Decoding the economics of apologies

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Mistakes can happen anywhere – be it one’s personal or professional life – and they can cause pain, anger, or loss to someone. Companies today are quick at damage control actions, but quite often leaders fail to apologize effectively

When Zomato messed up their order delivery to Sai Shyam G, a resident of Chennai, he was very disappointed. The food arrived 40 minutes late, the bread was burnt and the food was cold. A disheartened Sai tweeted about it, and then forgot about the incident. But he was pleasantly surprised a few days later when he received a hand-written note from Zomato apologizing for the poor customer experience. The apology note was accompanied by a cute little gift. The next tweet was from a super thrilled customer. The personal touch in the apology made his day and the gift – a cup and a diary – was the icing on the cake. Zomato touched the right chord and won over a client for life.

‘To err is human, to apologize is humane.‘ Mistakes can happen anywhere – be it one’s personal or professional life – and they can cause pain, anger, or loss to someone. Large corporations make mistakes, celebrities cross limits while interacting with social media, leaders in the political arena make errors, and they hurt customers, employees, business partners, or the public at large. Companies today are quick at damage control actions, but quite often leaders fail to apologize effectively, and this can severely damage their reputations and their relationships with stakeholders. Either way, what then transpires is the ‘economics of apologies’.

Mistakes have a cost associated with them. According to the World Health Organisation, medication errors alone cost an estimated US$ 42 billion annually globally. Besides, there is a price to pay in terms of loss of life and massive litigation costs due to medical goof-ups too. Even though some of these losses can never be compensated, it still deems an apology of some kind, and it does work somewhat, if not totally.

Lee et al. (2004) analysed annual reports from publicly traded companies and found that companies that admitted responsibility for bad earnings had higher stock prices one year later than those who did not. According to Ho and Liu (2011), after 36 states in the United States passed laws that encouraged doctors to apologise, malpractice cases settled 19-20% faster and there was a 16-18% reduction in the number of claims filed.

In 2015, Coca Cola came under the scanner for financially supporting a nonprofit’s work that seemed to shift the focus from good eating habits to exercise as a solution to obesity. Coca Cola was criticized for putting business interests ahead of consumer health. CEO Muhtar Kent immediately responded by writing an op-ed in the Wall Street Journal stating his disappointment that their supporting the nonprofit for a social reason had caused confusion, but went on to clarify that Coca Cola was committed to good health and strongly believed that lifestyle, including diet, are important. He also promised to introduce healthier options of the soft drinks and the company kept their promise by introducing low calorie options. Quick response, addressing the concern, a feasible promise for the future: all the elements of a good apology were in place.

Another classic example of the right kind of corporate apology is the one extended by Johnson & Johnson during the Tylenol crisis. In 1982, seven people died from consuming cyanide-laced Tylenol capsules. Although an individual and not the company had caused the catastrophe, James Burke, the CEO at the time, immediately assumed responsibility for the calamity. Production and advertising were halted, Tylenol worth an estimated cost of about 100 million dollars already in the markets was recalled, a public statement was issued inviting consumers to return their bottles of Tylenol for a voucher and even though it was not an organizational error, Burke assured the public that this mistake would never be repeated and that capsules with new and improved packaging would be out soon. The general belief at that time was that it was the end of the Tylenol brand, but the new, better-packaged Tylenol regained 90% of its market share within a year.

‘Apologies require taking full responsibility. No half-truths, no partial admissions, no rationalizations, no finger pointing, and no justifications belong in any apology.’ A good apology should be an honest appeal for forgiveness and must be rendered in a timely manner and include the following elements (or sometimes a combination of a few of these):

• Acknowledgment of the mistake or wrongdoing
• Acceptance of responsibility
• Expression of regret
• If confident, promise that the offence will not be repeated (and live up to it)

‘Not admitting a mistake is a bigger mistake.’ Companies increasingly understand the value of saying sorry, and this is evident from the growing trend in the corporate world of apologizing; you rarely see an issue go unaddressed, and companies are investing time and resources in PR teams and crisis management. Companies want to regain consumer trust, and so they are admitting fault, asking for forgiveness, and promising that they have learned from their mistakes. But re-establishing trust is a consumer choice, not a brand choice, and not a quick process either. If we want to stay in the business, we need to say sorry before we put ourselves in a ‘sorry’ spot.

However, despite the benefits, Indians do not apologize as often you would like. One reason for this could be the importance of social hierarchy and power dynamics, where apologizing can be seen as a sign of weakness. Apologizing can actually be a way to signal strength and commitment to resolving disputes. But do we care?

Another reason for the lack of apologies could be cultural differences in communication style, where indirect communication is often preferred. Long story short – next time you’re in a disagreement, consider saying sorry. It might just help you out economically!
 

References:

• https://www.researchgate.net/publication/353427261_Toward_An_Understanding_of_the_Economics_of_Apologies_Evidence_from_a_Large-Scale_Natural_Field_Experiment
• https://qz.com/1394320/economists-figured-out-the-best-way-for-uber-to-say-sorry
• https://boingboing.net/2014/05/13/economics-of-apologies.html
• https://www.npr.org/2018/10/17/658253838/the-economics-of-apologies-why-saying-sorry-isnt-always-as-easy-as-it-seems
• https://sproutsocial.com/insights/public-apology/
• https://www.cnbc.com/2019/04/16/saying-im-sorry-can-make-people-think-poorly-of-you-research-heres-what-successful-people-do-instead.html
• https://hbr.org/2006/04/when-should-a-leader-apologize-and-when-not
• https://hub.airfoilgroup.com/blog/the-rise-of-apology-marketing-how-brands-can-say-sorry-like-they-mean-it