took place. This puts Google into the ‘inelastic’ camp, where the sheer magnitude of its reach overcomes reputational damage.
So what are the implications of reputation elasticity for businesses? Well, a reduced reputation can bring about reduced prices. If reputation affects demand it puts downward pressure on the prices that can be charged. Effective reputation management can therefore equate ultimately to profit with a better reputation potentially meaning higher profits. Even inelastic companies must, however, avoid complacency: demand will only tolerate so much ‘low reputation’ before it declines. A poor reputation can also open up possibilities for a competitor to enter the market and lure away dissatisfied customers.
Perhaps the most important thing to remember about ‘reputational elasticity’ is that it only stretches so far and that hanging on to a good reputation should be the priority of world leaders and business leaders the world over.