Perceived risk

Steve Ferrante’s quote “If you want to know how to sell, then you better know why consumers buy” should not be taken lightly by any business that wants to make profits by selling more and more products. Given the importance of consumers and their buying behavior, it is natural for businesses to study consumer behavior in detail and then draft a winning marketing strategy.

With so much importance being given to the study of various kinds of consumer behavior, the various risk theories associated with consumer behavior and risk theories too become important.

Though various kinds of risk theories have been floated, perceived risk plays an important role in the buying pattern of consumers and thus organizations – both big and small should pay attention to this factor too when drafting their marketing strategy. If you are unaware of perceived risks, then read on and know more about it.

Definition of Perceived Risk

According to Arrow (1950), Humphreys and Kenderdine (1979) and Taylor (1975), Perceived risk “represents an uncertain, probabilistic potential future outlay”. In simple terms, perceived risk is the ambiguity that consumers have before purchasing any product or service. a term that is used in Marketing and sales, Perceived Risk refers to the customer’s perception of the risks associated with any purchase and is mostly associated with products that are expensive such as houses or cars or products that are complex and have many features such as Computers or laptops.

This kind of risk occurs when a consumer perceives that the purchase decision might cause a potential hazard or chance of loss. It does not matter whether the perceived risk exists or not. Perceived risk is always subjective in nature and differs from people to people. It might also vary from time to time.

When buying products that have a higher perceived risk, Consumers often consult experts, family or friends about the product and then make their decision. A common observation is that for products with high perceived risks, a majority of consumers tend to favor the market leader – which already has a good review.

Types of Perceived Risk

Perceived risk can be of different types. Listed below are the various types of Perceived risk.

1. Functional Risk

Functional Risk refers to the risks associated with the functioning of the product. For example, a consumer who loves to bake cakes for his family and friends might think “Will the oven be sufficient to bake multiple batches of cakes?” The functional perceived risk is associated with the product’s features, functioning and perceived benefits and also includes concerns regarding the quality of the product.

Since it is related to the features of the product, this kind of risk can be easy addresses by the parent firm of the product. Providing adequate product information and addressing every query of the consumer will go a long way in helping alleviate such kinds of perceived risk.

2. Physical Risk

Doubts about the safe usage of the product come under Physical risks. A consumer might be confused about how safe it is to use a particular product or service and thus thinks multiple times before making the purchase.

This kind of perceives risk too is easy to address by the parent firm as they can easily alleviate the customer’s fears by providing them information about the safety of the product. A simple example in this regard would be the customer’s doubt about cooking in the microwave oven. With multiple kinds of research pointing to the harmful effect of radiation inside the microwave, it is quite natural for consumers to worry whether cooking in the microwave is safe or not. To put this fear to rest, the manufacturing firm can explain how the food is safe when cooked in a particular material.

3. Financial Risk

Financial perceived risk arises when the consumer thinks about their Return on Investment. Assessing whether the product they intend to purchase is worth its price and whether the benefits of the products outweigh the investment they make come under Financial perceived risk. When a consumer worries that an impulse buy might strip him of valuable cash, it also comes under financial risk.

An apt example here would be a customer thinking if the dishwasher, costing USD 525, he intends to purchase is worth the investment. This kind of risk too can be addressed by the manufacturing firm by providing information – such as life – about the product.

4. Social/psychological Risk

It is a known fact that brand works extremely hard at creating an identity and image that their customers can identify with. Customers too start relating to a particular brand and thus hesitate to get associated with a newer or lesser priced brand.

Such perceived risks can be classified as the Social risk. An example would be a consumer’s reluctance to wear a certain brand of clothes because it affects their social status. Another example of perceived social risk can be a customer worrying whether a particular high priced dress would get his/her parent’s approval or even worrying whether a particular brand of crockery would complement his/her classy and expensive dining table.

5. Time risk

This kind of risk refers to the consumer’s worry about time consumption when purchasing a new product. The consumer here worries about how much of his time as well as the effort the new product would consumer.

A common example here is when firms switch from existing software to a new one. If using complex new software, the firm would have to train their resources in the new software and thus have to invest their time and effort when making the switch. Companies, therefore, address this kind of concern by pitching their products as a time-saving.

Since Perceived risks affect the consumer buying pattern, Marketers across industries try to address the concerns of the consumer in various ways. Some common methods of addressing perceived risks are providing warranty or guarantee for their product, including detailed information of every little detail about their product or even taking the help of well-known celebrities to address the perceived risks associated with their product and thus encourage consumers to buy their products.

Liked this post? Check out the complete series on Risk Management