Sunday, November 20, 2016

How do perceived risks impact a consumer's decision process? What are examples of two ways this happens?

Most human beings are risk-averse, meaning that they prefer a sure thing to a risky bet with the same expected return. For example, given the choice between getting $100 for sure or getting $200 or $0 based on the flip of a coin, most people would choose $100. To get them to take the bet, you might have to offer say $250 or $300 on the coin flip instead.

This same principle applies when people are purchasing products.

Suppose we have two brands to choose from: Brand A is familiar, and okay. Not great, but acceptable for our needs. Brand B is new, and could be better--but it could also be worse; we don't know, because we haven't tried it. Many consumers will stay with brand A, because they are afraid to take the risk of trying brand B.

A company trying to sell brand B has two basic options in order to break into this market.

First, they could make a product that is just obviously way better. If there is a good chance that the new product is far better than the original, people will be more likely to take the chance.

The second option, which is probably easier, is to take away some of the risk by offering some sort of guarantee. They could offer a 90-day satisfaction guarantee ("or your money back!"), perhaps; or they could offer to purchase you a product of the competitor's brand if you are not happy with the new brand. Finally, for some products at least, they could offer you a sample for free, so that you can see that you really do like the new product better. That removes most of the risk of trying the new brand.

For example, many people choose a car company to buy from early in life (where my mom grew up in Dearborn, it was always Ford) and always buy from that car company for the rest of their lives. It's the safe bet, the sure thing. They know exactly what to expect from that brand. Some other brand might actually be better---perhaps Honda, or Toyota, or whatever---but they are afraid to take the chance that it might be worse. If car companies were willing to offer money-back guarantees, this might happen less often; though they do already try to offer something like a "sample" by letting people visit for free test drives, and this is apparently not enough.

Risk also influences the way that people choose to shop--whether they go online or visit a store, for example. Buying online is much more convenient, but you can't see and hold the actual product, so you may know less about it. On the other hand, looking up reviews and testimonials online might provide you substantially more information about the product than you could get simply from looking at it in the store. Depending on the product, the lower-risk strategy could go either way (many people buy clothes in stores but electronics online, for example).

Note: I have linked a thorough technical review of studies of perceived risk on consumer behavior. It may be more technical than you're looking for.

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