The Risks of a Good Reputation

Kent Grayson, an associate professor of marketing at the Kellogg School, explains the function and limits of reputation in certain commercial environments—from hospitals to restaurants to extreme expeditions—and how customers can best use the information at hand to inform their decisions.

Brayden King, an associate professor of management and organizations at the Kellogg School, discusses the challenges the ride-sharing company Uber has faced in earning the trust of its customers and drivers. King suggests ways the company can show its trustworthiness.

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Jessica LOVE: Hello, and welcome to Insight in Person, Kellogg Insight’s monthly podcast, produced by the Kellogg School of Management at Northwestern University. I’m your host, Jessica Love.

This month we take a look at how companies approach trust and reputation.

In the first half of the podcast, we examine reputation in the marketplace and why it may not be the protective mechanism we think it is.

In the second half of the podcast, we turn to the complicated nature of trust in the sharing economy and how companies like Uber can win—or lose—the trust of their customers.

So stay with us …

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ACT 1: Kent Grayson on Trust and Reputation

Jessica LOVE: In business transactions—as in daily life—we’re constantly putting our trust in others.

Kent GRAYSON: Really you’re taking a bet that somebody else is going to do something that you’re paying them for, or that you’ve promised to pay them for. And when you take that bet, you have to have some confidence.

LOVE: That’s Kent Grayson, a professor of marketing at the Kellogg School whose research looks at how trust works in the marketplace. So what gives us the confidence to buy a car or hire a sitter or find someone to manage our investments? In part, he says, we rely on explicit mechanisms such as legal contracts or due diligence to ensure that the other party will act in good faith.

But we also rely on mechanisms that are less explicit—like a company’s reputation.

GRAYSON: It’s an accepted view, and it’s not wrong headed, that reputation is one of these mechanisms that operates in a marketplace to help increase confidence in the bet that a buyer is going to take on a seller that they’re worth it.

LOVE: In theory, reputation is supposed to protect consumers. If a company does something wrong—it fails to deliver on time, or the quality of its product isn’t as advertised—customers will make their bad experiences public.

GRAYSON: They have information now about the seller that other people don’t have, and they communicate that information in the marketplace, and now everyone knows that this seller is bad, and it creates a vicious circle for this seller. People stop buying from the seller and, assuming that the seller had this bad quality or poor customer service because they really are a bad seller, the few people that are left also experience this bad service, or this bad quality, and very quickly, because they have a bad reputation, they get kicked out of the marketplace.

LOVE: In other words, because customers have the ability to influence reputation—and we assume that companies value their reputation—the threat of getting a bad name should keep those companies from engaging in opportunistic behavior. So all we need to do is look for companies with good reputations and avoid those with bad ones.

But in order for reputation to work, information has to be transmitted both accurately and quickly in the marketplace. In some cases, this works well. But often this information is what Grayson calls “noisy”—it’s vague, secondhand, or described in questionable terms. Or, the information is just really hard to find.

GRAYSON: When people go to a hospital anywhere in the United States, and they go to that hospital with the belief that it’s a good hospital with a good reputation, if you ask people, so how do they get that reputation, they’ll tell you about this mechanism and how it works. But the truth of the matter is that good quality information about hospitals in the U.S. is not easy for the average consumer to get. If you’re going in for operation X or operation Y, and you want to know what the success rate of that hospital is for that operation, only the most dedicated consumers are going to actually search that out.

LOVE: But if that information is hard for us to come by, what exactly is motivating the hospital to keep its success rate high? How is its reputation protecting us from poor service?

Another problem related to reputation is that even when we do encounter quality information, we sometimes ignore it. Grayson and his coauthor Gulnur Tumbat recently studied hikers and guide companies involved in high-stakes expeditions to Everest and Denali. On these expeditions, hikers trust guide companies not to behave opportunistically—for example, by sending hikers off the mountain unnecessarily to make their guides’ jobs easier. After all, the guides’ reputations as honest brokers are at stake. But what’s interesting is—when those same hikers hear negative information about a guide, they tend to find reasons to discount it.

GRAYSON: They could say, well that client is complaining because they didn’t prepare well enough, or they weren’t strong enough to make it to the mountain and they’re just blaming the guide. As soon as many people in the marketplace are interpreting information in different ways, and sometimes in self-serving ways, and then communicating that in the marketplace, the reputational mechanism starts to fail despite the fact that people believe it’s working.

LOVE: If reputation doesn’t always work the way we think it does, this has potentially troubling implications for consumer welfare in all kinds of markets—online pharmaceutical sales, for example, or medical tourism. And while we rely on sites like Yelp or TripAdvisor to hold companies accountable and spread information through the marketplace, even these only go so far.

GRAYSON: I think at the restaurant that I went to because it had all these Yelp reviews, yep, reputation worked. It worked. But, that is sort of like a self-fulfilling prophecy, which is that I believed that reputation worked, I had one encounter with this restaurant that it worked. I don’t know how clean their kitchen is. I don’t know how many incidents of food poisoning they may have had. I don’t know how many of those reviews were created by friends of the restaurant or by robots who are trained to go in and put these positive reviews on.

When the positives are in the hundreds, you just think, well, reputation must be working there. But even in those cases, I think it’s worth questioning—Where do we get this faith in reputation? Where do people come to a belief about this mechanism? And why is it so commonly shared? Like I said, it’s one of the things that really amazed me, people say, well, why did you chose this guy? Well, they have a good reputation.

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ACT 2: Brayden King on Uber

Jessica LOVE: Perhaps few markets rely as heavily on the value of reputation as the sharing economy. Take Uber, the on-demand private transportation service that uses semiprofessional drivers—members of the public, really—who are willing to “share” their vehicles with others for a fee that is split between Uber and the drivers.

Brayden KING: If they do it right, then the company makes money and people throughout the world can find a cheaper, more informal way of getting a ride to wherever they want to go. That’s the idea of the sharing economy.

LOVE: That is Brayden King, an associate professor of management and organizations at the Kellogg School. King points out how companies like Uber eschew some of the traditional ways that companies communicate that they can be trusted—like agreeing to regulatory oversight, or implementing rigorous background checks on contractors. Instead, they rely on something else.

KING: They create reputational mechanisms to assure that you can trust this driver is not going to take you off to someplace you don’t want to be or is not going to do some harm to you. And it also works the other way around, where the driver can look and say, “Okay, this person seems to be a trustworthy rider. They tend to fulfill their part of the deal.” Uber built that into the original model, that there would be some sort of a rating system, that you could rate someone positively and look at the overall rating, the aggregated rating, as a way to see if this person is trustworthy or not.

LOVE: In other words, as with Yelp or Tripadvisor, reputation is crowd-sourced. Only here, there is more than one reputation involved. Drivers have to maintain high ratings from passengers, or they are banned; passengers with low ratings may wait a long time for a willing driver—and, of course, Uber itself needs to maintain a positive reputation in order to attract passengers and drivers alike.

But as in other industries, there are limitations to just how much reputation can be trusted in the sharing economy. And because reputation plays such an outsized role in facilitating trustworthy behavior—because it is acting as one of the ONLY checks on bad actors—these limitations are especially stark.

KING: Think of the examples coming out of, where people have been sexually assaulted by a driver at Uber. That’s a clear, a very ugly breakdown of this trust reputation system that’s supposed to be in place. And Uber, I think, by all accounts, didn’t do enough to take that seriously and show the public that they understood why this was a problem and why people might be skeptical about using Uber in the future. I think that really reflects the fact that they grew faster than they were ready for. They hadn’t developed the corporate structure that was professionalized in all the ways that we would expect a company of that size to be.

LOVE: Another problem is that the sharing economy—and trust more generally—relies on everyone coming to the same consensus about what behaviors are acceptable. Sometimes this is clear-cut. But sometimes parties may genuinely disagree. One passenger might not mind if her driver is talking on the phone; another might find that unacceptable. And what customers and drivers expect from Uber may not be quite what Uber intends to provide.

For former Uber driver Cara Megan Lewis, there were a few surprises in store after she signed up.

Cara Megan LEWIS: At the beginning when you sign up for the Uber partner app and you don’t mark not to receive text messages from the Uber system, you are bombarded, absolutely bombarded by incentives. 5:00 in the morning, sometimes 4:30 in the morning I’d be getting texts from Uber saying, “The weather is bad, it’s snowing, get on the road, you’re missing an opportunity to make money.”

I was getting, I feel like 30 texts a day encouraging me to get out on the road and drive. I thought it was a little nerve-racking, the pressure that I felt was put. It felt so much more like a business and not a ride share.

LOVE: When the weather turned bad, Cara took a few weeks off. It wasn’t long before her account was deactivated.

LEWIS: I understand it; they don’t want to just have a lot of partners with the app open, just dipping in from time to time. I thought there would be a little bit more of a grace period. Yeah, that was only, I think it was only four weeks. Though, they did say via email, “Call us and we’ll help you get reactivated.”

LOVE: This lack of consensus about Uber’s terms of engagement extends to the storage and use of customer data. Here’s Brayden King again.

KING: They reported on their blog that with their data they could predict when somebody was using Uber to go off and have an affair with someone else. They could use it to predict what you were doing at various times of the day if you were using Uber. This suddenly made people squeamish. They thought, “Wow, Uber actually has a lot more power and influence than we realized, because of all this massive amount of data.” It’s not as if having access to big data about customers is a bad thing.

We don’t care so much if people know what kind of cereal we buy in the morning, but we do care if a company knows, and if they’re willing to talk about, where we spend our time at 2am in the morning.

LOVE: But the bad publicity of data being mishandled, or the discomfort of a few outspoken customers, may not be enough to keep our data safe. In an op-ed in the New York Times, King has proposed an information fiduciary: an independent, external body to oversee how data are used. And ironically, companies that support this oversight may find that they’ve gained their customers’ trust.

KING: I don’t know if that needs to be a government regulator, but I think having a third-party certification system or a voluntary type of certification where companies say, “Yes, we recognize the need to have an auditor come in and see how we’re using data, would be a good thing, not just for our customers, not just because the customers want it. It’d be good for us, because we can show that we are a company that you would trust with your data, because we’re willing to do something that is a little bit costly for us to demonstrate that we are not trying to rip you off or do something with your data that might be harmful to your personal life.

LOVE: One recourse for customers who are concerned about how their data are used—or for that matter, how passenger safety is assured or how drivers are treated—is to vote with their wallets. Customers just can take a cab or rely on public transportation. But they can also use the company’s reliance on reputation to their own advantage. They can become activists.

KING: because people care about Uber, because it’s such a visible company that’s doing such an innovative thing, you’ll probably still see people engaging in activism to try to turn it into the company that it ideally should be.

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LOVE: This program was produced by Drew Calvert, Jessica Love, Fred Schmalz, and Michael Spikes. Special thanks to Kellogg School of Management faculty Kent Grayson and Brayden King, and Cara Megan Lewis.

You can stream or download our monthly podcast from iTunes, or from our website, where you can read more about Kent Grayson’s and Brayden King’s research. Visit us at insight.kellogg.northwestern.edu. We will be back next month with another Insight In Person podcast.