Unpacking perceived risk in the purchase of services

I am preparing some notes for a Services Marketing module, and thought that I would share this extract with you.

Services are mostly composed of intangible elements, which makes it very difficult for a customer to assess the quality of the service before purchasing it (and, sometimes, even afterwards as in the case of credence goods), as illustrated in this figure from Rushton and Carson 1985 paper ‘The Marketing of Services: Managing the Intangibles’ published in the European Journal of Marketing.

Image source: Rushton and Carson 1985

The difficulty to assess quality before purchase means that the customer is uncertain about the outcome of the purchase and, so, it carries a certain degree of perceived risk. Perceived risk may be different from the actual risk. For instance, for climate change deniers, the perceived risk of climate change is lower than the actual risk. Conversely, the health scare linking the MMR vaccine with autism led to the perceived risk of the vaccination being much higher than the actual one. [UPDATE: after publishing this blog post, I came across this news article, saying that, so far in 2015, more people have died trying to take a selfie than from a shark attack. Hands up who thought that sharks were more lethal than selfies?!]

As these examples illustrate, it is perceived risk that determines the purchaser’s actions, not the actual risk. Hence, it is crucial for a services manager to consider what impacts on perceived risk, and how to manage it. For that end, it is useful to unpack perceived risk into its components. They are:

• Perceived risk arising from the type of service, and which can be broken down into inherent and outcome risks;
• Perceived risk that arises from the specific service provider, and which can be broken down into handled and consequent risk.

Risk associated with the service category

Some service categories are perceived as more risky than others. For instance, air travel is perceived as more risky than car travel, even though the former is safer per passenger / mile than the latter. We call this the inherent risk.

The inherent risk becomes more or less influential in the decision making depending on what the customer stands to loose by purchasing the service, i.e., the outcome risk. For instance, when choosing our holiday destination, we assess the risk of incurring not only financial losses, but also wasting our time, suffering frustration or embarrassment, or even putting our well-being or lives at risk.

Inherent and outcome risks tend to increase with lack of familiarity with the service category, and other factors discussed in this blog post by security expert, Bruce Schneier. Managers can reduce the perceived risks associated with the service category by allowing free trials (to increase familiarity), educating consumers about the actual risks, disclosing information about the operations supporting the service delivery, and by offering warranties that reduce the losses for the customer in the event of something going wrong.

Risk associated with the service provider

Within each service category, different brands will be perceived as offering different levels of risk. For instance, unbranded goods are deemed as more risky than branded ones; and new industry players are seen as more risky then well established, incumbent ones. We call this the handled risk.

The handled risk leads to the consequent risk, which is the probability that something will go wrong (and, hence, that the negative outcomes will materialise).

Managers can reduce the perceived handled and consequent risks by increasing familiarity with the brands, providing superior customer service (e.g., provision of relevant information, or 24/7 availability of customer support), using physical evidence to signal quality, partnering with trusted providers (e.g., the brand of shampoo used in an hair salon, or the brand of processor used in a computer), adopting industry standards, or using customer testimonials, among others. In recent years, online customer reviews and electronic word of mouth have become extremely influential in purchase decisions, by shaping the perceived handled and consequent risks.

So, this is my brief note about perceived risk. I am now going to record a podcast for the students. Anything else that I should add?