High Risk & Low Reward: Buying With The Brakes On

After a brief detour last week (thanks for the many heartfelt messages for my Uncle Jim) I want to return to my exploration of the role of risk and reward in our online consumer behaviors.  We looked at the low risk/low reward and low risk/high reward quadrants. Today, we'll continue by exploring the High Risk/Low Reward quadrant.

As a brief recap, our brains tend to apply brakes or step on the gas when steering through a buying decision based on the degree of risk and the promise of reward inherent in the decision. This dictates the nature of the consumer journey we take - both in terms of paths chosen and duration. I've talked before about the concept of bounded rationality, or the threshold of logical consideration we give to any decision. As behavioral economists have found, in almost every human decision, ration is modified by gut instinct. We call this "satisficing." The only question, it seems, is the balance between the two. Risk and reward are hugely influential in determining our "satisficing" threshold for any purchase decision. 



High Risk/Low Reward

In the last column, I described Low Risk/High Reward indulgences as "all gas and little brake." The chocolate bar temptingly placed at the grocery store checkout aisle is just one example. High Risk/Low Reward purchases live at the opposite end of buyer behavior spectrum. Here your buying brain is driving the brake pedal through the floorboards. Consider this the consumer equivalent of teaching your teenager to drive. 

In our personal lives, it includes such joyless purchases as insurance (all kinds, and the higher the premiums, the greater the perceived risk), financial planning, big-ticket home maintenance (not fun stuff like renovations, but replacing a roof, fixing a sagging foundation or getting a new furnace), car repairs and professional services such as lawyers or accountants.  

Ironically, each of these types of purchases is usually triggered by either legislation  (car insurance), a non-negotiable need (a leaking roof) or the greater perceived risk of doing nothing (not having a lawyer in a divorce). If there wasn't some impending reason to buy, we never would. There are no positive emotions at play here, only negative ones.

There is another type of purchase that falls into this quadrant that impacts many of our clients - bigger ticket B2B purchases. Indeed, I wrote an entire book on the subject : "The BuyerSphere Project."

The lack of positive reward means our consumer research is all aimed at one thing and one thing only: the elimination of risk. In this scenario, risk has several dimensions: price, reliability and, because many of these purchases are predicated on avoiding future risk, balancing current risk against future risk. There is another aspect of risk, which is not commonly identified in these types of purchases: the risk of change. Often, big-ticket purchases require you to make changes in your routine, which involves change management.

When we look at what online behaviors might be for a High Risk/Low Reward purchase, we see risk mitigation as the key factor. Sites that allow buyers to compare several alternatives tend to be very popular, especially if they offer some type of rating. Online aggregators and directories tend to thrive in this quadrant, as they focus on quantifying pricing-based risk. 

Because there is little or no emotional reward in these purchases, there is little in the way of positive emotional engagement.  As somebody once told me, nobody ever threw a party to buy car insurance.  Social media engagement is restricted to verifying you don't get burned in the purchase. Rich-media demonstrations will be passed over in favor of quick comparison charts. And if you are engaging the senses, you'll be capitalizing on fear of risk rather than a promise of reward. 

Next week, we'll make our way to the last quadrant of the matrix: High Risk/High Reward.

3 comments about "High Risk & Low Reward: Buying With The Brakes On".
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  1. Andre Szykier from maps capital management, January 6, 2011 at 11:57 a.m.

    Well written. It might explain why car insurance commercials focus either on price comparison between insurers (a meaningless and somewhat untruthful means of advertising) and silly entertainment with geckos, pirates, serious black personalities spouting mush...and so on.

    There is no risk and no reward in making a choice for insurance. However, there might be fear of getting dropped after a single accident or doubling rates after on speeding ticket. Fear is a great motivator for decisions made quickly...

  2. David Pavlicko from AVISPL, January 6, 2011 at 12:14 p.m.

    Excellent post and analysis.

    Before my digital career, I sold disaster recovery and data backup services to mostly fortune 1000 corporations in Florida and although most of them understood the inherit need and value of these services to their organization, 50% of the time the close would only happen when one of the issues you stated occurred - an impending disaster such as a hurricane or a massive fire at their office, forced regulation (Sarbanes/Oxley), etc...

    but the upside to this sort of customer is that once you've helped them, the bond becomes much stronger and customer retention soars. (assuming you actually provide decent solutions or services) - insurance and lawyers are perfect examples.

  3. Kenneth Hittel from Ken Hittel, January 11, 2011 at 1:49 p.m.

    Try life insurance instead of car insurance that, as you note, is legally required. And then consider permanent life insurance, which is much more expensive (at least initially) than term insurance. It's a tough sell & historically why the industry has needed to recruit & train agents to sell it.
    Yes, you can emphasize the satisfying feeling of safety & security buyers feel as they sign the dotted line(s) -- but it's difficult to carry that feeling day-by-day for any extended period of time, We soon tire of our bright & shiny purchases, & here there's nothing either bright or shiny. You sum it up well: "If there wasn't some impending reason to buy, we never would. There are no positive emotions at play here, only negative ones."

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