Having a business is always associated with risk, including financial, strategic, compliance, and reputational risk. Reputational risk is different from other business risks like strategic risk as it is quite unpredictable.
With the increased social media usage to digitally market your business, the reputational risks have also increased. Social media platforms are accessible to everyone and you may have to face criticism. The impact is huge, and you may face reputational damage. Besides social media, there are plenty of other types of reputational risks that may cause harm to your company if not managed properly.
7 Types of Reputational Risk
According to Reputation Management, 25% of a company’s market value is directly attributable to its reputation.
Thus, it is highly important to consider all risks and study reputational risks properly. Here are the different types of reputational risks based on their causes and influence.
Contrary to the unpredictability of reputational risk, any foreseeing businessman understands that increasing competition is an indirect risk to the business. As more similar options are available, some may have better products and services than yours. When a customer buys a better product from another brand, your reputation subsides from their memory. They tend to buy more from your competitor, improving their reputation. While it may not directly harm your reputation, increasing competition means that you need to improve your services for the best.
Company negligence reputational risks are related to increasing competition. Your reputation is at high risk if your employees do not understand the need for work to stay in the market. Whether the competition is high or not, your customers can always find a substitute. If your company does not deliver high-quality products or services as promised, the clientele does not hesitate to move to another brand. Some of the major reputational risks associated with company negligence include:
- Low-quality products or inadequate service
- Data breaches that enable others to look into your confidential information cause damage
- Below-par customer service that does not validate the customer’s concerns
Improper Working Conditions
Reputational risks are attributed not only to the customers’ words but also to the employee. You may be surprised to know that a negative word from an employee about the company causes more harm than a bad review from the customer. So, if you want to avoid reputational damage, it is a must to take care of your employees and their needs. Internal scandals are also bad publicity that a company must try to avoid. The short-lived limelight can lead to a dark, long-term pothole that you may not be able to come out of.
Non-Compliance with Local/ International Regulations
Non-compliance to regulations is also a critical reputational risk that can harm your business seriously. If you do not comply with the local or international rules and regulations regarding your business, you can get into big trouble. Like internal scandals, this kind of reputational damage is also challenging to reverse. The regulatory bodies typically issue you notice. If not taken care of, the news can go online to stop people from buying your product or service.
A business’s reputation is also related to the stakeholders. Sometimes all stakeholders are not on one page, and one of them might not like any of your policies. And if they take it to the media and talk about the policies they do not agree with, it can backfire badly. While this is quite unlikely to happen, it is not impossible. It’s better to make sure all your stakeholders are happy with your decisions to avoid reputational damage.
When customers trust your product, they believe that you inquire properly about your suppliers and choose the best one. However, if they encounter any misconduct regarding the supplier, they doubt your previous products as well. One way to avoid this kind of damage is to keep up to date on the quality of your vendor’s material. A supplier’s misconduct or bad reputation can cause damage to your company’s reputation as well.
Negative reviews are the most common and most influential type of reputational risk. Typically, consumers present their concerns through social media posts, but newspapers or digital publishing agencies may also cover more serious matters. Digital media platforms have provided the customers with a safe space to voice their concerns about a brand.
What is reputational risk in banks?
Reputational risk in banks is primarily related to the risk of not being able to meet the expectations of the stakeholders due to any action, event, or behavior. It may occur by the bank as an institution, the employees, or other associated entities.
What is reputational damage?
Reputational damage occurs when you do not manage the possible reputational risk in time. Reputational damage can lead to long-term issues or eventually losing a loyal customer base.
What is the cost of reputational damage?
The cost of reputational damage mainly depends on the extent of the damage. Yet, according to Kaspersky, the average cost of brand damage by one incident came around $8,000 for medium-sized businesses and up to $200,000 for large enterprises.
What are the types of risk operational reputational?
Operational risks are system risks, people risks, process risks, external event risks, and compliance risks. Conversely, reputational risks are related to acts by the company, employees, stakeholders, or customers that affect the business’s reputation.
What are the types of pure risk?
Pure risks are those you cannot control and may result in loss. Typically, pure risks are attributed to natural disasters and unforeseen incidents. They are of three types; personal, liability, and property.
The Bottom Line
Reputational risks are significant for a business, especially when you are trying to make a name in the market. If you do not consider the reputational risks, your competitors may use them against you. Common types of reputational risk include negative reviews on social media and publications, misconduct by the vendor, and public disagreement by the stakeholders. You can save your company from reputational damage by considering these types of reputational risks. Do not forget to mitigate and manage them adequately.
Matthew is a Co-Founder at BusinessFinanceArticles.org. Matthew was a floor manager at a local restaurant in Wales. He lost his job after the pandemic and took initiative to make a team and start the project.