Perceived risk is the uncertainty a consumer has when buying items, mostly those that are particularly expensive, for example, cars, houses, and computers. Every time a consumer considers buying a product, he or she has certain doubts about the product, especially if the product in question is highly priced.
What is Perceived Risk?
What is perceived risk? The concept of perceived risk is best understood through an example. Let’s say that Mary has to buy a pair of shoes. As Mary has just started to work, she is on a low salary, so she does not have much money to spend on new shoes. Therefore, as the price of the pair of shoes she wants to buy is about two times her monthly salary, she does not want to buy the shoes. Instead, she would rather wait till her salary increases by another 50% so that she can buy the shoes.
It is clear from the above example that when buying something, people compare the cost of buying the item and its benefits to the price of similar items at other stores and then make a decision. So, when you want to buy something, you compare its risk with the risks of similar products, and then buy the item with the least risk. In this way, perceived risk and the risk of similar products are associated with the item.
Risk vs. Perception
It is already clear from the above example that perceived risk is different from real risk. While real risk is an objective entity, perceived risk is subjective or a perception. Therefore, while perceived risk is different from real risk, it is more important than real risk.
As we know, in the above example of Mary and the shoes, the price of the shoes is high compared to her salary. In the same way, the risk of buying the shoes lies in the fact that it may be difficult to live on the remaining amount after buying the shoes. In fact, the risk of buying the shoes is greater than the risk of similar shoes being sold at other stores.
Similarly, when you consider the risk of buying an expensive car compared to the risk of buying a sedan car, the perceived risk of buying the sedan car is less. If you are working in an engineering company, then, there is a perceived risk for buying a Mercedes Benz over an Audi. The same is true in the example of buying a small or an upper-end apartment.
Perceived Risk and Additional Costs
Perceived risk is often associated with additional costs. People generally perceive a higher risk with large-ticket items, as it is easier to expect an additional cost, for example, an insurance cost, for a low-end car than for a high-end one.
As a result, the perceived risk of buying a Mercedes Benz will be much greater than the perceived risk of buying a Chevrolet Cruze. Hence, the quality of Mercedes Benz is perceived better than the quality of the Chevrolet Cruze.
Related Products Determinants of Risk Perception
Perceived Risk and Step-by-Step Process
Perceived risk is often involved in a step-by-step process. Let’s say that you have to buy a compressor, you can go about the process in this order. You will first compare the quality of the compressor with the quality of similar products in the market.
The next step is that you will compare the efficiency of the compressor and compare it with the efficiency of different types of compressors or you may compare it with the efficiency of your current compressor. After achieving these comparisons, you will then compare the price of the compressor with the price of similar compressors to find out if the compressor is too expensive or not.
Finally, you will compare the risk associated with the purchase of the compressor with the risk of buying similar compressors.
Perceived Risk and the Decision Making Process
The decision-making process is a progressive and interrelated process. In the beginning, you will compare the possible options by evaluating the strengths and weaknesses of each one of them.
For example, you may evaluate the option of buying a Honda Civic or a Hyundai Tucson. At this point, there is no perceived risk either way. Now, suppose that you are left with two options: Honda Civic and a high-end sedan.
In this case, you will make a cost – benefit analysis. However, if the perceived risk is higher than the perceived value or benefit of the item, then you will not buy the item. For example, suppose that the cost on buying a Honda Civic is two thousand dollars and its selling price is $18,000. But you feel that the Honda Civic will not last beyond two years, and to replace it you will have to spend $12,000.
Now, let’s add a high-end sedan in the equation. It will be sold at $20,000, and you can expect it to run for eight years. Therefore, the total cost over eight years will be $240,000, and the perceived risk is $240,000. Now, if the perceived risk becomes greater than the perceived value, then you will not buy the high-end sedan.
Perceived Risk and Consumer Behavior
When you consider the place of perceived risk in the consumer behavior, it can be said that it has a major role in consumer behavior. If it is true that a consumer’s intention to buy an item is the very basic for the entire decision-making process, then it can be said that perceived risk is an important component for consumer intentions.
For example, suppose you want to buy a new laptop and the most important factor in the decision-making process is quality of a laptop. When you compare the quality of three laptops, you will be looking at different aspects, for example, RAM size, warranty, processing speed, and hard disk size. At this point, there will be no perceived risk.
But if you consider the next laptop, which is a high-end laptop, then there will be a risk. For example, you compare the cost of the three laptops. The cost of the high-limit laptop is much higher than the cost of the other two laptops. Now, you have to decide, so you compare the three laptops again.
But in this case, the cost of the high-end laptop is not higher than the cost of the other two laptops. Now you compare the quality of the high-end laptop with the quality of the other two laptops. But the high-end laptop has the same quality as the other two laptops. Now, the quality of the high-end laptop is not better, so you do not buy the high-end laptop.
Perceived Risk and the Purchase Process
Perceived risk is an important element in the purchase process. Let’s say that you are a regular customer of the Walmart. You know that Walmart generally offers discounts and therefore, you are expecting a reduction of three percent on a specific item. So when you buy that item, there is no perceived risk.
Now, suppose that on the next visit to the Walmart, you notice that there is no discount. Here, you feel that you are losing your potential savings. So, you change your expectations. Now, you are expecting a reduction of three percent on at least three different items.
Now, when you buy one of the three items, there is a perceived risk of not getting a discount. In this way, perceived risk plays an important role in the purchase process. As a result, perceived risk is different from real risk. While the real risk is an objective measure, perceived risk is subjective or a perception.
However, perceived risk is more important than the real risk because it affects the purchase process a lot.
In the above example, the real risk is that you can only save three percent on the item. However, you are expecting a benefit of saving three percent on at least three items. As a result of this expectation, the perception of risk grows bigger than the real risk.
In the above example, you thought that you would save three percent on at least three items. However, when you bought one of the items, you felt that you had lost some potential savings, even though saving three percent on one item is attractive.
This is because the expectation is subjective. As a result, this makes the perception of the risk greater than the real risk.
Perceived Risk in the Environment
Risk perception is sensitive to the environment. Consider the case of a student who is planning to visit India. He discovered that most of his friends don’t visit India because they feel that the roads are not safe. So, when the student thinks about his trip to India, he also gets afraid.
This fear is because of the environment. In this case, the student is not really facing any real risk. But the perception and the fear of being attacked by a bandit have made him feel afraid and risk averse. The perception of the risk is more than the real risk.
Perceived Risk and the Law of Rationality
The law of rationality, which is developed by William James, can be used to explain the importance of perceived risk in the purchase process. It can be said that rationality and experience are two different things.
In fact, when you learn about the risks associated with an item, you can apply that knowledge to other scenarios. This means that you can transfer your knowledge to a similar situation. For example, suppose that you are training to be a deep-sea diver.
You can learn about the dangers of going deep in the sea, for example, lung damage. The knowledge can then be used in different situations. In the above example, it can be used while swimming in the sea.
Similarly, in the example of buying the laptop, you have learned about the risk of the laptop going after two years. In this way, you can apply the knowledge to other situations. As a result, it is impossible to remove perceived risk.
Instead, you can only manage it. The risk management process includes three factors: anxiety, perception, and the risk itself. The higher the anxiety, the higher the perceived risk.
If you do not feel anxious, then the perception of risk will be high. Finally, as the level of anxiety increases, then the real risk also increases. So, for the sake of proper risk management, you must manage the perception of risk.
Perceived Risk and Consumer Behavior
Perceived risk has an influence on the consumer behavior. For example, when you buy an item, there is the risk of not getting the item. If the perceived risk leads to anxiety, then it will reduce your satisfaction with the purchase. So, in order to increase the satisfaction, it should be reduced.
This section about the purchase process will be discussed with the help of the judgment indicator, which is also called the purchase utility. This concept is developed by the researchers in consumer behavior. It is also called the utility, which is the very basic concept of consumer behavior.
When you evaluate a potential product with respect to a specific indicator, then it is called the judgment indicator. For example, if there is a need to buy a new car, then you can compare your new Honda Civic with the Toyota Camry. So, you will be evaluating both the cars with respect to the quality.
In this case, the quality is the judgment indicator. If you decide to buy the Honda Civic, then you will feel that Honda Civic is good and therefore, provides you with higher satisfaction.
Judgment Indicator and Purchase Utility
In the above example, the quality of the cars is a judgment indicator. When you compare these cars with respect to this quality, then you conclude that Honda Civic is better. So, in this case, the satisfaction that you get from Honda Civic is higher.
In that way, the satisfaction that you get from the purchase is called the purchase utility.
If you consider the judgment indicator from two different people, then you will come to know that different people will evaluate the same item differently. For example, suppose that there are two people, John and Chris. When they bought the chess board, they found that they were different.
It means that John and Chris have different judgment indicators. This is because John has a chess player friend who has the ability to beat John in the game. Now, John has bought a chess board with respect to the quality that allows John to play with his friend.
On the other hand, Chris bought a chess board for his son. In this case, Chris’s judgment indicator was the educational value of the chess board. So, John and Chris will have different satisfaction and purchase utility.
Judgment Indicator Evaluation
When you consider the judgment indicator, then you are actually evaluating the judgment indicator based on the degree of satisfaction that you get from it. John is getting higher satisfaction because of the fact that he is a chess player.
So, if you evaluate the judgment indicator, the item, how to buy and the buying process, then it is called the evaluation process. In case of evaluation, the judgment indicator is the most important factor.
For example, suppose that John is a chess player. Then he will evaluate the item more than Chris. It means that John will be more satisfied with the item than Chris.
Evaluation and Judgment Indicator
During the evaluation process, you are making the judgment with respect to the quality, how to buy and the buying process. For example, to evaluate the quality of the chess board, John compared the boards of different companies.
Then he realized that his judgment of quality was right. He felt that he was right in comparing the boards. In this way, when you evaluate the item, then there is a satisfaction. As a result, the more you evaluate the judgment indicator, the more satisfaction you get.
Evaluation, Evaluation and Quality
In the above example, John compared the boards of different companies. While doing so, John was evaluating the quality of the boards. He was evaluating both companies according to this indicator.
If he is satisfied, then he will feel happy because of that judgment. As a result, he will purchase the board of the company that provides him with proper satisfaction. So, it can be said that proper evaluation helps you to get proper satisfaction.
Buying the Product and Item
If you consider the example of John again, then he compares both chess boards with respect to the quality. Then he compares the price. Then, John follows the purchasing process and buys the chess board from the company.
To follow the purchasing process can be both an activity and state of mind. So, in case of John, he followed the purchasing process. As a result of this process, he has purchased the chess board and got the satisfaction.
He feels happy because of that activity. While selecting the chess board, he follows the purchasing process. This process allows his judgment to be right, which will gradually lead to the satisfaction of John.
Cognitive Dissonance and the Satisfaction of Judgment
When you pursue the purchasing process, then you will find that the process is a cognitive process. However, when you choose the product, then you will find that it is a feeling-related process.
The satisfaction that you get from the purchase of the chess board is a judgment-related process. This satisfaction is related to the process that you experience during the purchase. Hence, when you consider the purchase of the product, you will find that it is a cognitive process.
The satisfaction and judgements that you receive from the product purchase are feeling-related processes. In that way, there is a cognitive dissonance between your judgments and feelings.
Reasonable Transaction and Perceived Risk
It can be said that perceived risk is a risk that you face due to the activity that you have done. So, in case of John, he has a reasonable transaction.
This transaction is a process that includes his activity. He buys a chess board and that is his transaction. In this transaction, John is buying the product that he had evaluated.
When John purchased the product, he observed the reasonable transaction. This transaction is the activity that he experienced. So, John’s satisfaction and feelings are involved in the chess board purchase.
It means that there is a cognitive dissonance in the feelings of John. But, John is independent and does not have any problem in it. John can read many chess books and learn chess, during free time.
In this case, John’s spare time was filled with the study of chess. But, John’s work depends on the computer performance. The computer performance is a mechanical activity.
So, there is a cognitive dissonance between perception of John’s spare time and perception of his work. In this way, John’s cognitive dissonance will be resolved by the removal of the dissonance.