How to reduce the perceived risk in buying decisions

What is the perceived risk?

Perceived risk is a lack of information seen by the buyer in the situation of a purchase decision.

They include financial, psychological, product-related, health impairing, and social risks associated with a purchase.

The concept originates from mathematical statistics has a central role in explaining the purchasing behavior of consumers.

In all purchasing decisions, consumers want to minimize the perceived purchasing risk.

How do consumers evaluate risks?

A risk (not to be confused with a hazard) is made up of two factors:

• Amount of damage: the higher the negative consequences, the greater the perceived risk.
• Probability of occurrence: the more likely the negative consequences are, the higher the perceived risk.

Therefore, consumers assess two dimensions in their risk assessment: the potential damage and the probability of occurrence.

For example: The probability of surviving a plane crash is slight, so the amount of damage is high. However, the figures for 2018 represent a rate of only one fatal accident for every 3 million flights, so the probability of occurrence is extremely low.

In addition, for some industries, it can make sense to include two further factors to assess risks:

• Benefit of an action: the more significant the expected benefit, the more likely people are to take a risk.
• Influenceability: consumers are more likely to take risks that they can influence (e.g., smoking) than risks that they are unprotected against (e.g., flying, nuclear power)

Do consumers evaluate risks equally?

No, everyone evaluates the risk of a particular situation differently. 

And everyone deals with a perceived risk differently.

Risk does not exist objectively, but always represents a personal evaluation of people.

And that is why risk perception is also a matter for psychology, which examines human perceptions of risk.

The aim is to explain why different people have different perceptions of individual risks.

The underlying assumption is that risk is always perceived subjectively.

Which factors define the individual level of perceived risk?

The most common dimensions of risk profiles are:

• Voluntariness: the extent to which one voluntarily exposes oneself to risk.
• Immediateness: the extent to which the consequences can be determined immediately.
• Certainty: to what extent a person knows if he is exposed to the risk.
• Expert knowledge: to what extent experts know the risk.
• Controllability: the extent to which a person affected can control the severity of the effects.
• Novelty: to what extent the risk is new for society.
• Disaster potential: how many deaths occur from that risk.
• Fear: the extent to which the impact of a risk is feared.

CHAPTER 2:

Reducing Perceived Risk

1. Guarantees

There is a good reason why many stores and online shops offer guarantees.

When customers know that they can easily return the goods if they don’t like them, they are more likely to buy.

If you are convinced of the benefits and quality of your goods, there is no reason not to offer a guarantee.

One can assume that satisfied customers do not return a product. Misuse of the warranty is therefore unlikely.

Guarantees do include, but are not limited to:

• money-back guarantees, 
• replacement guarantees or 
• repair guarantees.

Think of the marketing advantage you will certainly have. 

If a customer is not satisfied with a product, he will give it back and still spread positive things about your business among friends and acquaintances. 

He will praise your goodwill and customer friendliness. 

Not only have you created a positive brand experience with this customer, but you have also achieved positive attention overall. 

Some people from this circle will become your customers. 

The guarantee promotes the sales of your products in the long run. 

So don’t miss this opportunity.

A good starting point is to look at your service history to see how many claims there were in the past.

If there were only a few replacements or repairs, your financial exposure might be superficial with a guarantee.

2. Testimonials

Testimonials are only for large corporations with huge marketing and communications budgets. 

A simplified picture, but not so accurate. 

Because especially for small businesses sponsoring offers lots of possibilities.

A testimonial is a highly believable or likable source that endorses the product.

This can either be an ordinary private individual who articulates their preference for a specific brand (commercials with interviews shoppers) or a public figure who represents the brand (like Roger Federer for Rolex).

Consumers have more faith in a product if it’s endorsed by an individual or organization they trust.

3. Transparency

Digitalization creates transparency that did previously not exist. 

In the past, companies were able to hide behind their established brand. Today, some companies stand out from their competitors through transparency and sustainability. 

For example, the German chocolate brand Ritter Sport is positioning itself as a sustainable company that exclusively processes certified sustainable cocoa. They provide their packaging with a code based on blockchain technology that enables consumers to trace where the processed raw materials come from. 

Local retailers could, for example, make their warehouses available online so that customers are informed about available capacities.

With the whole world connected through social media, there are no more secrets. 

Customers want, even demand, honesty from their favorite brands. 

They want to know what your products are made of, how you make them, and even how much they cost to make.

Be transparent and let customers participate. 

This will make your company more tangible, closer, and more likable.