Understanding Customer Risk

Any purchase entails risk. Services are relatively riskier than products, especially credence services discussed above. If you buy a defective toaster, you take it back and get a new one. But if your veterinarian does more harm than good to your pet, there is not much you can do. This is one reason why there is greater loyalty to service providers than to product manufacturers. The seven types of customer risk are:

1. Performance risk is the chance the service provided will not perform or provide the benefit for which it was purchased.

2. Financial risk is the amount of monetary loss incurred by the customer if the service fails. Purchasing services involves a higher degree of financial risk than the purchasing of goods because fewer service firms have money-back guarantees.

3. Time loss risk refers to the amount of time lost by the customer due to the failure of the service.

4. Opportunity risk refers to the risk involved when customers must choose one service over another.

5. Psychological risk is the chance that the purchase of a service will not fit the individual's self-concept.

6. Social risk is closely related to psychological risk, and refers to the probability a service will not meet with approval from others who are significant to the customer making the purchase. Services with high visibility will tend to be high in social risk. Restaurants, hair stylists, and plastic surgeons are perceived to have a high level of social risk. Even for business-to-business marketing, social risk is a factor. Corporate buyers are concerned that a service they purchase will meet with approval of their superiors (thus IBM's famous slogan: “No one ever got fired for choosing IBM”).

7. Physical risk is the chance a service will actually cause physical harm to the consumer (Kurtz and Clow 1998: 41–42).

It must be emphasized that the above risks are perceived, not necessarily actual, risks, and the perception is in the mind of the customer. The actual probability of service failure is immaterial. Usually, all things being equal, the service provider that offers the lowest perceived risk will be chosen, especially with credence services. FedEx's guarantee of “Absolutely. Positively. Overnight.” was a strong factor that led to — and maintains — its dominant share of the overnight delivery market at a premium price. This guarantee was especially important when FedEx began, since no one knew whether it could actually deliver on its promise.

Be sure to perform a risk analysis using the above seven factors, and find ways to mitigate those risks, keeping in mind it is the perceived risk to the customer that is important. Most professional firms do an inadequate job of assessing and pricing risk from the customer's vantage point. It may make sense to employ the services of an actuary for this type of intellectual capital and to learn the actuary's famous axiom: There is no such thing as bad risks, just bad premiums.

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