Reputation Renting

Reputation renting is the action of an organization with a lower reputation forming a mutually beneficial relationship with an organization of a higher reputation such that the organization with the lower reputation is able to enhance its reputation, while the organization with the higher reputation receives other considerations (e.g., financial payments).

Reputation renting is based on the same psychological processes as the individual phenomenon of “basking in reflected glory.” For example, when a local sports team wins the “big game,” fans often wear clothing featuring the team’s logo or name to associate themselves with a winner. Basking in the reflected glory is rooted in social identity theory, which provides the theoretical rationale as to how a person’s self-esteem can be enhanced by another’s success, even though the individual has done nothing to directly contribute to such success.

Individuals are more supportive of organizations that possess more positive reputations than those that do not. Reputation is even more important in incomplete information settings—that is, reputation becomes important to the public when stakeholders are not sure exactly how a company will behave. In those situations, stakeholders, such as investors, will often rely on an organization’s reputation in making their decisions. Consequently, organizations expend a great deal of resources to enhance their reputation, including “renting” other companies’ reputations. This entry discusses the types of reputation renting and the benefits and disadvantages of reputation renting.

Types of Reputation Renting

Four types of reputation renting are (1) cause-related marketing, (2) hiring reputable service providers, (3) working through reputable distributors, and (4) advertising.

Cause-Related Marketing

One common way of reputation renting is through cause-related marketing. Cause-related marketing is a mutually beneficial collaboration between a for-profit corporation and a not-for-profit organization in which their respective assets are combined to create shareholder and social value, connect with a range of stakeholders (consumers, employees, etc.), communicate the shared values of both organizations, and allow the for-profit organization to “rent” the reputation of the not-for-profit organization. American Express first used the phrase cause-related marketing in 1983 to describe its campaign to raise money for the Statue of Liberty’s restoration. American Express donated 1 cent to the restoration every time someone used its charge card. As a result, the number of new cardholders grew by 45 percent, and card usage increased by 28 percent.

Reputation renting through cause-related marketing has taken on many forms. Some of these include product sales, the use of “purchase plus,” licensing, co-branded events, and co-branded programs. The first involves product sales. For example, the (PRODUCT) RED campaign has brought together many companies to sell specially branded products (e.g., a red Gap T-shirt), with a portion of the selling price going to the Global Fund for use in HIV/AIDS prevention. The second is “purchase plus” where a customer is asked at the checkout line if she or he would like to add a small donation (e.g., $1) to the bill. The store processes the money and gives it to the nonprofit with which it has partnered. The third is the licensing of the nonprofit’s logo, brand, and assets. The licensing can apply to products that are extensions of the nonprofit’s mission and allow use of its logo on promotional items such as T-shirts, mugs, and credit cards, or otherwise, the nonprofit can provide a certification or commendation of particular products (e.g., American Heart Association providing recognition for products that meet its standards for heart health). The fourth, the co-branded event, is a practice that involves social marketing campaigns that use marketing techniques to encourage behavior change in a particular audience. An example is the teaming up of the American Cancer Society and pharmaceutical company Novartis, on their Great American Smokeout campaign. The fifth type is a co-branded program. One example of this is the Pan-Mass Challenge, a two-day, 160-mile bike ride from central Massachusetts to the end of Cape Cod. The ride raises money for the Dana Farber Cancer Research Institute. The event draws more than 5,000 riders and attracts numerous participating national and local sponsors.

Hiring Highly Reputable Service Providers

Another way of renting reputation is to hire firms with highly positive reputations to provide services for an organization. For example, the accounting industry, which derives the bulk of its revenue through audits, functions on the basis of the traditional economic theory of reputation. One way of reputation renting was for corporations to hire a highly visible and trustworthy accounting firm to do their books. As a result, companies doing so often found that they were able to lower their costs of borrowing and raising new capital. Consequently, both sides benefited—the corporate client benefited from lower borrowing costs, and the accounting firms benefited from the fees they charged.

For accounting firms to charge for their audit services, and for clients to be able to rent those firms’ reputations, accounting firms had to maintain and invest in those reputations. It was critical that accounting firms not approve erroneous or fraudulent financial records. When accounting firm Arthur Andersen began to add in lucrative consulting services to its auditing services for its client Enron, the conflict of interest led the firm to support Enron’s efforts to “cook the books.” The scandal resulted in both firms losing not only their reputations but also their very existence.

Like accounting firms, law firms often rent their reputations. Unlike accounting firms, though, law firms often rent the reputation departments of their law firms or, more recently, of their individual lawyers rather than the reputation of the law firm itself. That poses an interesting problem for law firms as the incentive for lawyers to invest in their own reputations is increasing, while the incentive of lawyers to invest in their firms’ reputations is declining. The shift to law firms forming limited liability partnerships rather than general partnerships illustrates this phenomenon even further.

Working Through Reputable Distributors

A third form of reputation renting is working through reputable distributors. For example, research shows that manufacturers of high-quality products choose to sell through reputable distributors, while manufacturers of low-quality products tend to sell through discounters. Additionally, small retailers on the Internet would move their goods and services on well-known portals such as Yahoo! and Google to benefit from those portals’ reputation. Reputation renting benefits smaller retailers who lack the assets to advertise heavily.

The Internet has made it easier for consumers to obtain information about products and services than ever before. Consumers often turn to an information intermediary (also called an infomediary) for such information. Research shows that the reputation of the manufacturer’s brand, the reputation of the online retailer, and the reputation of the infomediary increase the purchase intentions of consumers. However, a weak manufacturer brand can be more enhanced by a strong online retailer than by a reputable infomediary. By contrast, a strong manufacturer brand benefits more from a reputable infomediary than from a strong online retailer. Thus, strong manufacturers should rent the reputation of infomediaries.

Those companies looking to export their products into international markets need to factor in the value of the goodwill of international importers. Research has shown that importer goodwill is an important signal of product quality. As a result, consumers factor in goodwill when deciding between a foreign product and a competing domestic product. New product exporters need to have importers who have established goodwill with their customers. Securing such representation in a foreign market is not easy to achieve. The importers with the highest goodwill are often unwilling to rent their reputation to new exporters. Consequently, to avoid being shut out of lucrative markets, exporters need to provide adequate compensation (sufficient rent) to those importers. That has implications for the pricing strategy of firms new to an international market.

Advertising

Advertising in reputable channels can also be considered reputation renting. Edmund’s has a long-standing presence in the physical world as a provider of information in buying new and used cars. Edmund’s established an early presence on the web and became a leader in providing such information to Internet users. For example, many auto-related companies and services (warranties, insurance companies, etc.) advertise on Edmund’s website to take advantage of Edmund’s reputation and leadership position. Similarly, research shows that advertising alliances can benefit new brands or established brands entering a new market. Such alliances are more likely to be found among larger firms in industries that have fewer competitors than among smaller firms in highly competitive industries.

Benefits of Reputation Renting

There are many benefits to organizations that are engaged in reputation renting, such as establishing a presence in a new market, improving an attribute (e.g., corporate social responsibility activities) of the organization, or inoculating an organization from the fallout from a corporate crisis. The economic benefits to a not-for-profit organization from reputation renting vis-à-vis a cause-related marketing project can be substantial, often reaching millions of dollars. Besides the economic benefit, not-for-profits gain the value of the publicity and advertising that usually accompany a cause-related marketing program, which is often done by the corporation’s public relations and marketing departments.

Downsides of Reputation Renting

There are downsides to reputation renting. These include public cynicism about the companies’ motivation, poor fit between the reputation renter and the reputation rentee, and risking the reputation of the firms. For example, one concern is that by linking its good name to for-profit activities, a not-for-profit may weaken its trustworthiness. The public might feel that the not-for-profit is “selling out” and blurring the line between business and philanthropy. Or the public might believe that a good cause is being exploited for profit. For example, Microsoft Corporation’s Bing search engine created a backlash when it posted a message on Twitter, offering to donate $1 to Japan’s relief efforts in the wake of the 2011 tsunami each time someone forwarded its message. The tactic touched off a massive number of complaints from Twitter users, who accused Microsoft of using the tragedy as a marketing opportunity. Microsoft dropped the plan within a matter of hours, providing a straight donation of $100,000 to the relief effort instead.

Furthermore, research from several studies on cause-related marketing indicates that information regarding a company’s support of social causes can affect choice. However, cause-related marketing’s influence on product or service choice is found to depend on the perceived motivation underlying the company’s cause-related marketing efforts as well as on whether consumers must trade off their company sponsorship of causes for lower performance or higher prices. The effects of retailer-cause fit are moderated by consumer perceptions of the retailer’s motive for engaging in cause-related marketing and by the affinity that consumers hold for the social cause component of the campaign. In other words, consumers are more likely to support companies that are making a difference in the world. But consumers are growing wary of the motives.

Finally, there is always the possibility that one of the parties involved (nonprofit or corporation) will engage in some activity that hurts its reputation. In that case, the other party may be perceived negatively as well. For that reason, corporations and nonprofits should choose their partners wisely.