Risk Aversion Consumer Behavior

Each individual has different preferences about their consumption (whether it is a product or service) in different situation. The fact that many of situation are under uncertainty make the decision hardly to be decided. Based on individual’s preferences toward risky prospect, the type of consumer can be classified as below:

• Risk Averse (Risk-avoiding): An individual who prefer to accept a bargain with a certain payoff rather than another bargain with an expected payoff.

• Risk Loving (Risk-seeking): An individual who prefer to accept a bargain with an expected payoff rather than another bargain with a certain payoff that usually lower than expected payoff.

• Risk Neutral: An individual who is indifferent between a certain payoff and an expected payoff from two different bargain.

In the market, please note that most of the consumers are risk averse type. This kind of behavior will have no impact in monopoly market because the choice is only one. However, in oligopoly market, the risk averse consumer behavior really affects the consumer’s decision when they have to select and purchase any products. That is why many managers of the firm take this into account when they have to make economic decisions.

One of the most common implication of risk averse consumer behavior come up when consumers face two or more product choices to be purchased. For example, there is a consumer who has used a certain product for years. But lately, a new product is introduced in the market. If he is a risk averse consumer, he will not buy the new product if that product is just as good as his current product because he prefers a sure thing to an uncertain prospect of same expected value. He will buy the new product only if he is very sure that the new product is much better than his current product.

Thus, the challenge of the manager of new product is how to ensure this type of consumer to believe that the new product is better and they don’t have to take any risk on using it. For helping managers to make optimal managerial decisions, here are some strategies that can be used to encourage potential consumers to try a new product.


1. Ensure the Product Quality

The most important thing to be done by managers is to ensure the product quality is as good as current product or even better. Because consumers still have uncertainty about the quality of the new product, so the initiation action when introducing new product really decided the consumers’ perception about the product quality. How to improve the product quality is somehow more related to the designing and production process. As a manager, he should define first the product quality that the firm is going to achieve. After the product is produced, the quality control team can use that quality guideline as a reference so that the product really has a quality as in firm’s plan.

2. Lowering the Price

The firm’s manager can lower the price of the new product below the current product price. This is to compensate the risk of trying the new product. One of the applications for this strategy is by giving free sample of new product to potential consumers. When firms give free samples, they can compensate potential consumers the risk of trying the new product since the cost of new product is zero.

3. Guarantee the Product

Another strategy is to make potential consumer think that the expected value of the new product is higher than the certain quality of current product. In order to do so, the firm’s manager should guarantee his product is better than current product. Usually the tactic used is to do comparison advertising. It is showing the result comparison of using new and current product. For example, with a cup of detergent, the new detergent can wash up to 20 pieces of clothes, while the current detergent can only wash up to 14 pieces of clothes. So it means that the new detergent is guaranteed as a better product. Another tactic is to inform public about the consumer satisfaction and testimonial regarding the new product. If the potential consumers are convinced by this tactics, they may go ahead and buy the new product because its higher expected quality compensate the risk of trying new product.