Perceived risk and trust

Literature suggests the online trading arena is intrinsically different from any other channel to market and in essence is an unfamiliar environment (Rutter, 2001). Online consumers are buying into a trading situation that is inherently laden with uncertainty, lack of cues to reinforce trusting relationships and risk. Risk and trust are multi-dimensional constructs and have been found to improve online sales effectiveness if perceived risk is reduced and trust established.

Perceived risk conceptualised by Bauer (1960) consists of six components:

1 financial risk

2 product performance risk

3 social risk

4 psychological risk

5 physical risk

6 time/convenience loss.

Willingness to purchase is considered to be inversely affected by perceived risk. Stone and Gronhaug (1993) state that 'risk is the subjective expectation of a loss'.

Closely associated with risk is trust as it is a potential outcome of risk reduction. Trust needs to be increased and perceived risk decreased if e-retailers are to engender positive belief in the organisation's online reputation. Dimensions of trust include: service provider expertise, product performance, firm reputations, satisfaction (with past interactions) and similarity. It should be noted that some researchers have suggested that not all online customers respond in the same manner. Newholm et al. (2004) conclude that e-retailers should adopt a differential approach to building trust and raise the point that types of customers and products can significantly affect how retailers should develop approaches for handling risk and trust. Indeed 'bargain hunters' are inherently risk takers and in this case it becomes the propensity to engage in risk taking, rather than being risk averse, which drives the consumer behaviour.

The risk seeking element of online purchasing behaviour possibly begins to explain the success of the online auction platform eBay. Online auctions have seen a massive upsurge in the number of sales of second-hand goods, which are traded between unknown buyers and sellers. Each party has limited knowledge of the other's past trading performance, the levels of service quality or the condition of the goods and/or services on offer and yet millions of buyers are willing to gamble large sums of money in pursuit of goods. The high level of purchasing activity has not gone unnoticed by retailers as many now offer goods for sale within the eBay platform.

Perhaps the key question for the e-retailer to consider is what levels of trust and perceived risk are required for a selected target audience, which will actually encourage buyers to purchase in an online trading environment. Whatever the level there is perhaps an even more fundamental implication, which is how to incorporate the excitement of the unknown into the online offer.

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