Real Risk vs. Perceived Risk: 2 Factors to Grow Your Business in 2020
Without a doubt, 2020 takes the title of “The Year of Risk.” The dangers of simply going to the grocery store or gathering with friends and family cast a bright spotlight on the concept of risk, our perceptions of it, and its effects on human behavior. Yet I would argue that risk perception — how we perceive and interpret external danger — carries new meaning and implications amid the current crisis. Beyond the sphere of our personal lives, we see the dramatic influence of risk perceptions in commerce, where it remains a prevalent force that all entrepreneurs and organizations must address to succeed.
But first, let’s establish the differences in risk perceptions between entrepreneurs and the customers they seek to acquire. As popularized, the term “entrepreneur” means “risk-taker.” Many who earn this designation bet their livelihoods in pursuit of a vision with no guarantee of success. They display an unusual tolerance for risk, one not shared by the majority of the population, all of whom retain purchasing authority in business-to-consumer (B2C) markets and many of whom hold this power in business-to-business (B2B) realms. A 2016 study, published in the Journal of Business Research, highlighted the substantive differences in risk perceptions between B2B entrepreneurs and prospective customers. The study’s key findings? Entrepreneurs tend to underestimate the influence of risk, while overemphasizing the importance of reward, when attempting to sell a product or service to a prospective customer. As a result, the sales process rarely addresses or allays the concerns to the degree needed to secure the transaction.
Additionally, other studies show that prospective customers are becoming more risk-averse, as seen by newly adopted measures in the procurement process. A McKinsey study discovered that companies no longer depend on one or a few individuals to make the purchasing decision, but instead cross-functional teams of employees representing multiple organizational levels and departments. It also found customers engage in a more dynamic and rigorous evaluation process, one far different from the conventional customer journey of awareness, consideration, acquisition, service, and loyalty. The result is a departure from less reliable, subjective measures of evaluation, to more stringent, objective forms of assessment.
But that was before Covid-19 sent our economy into the worst recession in its history, causing many businesses to permanently shutter, unemployment to skyrocket, and purchasing power to diminish. And while conditions appear to have improved, today’s risk perceptions are arguably more prevalent and severe than those of the past, especially as looming shutdowns and restrictions weigh heavily on prospective customers. For entrepreneurs to succeed in the current environment, I believe they must sensitize their perceptions of risk and see their business through the lens of the majority — A.K.A, the “risk-averse.”
But how? While the process depends on numerous circumstances unique to every business, and far too nuanced for the scope of this article, entrepreneurs should concentrate on two main factors.
Understand what influences risk perceptions
Returning to the 2016 Journal of Business Research study cited earlier, researchers found the presence of six risk categories that influenced customers’ buying behavior. These included privacy, functional, financial, psychological, temporal, and social risk. The study examined the influence of each category, which varied depending on the business and industry but played a role in affirming or denying the purchasing decision.
Entrepreneurs should evaluate the risk of their business through the lens of these six categories. For instance, they should examine the degree of privacy risk inherent in their enterprise, a category that most often translates into fears about data security and integrity. They should also consider financial risk, which pertains to fears about unexpected costs that may be associated with a product or service — both in terms of its acquisition and subsequent use. Importantly, they should also account for social risks, which include fears about jeopardizing one’s reputation from a poor decision — not just for the individual with purchasing authority, but for the company in the eyes of its customers. Importantly, entrepreneurs should engage in this exercise not just at the product or service level, but at the organizational plane too. Often, customers care more about the “who” of their purchase than the “what.”
At the same time, entrepreneurs performing this exercise should understand that risk perceptions vary by industry. Compared with B2C, B2B entities tend to place more emphasis on risk perceptions, and as revealed in the McKinsey study, rely on the judgment of multiple individuals before reaching consensus. Additionally, risk perceptions also vary depending on the purchase frequency (one-time versus recurring), contract terms (short-term versus long-term), and price (high versus low) of a product or service.
Mitigate the risk profile
Once entrepreneurs evaluate and determine their unique risk profile, they should invest in the mechanisms to mitigate fear. Three main vehicles can help them achieve this, although others exist.
Customer success stories
The first is investing in compelling stories that demonstrate the return on investment of a partnership (again, not simply a product or solution). Most often taking the form of a case study, these success stories illuminate the customer journey, illustrating what prospects should expect from the partnership in terms of the approach taken, solutions deployed, and results achieved. Importantly, not all customer success stories carry the same influence. The more respected and widely known the referenced customer, the better. Yet the similarities between the prospective and referenced customer also matter. The more they share—meaning the more their profiles overlap in terms of industry, size, and target customer—the better.
Empirical evidence and hard data
Objectivity reduces the influence of subjectivity in the decision equation. By assembling outside research that builds a case for a business’s existence, product, and/or service, businesses improve the likelihood of erasing the doubts and fears of prospective customers. Of course, it all depends on the credibility of the researcher and the research. The more credible, the more effective this vehicle becomes.
Like empirical evidence, third-party validation eliminates the amount of subjectivity involved in the purchasing decision. Businesses should seek objective measures that validate the excellence of their organization, product, and or/service. This includes credentials, awards, and publications. Like customer success stories and empirical evidence, the value of credentialing depends on the “who” and “what” — the credentialing authority and the credential. The more credible and recognized the authority, the more value credentialing provides.
Once the business assembles customer success stories, empirical evidence, and credentials, it must institutionalize them, so they interface with prospective customers across all points of interaction. This includes providing comprehensive and standardized training for employees as well as updating the company website, social media, sales and marketing collateral, and other online and offline channels. All customer touchpoints should proactively address risk and dispel perceptions of it through the vehicles discussed previously.
At ERG Enterprises, our investment and management company, risk perceptions remain top of mind. We spend extensive time and energy evaluating our risk profile and considerably more resources on improving it with the mechanisms highlighted earlier. Our firm owns and operates several businesses across multiple industries, each bringing unique challenges and opportunities from a risk mitigation standpoint. Take for example Omega Hospital and the Orpheum Theater, two unique businesses in the healthcare and hospitality industries, respectively. At Omega Hospital, where patients undergo elective and emergent surgeries, risk perceptions remain high, a reason we continue to focus on maintaining rigorous credentials that validate our health and safety processes and outcomes. At the Orpheum Theater, where patrons attend concerts, weddings, and other events, we spend relatively minimal resources on mitigating risk perceptions, and rather channel this energy into maximizing perceptions of rewards, since these bring the greatest influence in the decision equation (though, Covid-19 has forced us to address risk too).
Risk perceptions remain such a persistent problem because of their stealth. Prospective customers rarely mention “risk” as the reason for forgoing a purchase. Instead, they almost always point to “poor timing” or “pricing” as the hang-up. No one wants to voice their fears over job security, reputation, opportunities for advancement, etc. Yet this often becomes a deciding factor. As a result, risk perceptions continually thwart entrepreneurs and their businesses, who instead of focusing on the perceived risk of their business, tweak their pricing model or double-down on their sales outreach. For this reason, entrepreneurs must realize the real problem and engineer a solution to address it. Fortunately, what they lack in risk sensitivity, they make up for with ingenuity.