In Business, what is a Perceived Risk?

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

As a general rule, the more complex or large the purchase, the bigger 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 stakes purchase and a negative outcome would have relatively minor repercussions. By contrast, someone buying a house is making a major purchase. Much more time is taken to evaluate the home purchase to decide if it is a safe purchase.

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

Perceived risk can also take into account issues like social and psychological risks associated with a purchase. People may be concerned that a purchase will be mocked by friends and neighbors, or that a purchase might have problematic ethical implications. A classic example comes up 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 evaluate, as consumers think about the potential physical or health dangers associated with a purchase.

Functional risk, whether a product will function as advertised or intended, is another form of perceived risk. All of these forms can be increased or alleviated by gathering more information. Consumers rely on reviews from respected sources, opinions of trusted people, and information from manufacturers. Manufacturers and salespeople can offer things like guarantees and warranties to reduce perceived risk and seal a deal.