Perceived Risk: Definition, Types, and Examples 

Perceived Risk Definition
Perceived Risk: Definition, Types & Examples

Perceived risk refers to the uncertainty a consumer feels when purchasing goods. Perceived Risk is a subjective thought that a consumer has when buying a product or a service. Perceived Risk is usually thought about when the product or service in question is expensive or a significant one that could make some changes in the buyer’s life. Every product or service might have some inherent risk. But perceived Risk is something that the consumers assume is a risk if they buy the product, which goes on to say that it is the seller’s or the business owner’s duty to ensure and make the consumers confident in their product. However, perceived Risk is still a behavioral aspect of consumers, and business owners should address it regularly. 

Perceived Risk is a doubt which takes root in a customer’s mind before buying a product. Depending upon the section where the customer can take a hit, this notion can have different bases. A person could have certain inhibitions about buying an expensive car, which may vary from functional to social. There are other types of perceived risks apart from functional and social in between as well. For example, the buyers could have doubts regarding the technology and functional aspects of the car, like whether the quality and the version are top-notch. Or whether it is worth the money they will be spending on it. On the other hand, perceived risks that are social can be due to the brand name or the price value of the car. The customer might be looking for a car that goes well with their position in society and social status. And some might worry whether they are choosing the right one or not. 

A guarantee is one way to tackle perceived risk when it comes to a product. Consumers are more inclined to make a purchase if they think they can simply return a product if they are not satisfied with it. There is no reason not to offer a guarantee if the merchant is confident in the features and performance of the goods. It is reasonable to believe that satisfied consumers do not bring back products. Therefore, misuse of the warranty is improbable.

Guarantees consist of cash refund guarantees, replacement, and repair guarantees. It is impossible to avoid risk when it comes to the stock market but an investor can understand more about the stock market to ensure risk doesn’t play spoilsport in their investments.

What is Perceived Risk?

Perceived Risk is a psychological behavior seen in consumers before deciding to buy a product or a service. Perceived risk is very subjective and can change from individual to individual based on their life goals and circumstances. From the point of view of the business owner, the Perceived Risk of customers should be expected and addressed in a way that sounds authentic and truthful to the customers. Usually, customers may have doubts regarding a product with many features and functions.  A customer can simply just decide not to buy if they think that the product is not worth the money or that they can’t trust the brand to keep their word of guarantee. In such cases, the business owner or salesperson should gain their trust by educating them or giving other incentives, like free maintenance for the first three years. 

Perceived risk plays a crucial role in stock markets as well. Perceived risk has a crucial influence on stock market judgment calls. Perceived risk in stock markets is described as the belief that any movement a consumer takes will have repercussions that they cannot predict with any confidence, at least a portion of which is most likely to be negative. Perceived risk is also defined as a person’s subjective sentiments of certainty to act in an uncertain environment or subjective anticipation of incurring a loss in quest of a particular goal. Actual risk differs from perceived risk. The perception of risk can be more or less severe than the actual risk. Research demonstrates that individuals do not always possess a realistic or accurate perception of actual risk.

How does perceived Risk work?

Perceived risk works by creating doubt in the mind of consumers before buying a product. Perceived Risk as a phenomenon has been in existence since the advent of sales and marketing. Perceived Risk is an unavoidable facet of the sales of products and services. However, it is also a phenomenon that is widely talked about and also has got various theories based on it. Consumer behavior is closely related to perceived risk, and the theories talk about methods and techniques for producers or business owners to ensure the customers and retain the customer base. 

Perceived Risk from the customer’s point of view is still a valid response to the multitude of fraudulent practices and businesses in the industry and society as a whole. For example, misleading information about a product or negative reviews can deter customers from buying them. Therefore, customers would always try to find the flaws or loopholes in the data or the information a business owner provides. And the customers’ can’t be blamed for their rightful inhibitions. Therefore, the customer’s doubts are justifiable and should be treated as such. 

What are the different types of perceived risks?

There are five main types of perceived risks. These are time, social, physical, financial, and functional perceived risks. Each perceived risk factor affects individuals differently according to their risk perception, appetite, etc. Below is a detailed description of the five main types of perceived risks.

1. Time

Time-based perceived risk is rooted in the concern of usability before a certain period. The consumer’s concern over time consumed when buying a new commodity could also be referred to as time-based perceived risk. Here, the customer is concerned about how much of their time and energy the product will consume.

An example of time-based perceived risk may occur when businesses replace their existing software with new software. The company would be required to devote time and resources to educate its employees on the new program if it opted to use the new software. Therefore, businesses tackle this worry by advertising their goods as time-saving.

Another example of time-based perceived risk is the expiration date. Customers can think twice before buying a product if they are somehow time-bound or have an expiration date, they might wonder if it is worth the money they are going to spend. For instance, a customer might not be too patient if it takes a long time to get acclimatized to the product. They might end up not buying it altogether. 

Time-based perceived risk is important as often time is considered as money. Consumers may see time lost as money lost. 

2. Social

Social perceived risk is risk assessment based on the status and social positioning of the customer. Social risk is an essential driver of consumer behavior. The customer might have preconceived notions about what goes well and what portrays their social standing in society.  The perceived social risk is that friends and family would frown upon the purchase if a person chooses to buy something outside the social norm, perhaps a new trending product. The person might lose social stature because of that purchase. In addition, brand value and brand name play a role in influencing the customer’s buying behavior. 

An example of social perceived risk is the thought of what people will think if they buy something. Let us assume that a person only uses branded and expensive items, and the same is known in their social group. The person might want to buy something to save money or because of its usability, but they may have second thoughts about the same because of the risk of acceptance in their social group. This social risk perception may curb the purchase. 

An example of social perceived risk is the reluctance of consumers to wear a particular brand of clothing because it affects their social status. Another example of perceived social risk is a customer wondering about whether or not his or her parents would approve of a high-priced outfit or whether a particular brand of dinnerware will complement his or her elegant and pricey dining set.

3. Physical

Perceived physical risk is the risk that a commodity is unsafe and could potentially harm or injure the user or another person.  Perceived physical risk assesses the physical aspects of the product that is in question. Customers can think twice before buying products if the safety or physical features aren’t up to the mark or aren’t up to the standards of the customer.  The company easily addresses physical perceived danger, as they can allay their customers’ concerns by providing details about the item’s safety.

An example of physical perceived risk is the customer’s apprehension about cooking in a microwave oven.  Studies point to the detrimental effects of microwave radiation. Thus, it is only normal for consumers to question if cooking in the microwave is safe. To alleviate this concern, the manufacturer can explain why food cooked in a particular material is safe. Another prevalent example would be while buying a car. Sales representatives should properly convey the features of the car, otherwise, they could think the opposite. 

Perceived physical risk is important to address since consumers worry about the direct harm a commodity could cause. A customer may be uncertain about the safety of an item or service, and as a result, they may hesitate while committing to a purchase. It is important to address the same in a timely manner.

4. Financial

Perceived financial risk is the customer’s perception that they may be wasting money by purchasing goods or services. Financial perceived risk also arises when the consumer’s perception of financial risk develops when they consider their return on Investment. Common types of perceived financial risk involve evaluating if the goods they intend to acquire are worth the price and whether the product’s benefits outweigh the investment they make. The purchase is considered financially risky when a buyer fears that an impulsive purchase would deprive him of important cash.

An example of perceived financial risk is a second thought a consumer could have before buying an expensive product. The consumer may be well aware of the benefits of the products but yet they may have a doubt regarding the financial risk involved. 

Perceived financial risk is the most important since the current market encourages people to buy more and save less. This is because capitalism is designed in a way to encourage more money flow. 

5. Functional

Functional perceived risk pertains to risk related to the functional value of the product.  Novice customer most often has no prior knowledge of how well they function when they purchase goods or services, especially if the product is new. The customer might wonder whether the benefits outweigh the cost of the product.It can also cause an issue if the functions are too complicated for the customer. Therefore, the customer should be made aware of it in a way that can be easily understood and explained in a relatable way. 

An example of a functional risk is doubt one could have regarding the promises a product makes. There could be a dishwasher that promises to get all kinds of stains out in less than ten seconds. There is a chance for the product to fail despite its promise of the product. This describes a functional perceived risk. 

Functional perceived risk is important as it directly relates to the promise made to a customer. The customer will have a higher level of perceived risk if they have bitter experiences regarding the functionality of the product in the past. At the same time, the functional perceived risk is lower if the customer’s experience was positive before. 

What are the examples of perceived Risk?

The most common example of perceived risk is related to the functionality of the product. Let us take the example of a laundry detergent. Consumers may doubt whether a new laundry detergent that claims to remove all stains is genuinely effective. There is a possibility that the buyer will purchase your goods, but no stains will be removed. 

Another common example of perceived risk is related to the social status of the buyer.  Purchasing an iPhone or certain designer clothing is frequently influenced by social standing. The perceived risk here is that friends and family would disapprove of a person’s choice to buy something which deviates from the social norm, such as a trendy new brand. Purchasing can lead the individual to fall in social standing.

A perceived risk may arise when it could hurt a person physically or affect their family as well. buying a firearm, as an example. Accidents could happen if the pistol unintentionally malfunctions. On the other hand, a book almost never harms somebody physically.

Perceived Risk can take form in positive and negative ways. Perceived Risk can materialize in the form of a negative review or through word of mouth. But it is a notion that can take root in the minds of the consumers and stay there despite the efforts put in by the business owners to negate that. One scenario would be when a consumer heard a review from someone and now has a preconceived notion about the product, say a refrigerator. An older customer of the same brand might have told the new customer that the cooling has gone down within a few years of purchase, and multiple maintenance complaints have risen. On hearing this, the new potential customer might think twice about buying the refrigerator of that brand. Instead, they might be forced to look for better options. 

What is a consumer’s buying behavior?

Consumer buying behavior refers to a customer’s process before buying a product. Consumer behavior is vital for business owners to know and understand because it can help them recognize their sales and marketing errors. For example, if a customer does not trust the product, they may not bother buying it for the sake of it. And since the competition is very high in a highly globalized industry, business owners must know where they are losing their customers and how this situation can be prevented. 

What effect does perceived Risk have on consumers’ buying behavior?

Perceived risk is considered a negative mark for business owners since it means the customer thinks twice before buying the product. Perceived Risk in consumers’ buying behavior points out that there is a design flaw in the product or a flaw in the marketing or business model. These errors might make the companies lose their customers because of the customer’s lack of confidence. Therefore, the risk factor that the customers point out has to be rectified and reverted to the customer. 

For instance, a person is looking for a good car to buy. They require all the fresh and advanced safety features prevalent in the market. But then, the news suddenly pops up saying that a car accident has happened and the car that they were driving was the car they were planning to buy. Apparently, the airbag didn’t work and the driver had to suffer grave injuries. This news would be enough for the customer to think twice before buying that car. 

Is risk perception the same as perceived Risk?

No. Perceived Risk is a subjective thought that individuals have before they take any sort of action or before they are going to do an activity. Risk perception is more psychological than behavioral since it refers to the individual’s ability to accurately predict the risk level. Therefore, both risk perception and perceived Risk are related but, at the same time, used in different scenarios. 

What is the difference between perceived risk and actual risk?

Perceived risk and actual risk has got the following major differences. 

  • Perceived Risk is an assumption on how the risk can expose itself, which means that they are unfounded fears but valid and rational foreseeing of risks. On the other hand, the actual risk is something that is certain to happen. Or it can even be something with a high probability of happening. 
  • In the case of actual risk, a person might only be thinking about how badly it could affect them or how they can salvage the situation. Perceived Risk may or may not be actual Risk. 
  • Actual Risk is more objective than subjective. For example, there is a risk while doing an adventure sport. That’s an actual risk, and it’s mostly the same for everyone who attempts it. On the other hand, perceived risk is irrational fear about the same.
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