In business, what is perceived risk?

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Perceived risk is the potential risk that a consumer identifies or associates with a purchase. People are less likely to make purchases that they consider to be risky and more likely to make purchases that they consider to be low risk. Retailers and manufacturers use a variety of tactics to reduce perceived risk and make consumers feel more confident when making a purchase. Understanding the role of this phenomenon in purchasing decisions is an important element in designing, marketing and selling products.

As a general rule, the more complex or large the purchase, the greater the element of perceived risk. The consumer is making a big decision and may be correspondingly concerned about it. Someone picking up a bag of carrots at the store is making a low-risk purchase, and a negative outcome would have relatively minor repercussions. On the other hand, someone who buys a house is making an important purchase. Much more time is needed to evaluate the purchase of a home to decide whether it is a safe purchase.

There are several components to perceived risk. One is money. People may be concerned about whether they have enough money for a purchase, whether the purchase is a good deal, or whether there are better deals elsewhere. Time investment is another concern and can be an especially big problem with small purchases. People are willing to spend their time on big purchases, while with small purchases, they want to be able to complete a transaction quickly. A long line or a crowded parking lot can become a significant deterrent for the consumer.

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Perceived risk can also take into account issues such as social and psychological risks associated with a purchase. People may be concerned that a purchase might be mocked by friends and neighbors, or that a purchase might have problematic ethical implications. A classic example arises in the diamond industry, where many people are afraid to buy diamonds because of the perceived risk of buying a conflict diamond. There are also physical risks to assess as consumers think about the potential physical or health hazards associated with a purchase.

Functional risk, whether a product performs as advertised or intended, is another form of perceived risk. All of these forms can be scaled up or down to gather more information. Consumers rely on reviews from respected sources, opinions from trusted people, and information from manufacturers. Manufacturers and sellers can offer things like warranties and guarantees to reduce perceived risk and close a deal.

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