What is reputation risk?
Reputation risk, particularly in the realms of software development, software company, and internet company, refers to the potential damage to a business's public image. This risk is multifaceted and often unpredictable, wielding a significant impact on revenue by causing customer loss and irreparable damage to the company's reputation.
Reputation risk can come from numerous sources, such as poor customer service, product recalls, data breaches, or even fake Google reviews.
To manage a reputation, an ounce of prevention is worth a pound of cure. Take a proactive approach by monitoring their online presence, helping them engage with customers, and responding quickly to negative feedback or reviews. They can also establish crisis management plans and protocols to address reputational risks as they arise.
Why is identifying reputational risk important?
Your client’s reputation is one of their most valuable assets. It takes a long time to build a positive reputation, but only a moment for it to come crashing down. The worst part is that these risks can occur with little to no warning. That’s why it's critical to be prepared and watch out for potential dangers along the horizon.
Reputational risk examples
Reputational risk can come from factors found both inside and outside the business, so SMBs must be proactive in managing potential shortfalls to avoid their negative consequences.
Cybersecurity breach example
When your business is trusted with sensitive information, you must do everything in your power to protect it. But what happens when you don’t? Cybersecurity breaches can result in the loss of sensitive customer information, financial data, and trade secrets. These incidents can lead to a loss of trust in the company and damage its reputation. For example, the 2017 Equifax data breach led to a significant drop in the company's stock price, and even years six later, users are still feeling the effects.
(source: X)
Product recalls
Product recalls can be damaging not only to a company's reputation but also its bottom line. Fixing or replacing defective products and honoring refunds be costly, and still may not fully guarantee earning back consumer trust. For example, the 2010 Toyota recall saw millions of vehicles pulled from owners and dealerships due to a faulty accelerator pedal. This led to a significant loss of trust in the company and a decline in sales for years following a string of later recalls. (The Guardian)
(source: The Guardian)
Environmental incidents
Environmental incidents due to neglect, such as oil spills or chemical leaks, can have a significant impact on a company. These incidents can lead to negative media coverage and public outcry from citizens and environmental groups alike. For example, the 2010 BP oil spill in the Gulf of Mexico saw 4 million barrels of oil seep into the gulf over 87 days. (United States Environmental Protection Agency)
While the incident is over a decade old, users on X (formerly Twitter) were still voicing their frustrations nine years later.
(source: X)
Social media storms
Social media frenzies caused by a customer voicing their opinion online can quickly go viral and damage the public perception of a business. For example, the 2017 United Airlines incident, where a passenger was forcibly removed from a flight, led to a sharp decline in the company's reputation and many users voiced publicly that they’ll be taking their business elsewhere.
(source: Youtube)
7 common types of reputational risk to avoid
Risks to a business’s reputation can come in many shapes and forms. Below are some common risks to be on the watch for:
1. Product and service issues
If a business's product or service fails to meet customer expectations due to deceptive marketing or causes harm, it can damage the business's reputation, and may even lead to legal action.
2. Data breaches and cyber attacks
With our increasing reliance on technology, data breaches, and cyber attacks can be a major reputational risk. Customers may lose trust in a business that fails to protect their personal information from hackers.
3. Employee misconduct
Fraud, harassment, or discrimination, can reflect poorly on a business. Companies need to have strong policies and procedures in place to prevent and address such behavior.
4. Leadership and management issues
Poor leadership or mismanagement can lead to significant reputational damage if left to go unchecked. For example, a CEO who engages in unethical behavior or a company that fails to address employee concerns can lead to whistleblowers, worker protests, and bad press. Customers actively avoid doing business with companies that behave in a way they do not agree with.
5. Legal and regulatory issues
Navigating legal and regulatory issues with care is important, as any violations can severely damage your client’s hard-earned reputation. Whether accidental or intentional, breaches of laws and regulations not only result in financial penalties but also erode trust among customers, partners, and stakeholders.
6. Social media and public opinion
Social media can amplify negative opinions and quickly spread damaging information. For example, this post from a user in 2021 highlights the fact Burger King made a sexist post on X during one of its marketing campaigns. Companies need to be careful of the messaging they are using and have a plan in place to effectively respond to negative feedback left about them online.
(source: X)
7. Competition and industry issues
Competition and industry issues are also something an SMB should consider. For example, a company that is seen as lagging behind its competitors or finds itself associated with a controversial industry may suffer reputational damage.
By understanding the most common types of reputational risk, SMBs can take steps to mitigate their impact and protect their reputation.
Factors that can increase reputational risk
In this section, we’ll delve into the factors that have the most potential to harm an SMB’s image. Identifying what can tarnish a reputation can help you spot any gaps that need filling.
Direct actions of the business
This can include anything ranging from noncompliance with regulations to fraudulent activities and problematic business practices. An example would be something like buying Google reviews to artificially inflate your star ranking.
Employee actions
Another factor to consider is the actions of your SMB’s team. For instance, if an employee engages in unethical behavior or makes inappropriate comments on social media, it can negatively impact your client’s reputation.
Negative reviews
While a larger company might be able to absorb a few blows to the ego, negative reviews can make or break a small business. Review bombing, where numerous negative reviews are posted in a short period of time on platforms such as Google, can be particularly harmful.
Data breaches
43% of cyberattacks each year are targeted at small businesses (Security Magazine). With over six million data records exposed worldwide in the first quarter of 2023 alone (a growth of 7% over last year), this threat is only going to increase for SMBs (Statista).