Service Consumer Risk Perception - Essay Example

Service Consumer Perception of Risk Introduction The concepts and strategies employed in service marketing have developed as a result of the tremendous growth experienced by the service industry which makes it important to economies globally. As of 2006, Batra and Kazmi (2008) document that the service sector contributed 80% of America’s gross domestic product and total employment. Similarly, the growth in absolute numbers of jobs and job formation rates has been indicated to be high in the service industry, particularly in Information Technology and healthcare. Furthermore, trade in services has been noted to be on the increase globally with portion of GDP attributed to services standing at 73%, 79% and 91% for the UK, US and Hong Kong respectively among the various global economies. As of 2008, the UK had the value added to its GDP by the service industry at 75% according to Lovelock and Wirtz (2007). With services operating in a dynamic environment today, there would be need for effective marketing strategies. The importance of services and the service industry in economies thus calls for understanding of the meaning of the associated concepts. According to Batra and Kazmi (2008), services describe deeds, performances and processes coproduced or provided by a person or entity for another entity or person. Considering the 8 Ps cited by Lovelock and Wirtz as the “components of integrated service management,” the product in this case would be heterogeneous, perishable and intangible (2007, p.18). Furthermore, the production and consumption of the product would be inseparable. Therefore, services would require customisation according to the consumer’s requirements and the actual experience by the customer would assume particular significance. An example would be IBM whose products are intangible and provided for the customers and consumers of Information Technology services. The organisation provides IT service management solutions to businesses. With advancement in business operations, challenges emerged that could not be related to manufacturing of goods companies. As such, businesses engaged their marketing functions to find solutions. It was shortly realised that marketers who used to deal with packaged goods could not effectively handle the challenges in marketing as would be in the context of banking, healthcare and other service industries, hence the skills were not transferable (Hoffman & Bateson 2011). The adoption of service marketing brought the needed solution as it documented the marketing practices effective for the service industry. The major role that an organisation marketing its services would be focused on would be to constantly strive to ensure that consumers develop positive perception of their services. Perception refers to the process involved in selection, organisation and interpretation of information so as to develop a significant image (Laroche, Bergeron & Goutaland 2003). This would be dependent on physical stimulus and the relationship existing between this stimulus and the environment and customer’s internal conditions. Years after Bauer’s first introduction of the concept of risk to the American marketing community in 1960, it has matured to be among the most researched concepts in consumer behaviour. Perceived risk has continuously received attention from academicians and practitioners in various fields including banking, dental services, food technology and apparel catalogue shopping among many others, indicating the versatility of its application. Hoffman and Bateson (2011) contrast consumers purchasing goods from consumers of services noting that the latter would exhibit greater levels of risk perception. To illustrate this observation, Lovelock and Wirtz (2007) give an example of marketing a car hire service as contrasted to marketing a car for sale. While the latter could be simple due to the tangibility of the product, the former presents a complex situation due to the intangibility of the car hire performance. Laroche, Bergeron and Goutaland (2003) carried out a research that aimed at identifying how intangibility of services impacted on perceived risk levels. In their conclusion, these researchers document that the mental aspect of intangibility largely affects the variation observed in perceived risk as contrasted to the other dimensions of generality and physical intangibility in spite of the significance of each of these dimensions on the level of risk perception. Batra and Kazmi (2008) add to this argument noting that since most services would be delivered in outside the store setting, most of the consumers would be more perceptive of risk as opposed to if this was to be done in a store setting. An example has thus been given of purchase of services on the Internet. The reason for its wide adoption in the modern business environment has been cited to its round-the-clock convenience, time savings and ubiquitous availability among others. Lovelock and Wirtz (2007) give the example of Amazon.com, a bookstore with no physical bookshops though serving over 88 million customers with sales and net income of over $25 billion and $9.2 million respectively. In the airline industry, for instance, online bookings have had a lot of benefits to consumers of the service (Mudie & Pirrie 2006). With the customer conducting transactions from a convenient location of choice, such persons do not have access to the physical airline offices which propagates perceived risk, particularly financial risk. This has been the major cause of infrequent Internet shoppers. Since such customers have the resources to search for the required information, the debate that arises has been whether indeed risk perception could be influenced beyond search for information (Meuter et al. 2000). Consumers do not have the capacity to foresee the consequences that come with a purchasing decision. This uncertainty and the possibility of the consumer experiencing serious consequences refer to perceived risk. Hoffman and Bateson (2011) cite an example of a patient awaiting medical surgery. Having no previous experience, the patient, a customer in this case, has no idea what to anticipate. Moreover, even if the surgeon has had a long time experience, there would be no guarantee that the current surgery would end up well. Uncertainty increases with consumer’s lack of sufficient knowledge. Batra and Kazmi define risk perception as “the consumers’ perceptions of uncertainty that they face when they are unable to foresee various consequences of their purchase decisions” (2008, p.127). It would be critical to note that the influence of risk would be pegged on one’s perception (Chen & Chang 2005). As such, risk could or could not exist; and even if it exists without it being perceived, then, there would be no influence on consumer behaviour. It should also be appreciated that the levels of these perceived risks vary across different service industries. Risk perception plays a critical role in explaining the behaviour of consumers since consumers would be motivated to avoid mistakes other than maximising purchasing utility. Additionally, understanding the concept of consumers’ perceived risk concept enables marketers to view the market through their customers’ eyes (Chen & Chang 2005). Organisations should be critical of how consumers perceive their services so as to adopt measures that would make these consumers purchase their services. It would be helpful to evaluate the factors that influence the perceived risk. Being wrong on the customers’ risk perception would lead to outright loss of the customers. Types of Risks With the two principal factors determining perceived risk – uncertainty and the adverse consequences – researchers have proposed the evaluation of risk from five perspectives, namely; financial, social, psychological, physical and performance. Financial or monetary risk results from a consumer’s perception of financial loss in case the purchase fails to operate as should be. This risk would be mostly perceived when the service to be purchased is expensive. If the service fails to perform the expected, the risk would be referred to as performance risk. The third risk, physical risk, describes the kind of risk that results from a purchase going wrong and consequently inflict injury on the purchaser, for example medical services. Social risk would be referred to in case of loss of social status due to a particular purchase. Batra and Kazmi (2008) observe that this would be services that do not meet the standards considered as important to a reference group such as the sport one engages in. Finally, psychological risk describes a purchase influencing the purchaser’s self esteem. Laroche, Bergeron and Goutaland (2003) postulate on a possible risk related to loss of time due to purchase of a particular service, referred to as time risk. Having acknowledged the existence of perceived risk among consumers, it would be critical to evaluate the model used for measuring the concept. Chen and Chang (2005) suggest the model that has two components: uncertainty and the level of danger of the consequence which would be measured on four-point scale. This model calculates the perceived risk by multiplying the probability of an undesirable consequence by the importance of such a consequence. Approaches to Reducing Consumer Risk Perceptions by Organisations Risk reduction strategies refer to the tools employed by the consumer or the seller to reduce the perceived risk by the consumer (Meuter et al. 2000). Among these strategies include brand loyalty, private testing, brand image, endorsements, free samples, government testing, expensive models, money-back guarantees, store image and word-of-mouth communications among others. In as much as consumers have varied ways of curbing risk perception among themselves, organisations have the greater role to play in reducing risk perception among consumers. As such, this paper focuses on the strategies that organisations could adopt to ensure that their customers have low risk perception as possible. According to Laroche, Bergeron and Goutaland (2003), consumer risk perception reduction strategies adopted by organisations aim at reducing the uncertainty associated with perceived risk as opposed to avoiding the possible adverse consequences. The force driving organisations to enforcing risk perception reduction among consumers would be the need to increase the probability of purchase. Both practitioners and theorists advocate for adoption of marketing strategies that would reduce perceived risks among consumers. The first approach to curbing consumer uncertainty would be to provide information that would assist in the process of decision making. With the unknown proven to frighten customers, especially in cases of new services in the market, this would be beneficial. According to Chen and Chang (2005), consumers that lack information on the attributes of a service or product would be forced to make choices by inferring to available informational cues. According to these researchers, each consumer should be appreciated as an active interpreter who would make educated guesses that would not be directly judged and draw inferences on causal relations and associations. While there would be early adopters in the market, majority of the consumers have been noted to be late adopters. Such consumers would wait until the products have been consumed and proven and the prices become more reasonable which could take even years. As such, speeding them towards early purchasing would require proper application of print advertising, public relation releases and websites. Referred to as quality cues, there would be need for sources of information on the service quality prior to consumption. And even after purchasing, Mudie and Pirrie (2006) acknowledge the need for provision of service to the customer so as to contain post-purchase anxiety. All marketing system components including service personnel tasked with servicing facilities represent the cues to which customers could refer for information. Another approach that has been widely employed in service marketing to curb consumer risk perceptions has been the provision of service guarantees. Marketers have for long appreciated that undecided consumers could be coerced into buying products with the guarantee of their money back, provision of limited-time warranties and liberal return policies either with or without conditions. This buffering of a risky purchase by the customers encourages them to purchase as they establish standards of services in an organisation which create an image that customers associate with. Managers would be motivated to maintain such standards as they avoid expenses on quality failures. Nonetheless, Meuter et al. (2000) advise that organisations should carry out proper analysis on their strengths and weaknesses before undertaking a decision to introduce service guarantees. More so, organisations that already have an established reputation need not introduce guarantees on their services as this could be incongruent with the created image. In an industry where rivals use this strategy, organisations would have to establish highly differentiated guarantees so as to have an impact in the marketplace. Finally, converting consumers into customers by using the satisfied customers could also yield positive results in reducing consumer risk perception. As such, it would be critical to ensure that service consumers get satisfied. Associated with this argument, Lovelock and Wirtz (2007) observes that previous experience with a service would lower risk perception and therefore increase the chances of purchase among consumers. Such experiences could be shared with other potential customers, which in turn would make them experience minimal risk perception due to the information acquired prior to purchasing. In advertising, testimonials have been widely used with celebrities endorsing various services. However, with the increased awareness among consumers that these celebrities would be in such for the pay, marketers have been keen to include the phrase ‘real customers’ to such advertisements so as to boost the credibility of such advertisements. With critical evaluation of these strategies, Lovelock and Wirtz (2007) sum them up as the need for reliability, tangibility, response and assurance from the customer. Service being a combination of attributes of purchase situation and product essence, appropriate tangible compensation would be critical in the recovery of the service failure so as to reduce physical, financial and functional risks. Mudie and Pirrie (2006) give the example of the hotel industry which seeks to provide tangibility by providing for fast complain feedback, amend service failure and work towards reduction of time and social risk. Organisations should seek to adopt strategies that boost these four dimensions if they are to reduce risk perception among their customers and thus increase purchases. Importantly, organisations should be aware that each service would have a specific approach that would effectively reduce risk perception among consumers hence the need to select the most suitable perceived risk reduction strategy. Chen and Chang (2005) further argue on the need for selection of the most appropriate strategy as the effectiveness of a chosen strategy would be dependent on the level of uncertainty regarding the service in question or on the experience that the consumer has had with the service. Conclusion In this paper, a background study has been undertaken on service marketing from various secondary sources. The concept of service marketing has been noted to have started after it became apparent that the marketing strategies employed in marketing tangible goods could not be employed in the service industry. As such, marketing strategies had to be customised to serve the needs of consumers in the service industry. Intangibility of the products in the service industry has been a source of great challenge in service marketing as consumers and organisations alike grapple with perceived risks. These perceived risks come about due to the customers’ perception of suffering financial, social, physical, psychological, performance and even time risks due to the purchased services not meeting the expected needs. Although customers have various ways of curbing such risks, organisations have larger stakes in ensuring that consumers risk perceptions remain on the low as this would increase their sales. For this reason, organisations offer service guarantees, provide consumers with adequate information on their services and use satisfied customers to pull consumers to their pool of customers through word-of-mouth. These strategies increase reliability, tangibility, response and assurance and consequently encourage purchases from consumers of services. References Batra, SK & Kazmi, SHH 2008, Consumer behaviour, 2nd ed., Excel Books, New Delhi. Chen, T & Chang, H 2005, ‘Reducing consumers’ perceived risk through banking service quality cues in Taiwan’, Journal of Business and Psychology, vol. 19, no. 4, pp. 521 – 540. Hoffman, DK & Bateson, EG 2011, Services marketing: Concepts, strategies, & cases, 4th ed., Cengage Learning, Mason, OH. Laroche M, Bergeron J & Goutaland C 2003, ‘How intangibility affects perceived risk: The moderating role of knowledge and involvement’, Journal of Services Marketing, vol. 17, no. 2, pp. 122-140. Lovelock, C & Wirtz, J 2007, Services marketing: People, technology, strategy, 7th ed., Pearson Prentice Hall, Supper Saddle River, NJ. Meuter, M. L., Ostorm, A. L., Roundtree, R. I. & M. J. Bitner. 2000, ‘Self-service technologies: Understanding customer satisfaction with technology-based service encounters’, Journal of Marketing, vol. 64, 50-64. Mudie, P & Pirrie, A 2006, Services marketing management, 3rd ed., Butterworth Heinemann, Oxford. Read More