Additionally, with reference to Appendix 1, there was the Alar scare of 1989 that led to the confusion of perceived risks or products, particularly because of the stories that surfaced which became false alarms or were greatly exaggerated. People started dumping apple juice down the drains and apple sales plummeted because a series of new stories reported a study in which rats developed cancer after being fed Alar (a hormone growth used on apple trees). A similar situation occurred in 1990 when analyses of Perrier revealed minute amounts of benzene, a known carcinogen. The degree to which Perrier is deemed dangerous depends on the consumer’s perceptions of and tolerance for very small risks.
This sheds light on the fact that physical risks are one of the most important determinant factors in purchasing a product as consumers obviously do not want to bring harm to their own well-being as well as of others’ around them.
3.3 Financial Risks
Other types of unpleasant consequences include financial risks, also known as monetary risks whereby the consumer is at loss of money if the product does not work at all or the maintenance fees are higher than its initial cost to keep it in good shape. From a psychological aspect, financial risks also include situations where the consumer has already purchased a new pair of athletic shoes, and then finding them on sale the next day. Products and services that are very costly are most subject to this risk.
3.4 Social
Products closely related to a consumer’s public image present high levels of social risk (Neal, Quester and Hawkins, 1999). The brand or product may negatively affect the way others think of a consumer. These include cars, houses, clothes, and jewelry which play a major role in determining an individual’s status in society, such as a committed environmentalist buying a Ford Falcon GT.
3.5 Psychological
Similarly, as with social risks, the psychological risk may effect a consumer to the extent that a product/brand my not fit in well with their self-image or self-concept resulting in feelings of guilt, self-indulgence or stupidity for purchasing that product. Such products are high-priced, luxurious and long-lasting, for instance cosmetic surgery which is a service that has the potential for this risk. Additionally, according to Murray and Schlacter (1990), it is generally recognized that the degree of customer perceived purchase risk or disadvantage is often greater for a service than for a product.
3.6 Time
Given the above risks, a consumer could be troubled by the time spent in product search that may be wasted if the product does not perform as expected.
A purchase situation can involve some or all of these risk factors. The purchase of a dress, a hairstyle or a gift for someone important will have high social and psychological risks but lower levels of technical, financial, and functional risks.
The Decision Process
4.1 A brief definition
The decision process involves reducing the brand alternatives from a large general awareness brand set to smaller evoked, consideration and choice sets. For example, Howard (1977) defined the “evoked set” as the subset of brands that the customer would consider buying out of a set of brands which they are aware of in the product class.
Preference can be an act or attitude of liking better. Brand preferences involves the comparison of the customer’s attitudes towards the designated service provided by different companies in the consideration set and the choosing, selecting or ranking between these companies for that service provision (Heller and Rickard, 1999). A major part of the decision process model is understanding how consumers gather and store information and how they use it to evaluate and select products. Much of the research in this area has focused on high involvement or high-risk purchase situations where purchases are planned (Mowen, 1988).
Risk Perceptions and Information Search
As consumers, there is the increasing need to continually update the store of information and experience about various products (Bloch, Sherell and Ridgeway, 1986). Where the risk is perceived as large and has not been reduced sufficiently by direct experience, service customers are likely to seek additional information, such as word-of-mouth experiences of other customers who have tried the particular products or supplier’s service (Murray, 1991).
According to Dowling (1988), Luce and Raiffa (1957, p.13) stated that decision theorists have defined risk as the situation where a decision maker has a priori knowledge of both the consequences of choosing alternatives and their probabilities of occurrence. In the purchase decision process, search behaviour is motivated in part by perceived risk and the customer’s ability to acquire relevant information with which the purchase uncertainties can be addressed. Perceived risk is a pre-decision construct. A summary of the available consumer research indicates that it is thought to influence consumer behaviour in various ways (Refer to Appendix 2). It is also the case that while perceived risk is a pre-decision concept, some researchers have measured risk after the purchase (e.g. Brown and Gentry, 1975).
With reference to Appendix Three, the figure outlines the sequence of stages which reflect how consumers are thought to use risk in their decision making. At a point in time prior to when a need or opportunity arises to acquire a product, perceived risk will be at a certain level which will reflect the individual’s experience with products of this nature.
Based on a study by Chen and Feng (2003), perceived risk also relates positively to online search action, which is important in realizing that searching for information increases the risks faced by an online retailer through an expansion of the consumers' opportunity to find more favourable choices.
Where the consumer is experienced (i.e. has extensive product knowledge), and the purchase situation is routine and low risk, consumers are more likely to rely on stored information to make a choice. For example, as mango sorbet is a low-involvement, low-risk product, a consumer would only need to do a quick scan through the total number of sorbets and potential brands that they have knowledge of, in order to make the decision.
There are several factors that will determine whether or not a consumer will engage in external search in a given purchase situation and these are listed in Figure 2 below.
Figure 2 Factors affecting the extent of external search
Source: Goldman and Johansson (1978)
As mentioned by Craig-Lees, Joy and Browne (1995), if no negative factors such as lack of money or an imminent visit to the dentist existed then the purchase would proceed; the process, including consumption would take only minutes. For the most part, however, high-involvement, high-risk goods will require a degree of external information search and evaluation over a period of time.
Another example which illustrates the importance of the relationship between risks and information search is highlighted in an article by Sloan, Smith and Taylor (2003). It states that if smokers are informed of the long-term consequences of a disease, and if they are told that quitting can indeed come too late, they are able to evaluate the risks of smoking more accurately, and act accordingly. This is because smokers over fifty revise their risk perceptions only after experiencing a major health shock such as a heart attack.
As mentioned previously in Section 2.3.1, the case study on physical risks shows how important perceptions are in the decision and purchase process whereby if an individual did not think that particular product to be detrimental to their health, then they will purchase the product without much doubts. Given that, it emphasizes to the extent how perceived risks can affect a consumer’s search process.
Conclusion
There are several types of negative consequences that might occur. Whilst some consumers may worry about the physical risk of product consumption, other consumers may be worried about the risk that poor choice will cause embarrassment or loss of status. The six major categories of risk that influence amount of search are functional, physical, financial, social, psychological and time risks. If all are experienced in any one purchase, it is a high-risk purchase. On the issue of high-risk, when consumers perceive a purchase having high-risk factors, they will engage in extensive search. The influence of perceived risk on consumer behaviour is essentially a dynamic process which is driven by the search and receipt of new information and the affect this has on updating perceived risk. Therefore perceived risk can influence the amount of search undertaken by a consumer.
Recommendations and Implementations
Celebrities and other reference appeals are used effectively by marketers to communicate with their markets. Reference group appeals are effective promotional strategies because they increase brand awareness and serve to reduce perceived risk among prospective consumers.
When the determinant inhibitor of perceived risk is high, there are various potential enhancement strategies which can be utilized to overcome the inhibitor. Examples include success documentation, endorsement by credible sources and guarantees.
Opinion leaders, for instance can help in situations like these, i.e. an example set by testimonial-giver or an endorser may demonstrate to the consumer that any uncertainties related to the product or product purchase is unwarranted. Due to the fact that consumers talk about their purchases to their family and friends, other consumers are able to gather a considerable amount of product knowledge. This means that when consumers want to buy a similar product, not only is it possible for them to have stored product information, they also know ‘who’ has the relevant product knowledge (Richins, 1983).
Communication within groups is a major source of information about certain products. It is a particularly important source when an individual has a high level of purchase involvement and a low level of product knowledge (Neal et al., 1999). These “word of mouth” strategies are particularly important to every marketer when they are dealing with goods and services of high perceived risks. A testimonial or endorsement will instigate a difference in an individual’s perception of that good or service. Other strategies include warranties and similar policies which can help reduce financial risk. Whilst social risk is harder to reduce, skilled work force and known brands can help in reducing this risk.
Additionally according to Roselius (1971), consumers reduce risk by:
- Buying well-known major brands
- Brand-loyal behaviour
- Using consumer advisory and testing services, e.g. the Australian Consumer Association
- Buying the brand offering the best warranties and guarantees
- Buying the most expensive brand
- Using free trial options when offered
Further examples are displayed in the figure of Appendix 4 which shows a list of risk reduction modes and it’s effectiveness against each type of risk(s).
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