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Impact of Consumers Trust on Consumers Perceived Risk in Online Shopping Environment Ahmed Raza Zafar 10U0023

Table of Contents
Executive Summary ........................................................................................................................ 3 Declaration ...................................................................................................................................... 3 Literature Review............................................................................................................................ 3 Framework .................................................................................................................................... 13 Questionnaire ................................................................................................................................ 14 References ..................................................................................................................................... 16

Executive Summary
Previous researches have studies the antecedents of online shoppers trust and then studied its effect on the consumers perceived risk and online behavior attitude (like purchasing). Majority of studies have used antecedents of online consumers trust as their independent variable, consumers trust as mediating variable and consumers perceived risk and behavioral attitude as dependent variables. moreover they have tried to explain the consumers trust using consumers internet and businesses knowledge, their propensity to trust and risk aversion as the antecedents of consumers trust. We will be testing companies websites user friendliness as a possible antecedent of consumers trust to study its effect on their perceived risk about the company and on their online purchasing attitude.

Declaration
All of the work that I have produced is original and properly cited. In case of any plagiarism (above 20%), my submission will be cancelled.

Literature Review
Customers perceptions of a companys service quality affect trust in online shopping (Daignault, 2001). It seems to be the most significant factor of maintaining trust and building eretailer customer relationships, according to Kim and Tadisina (2007). As Anderson and Fornell (1994) observed in their study, a high level of service quality is likely to cause a high level of customer satisfaction which will lead to a customers positive experience and understanding of the company. In this way, customers trusting beliefs as well as trusting attitude are confirmed (Kim & Tadisina, 2007). The perceived service quality includes warranties (Grazioli & Jarvenpaa, 2000), guarantees (Pennington, Wilcox & Grover, 2003-2004), and customized services and delivery performance (Doney & Cannon, 1997), as well as the general concept of companys service quality (Gefen, 2002; Kim, Xu, & Koh, 2004) Study on risk aversion affecting consumers decision making is carried out by Shimp and Bearden (1982) who found that highly risk-averse customers are likely to search for more information regarding product quality when they make purchasing decisions. On the other hand, as suggested by Seenkamp, Hofstede and Wedel (1999), people with low risk aversion feel less

4 threatened by ambiguous and novel circumstances and tend to feel excited by the purchase of new and innovative products. As Hoffman et al., 1999 said that low penetration rate of online shopping despite high use of internet is pointing towards a big problem. Some researchers believe that lack of consumers trust for online shopping has resulted in disappointingly low rates of sales for various businesses. Cheung (2010) pointed that lack of empirical research concerning the area of online shoppers trust prevents marketers to develop appropriate strategies for targeting their market. Absence of research concerning antecedents and consequences of trust for online shoppers has posed severe problems in finding true problem for slow rate of online sales even for businesses that have exceptional success regarding physical sales. Moreover he said that limited research papers that do focus on empirical findings relevant to the topic [e.g. Jarvenpaa et. al., 1999] tend to focus on very small models and therefore lack of complexity prevents them to adequately explain the problem hence limiting their ability to guide marketers regarding the adoption of appropriate marketing strategies (Cheung 2010). The notion of trust has been thoroughly studied by various researchers over time (e.g. bargaining Schurr & Ozanne, 1985, industrial buyer-seller relationships by Doney & Cannon 1997, distribution channels by Dwyer, Schurr & Oh, 1987, partner cooperation in strategic alliances by Das, 1998 and the use of market research by Moorman et al, 1993). Study of the notion called customer trust across various disciplines provide useful basis for studying it in marketing context (Cheung 2010). However, as Mayer and Davis (1995) mentioned, that lack of clarity regarding the antecedent of consumer trust is what makes the study of this notion difficult. For instance in Kini & Choobineh (1999) definition of trust, its antecedents where also made part of the definition. Moreover lack of empirical support regarding the topic makes certain hypothesis uncertain. Propensity to trust which is a moderating variable of the research plays an important role in determining the effect of consumer trust about their perceived risk of the online vendor and on their purchasing behavior. People with different cultures and personalities tend to vary in their propensity to trust (Hofstede, 1980). Furthermore propensity to trust can be viewed as a

personality trait that leads to expectations about the trustworthiness of others (Hofstede, 1980).

5 Mayer et al (1995) suggested that trust propensity moderates the effects of the trust antecedents on the formation of trust. Hence it can be claimed that higher the consumers propensity to trust the higher will be the effect of consumers confidence on business online sales by means of lower perceived risk about the business (which is another consequence of consumers trust). As Doney and Cannon, (1997) discovered that consumers perceived risk about the business is inversely related with their trust. Consumers who tend to have higher confidence in an online business will obviously perceive it to be less risky to buy from them and vice versa. this hypothesis is also verified by Selnes in 1998. Past studies have confirmed, with empirical evidence, the role of consumers trust in Internet shopping (Gefen & Straub, 2004) and have argued that the most primary obstacle for prospering online businesses or sales is lack of consumers trust (Jarvenpaa, Tractinsky & Vitale, 2000; Hoffman, Novak & Peralta, 1999). Bao, Zhou and Su (2003) mentioned consumers risk aversion as the primary factor behind lack of consumers trust. Risk aversion being the antecedent of consumers trust can be used in explaining consumers online buying behavior (Mao 2011). Before studying the effects of consumers trust on their perceived risk about businesses, it is important to clearly understand the theoretical definition of trust (as used by majority of researchers in their various researches). Trust as defined by Mayer, Davis and Schoorman (1995) is the willingness of a party to be vulnerable to the actions of another party. Therefore according to the definition, greater trust calls consusmers to undertake higher risk by undertaking a particular task. Hence business consumers possessing greater trust are expected to be the pioneers in using business new onien facilities and therefore will be of high value to their respective companies as generation of positive word of mouth as a result will ensure success of businesses online activities.

Some other researchers have defined the term which might be useful for some other researhers in designing their research questions. According to Lewis and Weigert (1985), trust is Identified as the understanding of a risky course of action on the confident expectation that all persons involved in the action will act competently and dutifully

6 .on the other hand Bhattacharya, Devinney and Pillutla (1998) and Boon and Holmes (1991) conceived trust as predictability and reliance upon another person under uncertain and risky circumstances. Some researchers have used fairly simple definition of the concept which might have affected their empirical results. for instance Gefen 2000; Hosmer 1995; Moorman, Zaltman & Deshpande 1992 viewed trust as a general belief that another party can be trusted. usage of such generic definition of variables of interest can lead to misleading results because of the difficulty involved in adequately quantifying all the relevant dimensions of the variable. One of the most popular studies on electronic commerce trust is the one conducted by Mayer, Davis and Schoorman (1995) who viewed trust as a trustors intention to take a risk and proposed the trustors perceptions about a trustees characteristics as the main predictors of trust.

An interesting insight by White and Lloyd (2006) found trust to have positive impact upon uncertainty and complexity involved in businesses websites. though businesses are and should be conscious of ambiguity involved in their websites and other social media to prevent its negative effects on concumers image (about the business/product) and online buying behavior but even in case such a situation exist then high consumers trust can help businesses avoid its negative consequences on business sales/ image etc. According to Roussseau (1998) trust is a psychological condition comprising of the intention to accept vulnerability based on positive expectations of another partys intention or behavior. As is evident from the set of these definitions of trust, it is about having a positive expectation about another party in cases of risky situations. As consumers trust for online purchases is not only affected by businesses online activities but instead is based upon all the tangible and intangible characteristics concerning a business; therefore it is utmost necessary for businesses to ensure efficient operations and marketing activities. Moreover presence of cyber crime cases in the past has made consumers much more conscious of their online activities and therefore they have now become slightly reluctant to use this mechanism for an important decision (purchase). Hence consumers are using more of this medium (internet) for information and news sharing and receiving rather than purchasing purposes.

7 Jarvenpaa and Tractinsky (1999) while trying to determine antecedents of trust found businesss size and reputation (among existing consumers) to be significant variables. They verified their claim by elaborating upon consumers way of reasoning and stated that consumers believe bigger firms to be more stable and hence more reliable for establishment of long term relationship. the hypothesis was also verified by many other researhers including Grazioli & Jarvenpaa, 2000; Pavlou, 2003; Kim, Xu & Koh, 2004; Koufaris & Hampton-Sosa, 2004). Moreover consumers level of trust is also determined by the quality of businesses service quality (if consumers happen to interact with businesses before) and therefore by means of positively affecting customer satisfaction will lead to enhanced customer trust Anderson and Fornell (1994).

The hypothesis was also verified by Kim & Tadisina, 2007. Some researchers have explicitly mentioned in their study about the nature of serive quality and for that purposes they have made use of various variables that make up this variable (service quality). for instance they said that perceived service quality includes warranties (Grazioli & Jarvenpaa, 2000), guarantees (Pennington, Wilcox & Grover, 2003-2004), and customized services and delivery performance (Doney & Cannon, 1997), as well as the general concept of companys service quality (Gefen, 2002; Kim, Xu, & Koh, 2004). Similarly some researchers have also highlighted the importance of businesses website quality as a determinant of consumers trust. These include McKnight, Choudhury, & Kacmar, 2002; Araujo, 2003; Kim, Xu, & Koh, 2004. as stated earlier user friendly websites which are perceived as easy to use and of good quality are more likely to build high level of customer trust (Wakefield, Stocks, & Wilder, 2004; Want & Benbasat, 2005). Risk aversion just like consumers propensity to trust is found to be another relevant moderating variable in this research topic. the term is formally defined as the extent to which people feel threatened by an ambiguous situations, and have created beliefs and institutions that try to avoid these (Hofstede & Bond, 1984).

8 Risk-averse people tend to feel threatened by risky and ambiguous situations (Hofstede, 1991). Just like consumers propensity to trust being dependent upon cultures and peoples personality, risk aversion is also found to be determined by these variables Bao, Zhou and Su (2003). As Tse, 1996 findings showed that Chinese people are generally more risk averse as compared to Americans. This finding therefore proves the hypothesis that risk aversion is dependent upon concerned peoples cultures etc. Our research hypothesis can be supported by Boulding, Kalra, Staelin, & Zeithaml, 1993) findings according to which consumers purchase intention is the function of consumers trust in internet shopping.

Similarly McKnight and Chervany (2002) findings are also in line with our hypothesis according to which customers holding higher level of trust are more likely to depend upon internet vendor for making online purchases whereas on the other more risk-averse people might prefer physical purchases. Consumers were found to prefer companies that are known for their good reputation when relying on online purchases because with such comoanies they perceive lower risk and therefore are more willing to enter into a transactional contract due to their higher trust Mao (2011). Perceived service quality that was found to be a significant variable in explaining consumers trust was explained as gaining consumer trust and building long-term customer relationship Grefen, 2002; Kim, Xu, & Koh, 2004. Other researchers have gone beyond this simple definition by adding elements of guaranties (Grefen, Karahanna, & Straub, 2003), warranties (Grazioli & Jarvenpaa, 2000; Pennington, Wilcox, & Grover, 2003-2004), and customized services (Doney & Cannon, 1997). As stated earlier that user friendly websites were found to be major factor boosting online consumers trust was because it makes it easy for them to find information and make transactions on a particular website (Mao 20110. Trust is defined as the consumers willingness to be vulnerable to the actions of an internet vendor in an online shopping transaction (Lee & Turban, 2001). Reduced customers perceived

9 complexity and uncertainty in online context due to their higher trust encourages their online businesses related activities (for instance purchasing etc). An interesting insight found by Mao (2011) was that customers feel threatened from ambiguous online environments and therefore might be reluctant to even try for an online shopping experience. Moreover he found that, at times, people with high level of trust but high risk aversion might not engage in an online trade whereas people with low trust but low risk aversion might be more likely to engage in an online trade. Though risk aversion being a moderating variable but can at times directly influence the dependent variable namely online business sales. However the exact nature of relationship of the variable with other related variables is what needs to be defined more clearly defined for more reliable and valid future researchers. The results prove the proposed positive direct effect of perceived service quality and perceived website quality on consumer trust. However Perceived website size was found to be reversely related to consumers trust toward online shopping which is opposite to expectation (Mao 2011). This is perhaps due to increases consumers ambiguity which was found to negatively affect their trust. Moreover he (Mao 2011) also found consumers inter-activeness as another moderating variable affecting the relationship between consumers trust and online business sales. this is perhaps that increased consumers activeness on online media shows their willingness to engage in online trade because otherwise no rational person would have been willing to spend so much time online and therefore it influences the magnitude of relationship between the research study dependent and independent variables. Online retailing offers consumers a shopping experience different from physical retailing in terms of convenience, search cost, delivery, and price (Palmer, 2000).

Therefore the variables affecting businesses online and physical sales might not be similar and even they might be related. Chen & He 2003 claimed that online sales are rapidly growing which shows growing potential of this medium as businesses profitable lower chain aspect. However consumers anxiousness from online activities privacy and security requirements therefore discourage them to extensive engage in online transactions. Moreover these security and privacy requirements also make some consumers to perceive online service quality as low and therefore

10 negatively affects their purchasing behavior Zeithaml et al. (2002). However in fact most of these security requirements are actually in favor of consumers to help them protect them against cyber crimes etc. hence in the presence of given scenario some researchers are of the opinion that it is high time for businesses to shift the focus of e-business from ecommerce to e-service. This will help them enhance their customers trust and therefore will not only help them gain competitive advantage but will also help them improve their online sales performance Zeithaml et al. (2002). Reviewing the literature (e.g. Cronin et al., 2000; Hellier et al., 2003; Lai, 2004; Varki and Colgate, 2001; Wang et al., 2004) reveals that there has been extensive investigation of the interrelationships among the four constructs (service quality, perceived value, customer satisfaction, and behavioral intentions).

There are many empirical researchers concerning the topic and therefore help develop concrete hypothesis based upon them whereas on the other hand similar literature is greatly missing for online business activities (Lien 2010).

As mentioned by Wolfinbarger and Gilly, 2003 online and offline environments present different shopping experiences even when the same products can be purchased and therefore same literature concerning physical business activities cannot be used for consumers online purchasing activities. Zeithaml et al., 2006 defined customer satisfaction as their assessment of a service in terms of whether that service has met the customers needs and is upto their expectations. Cronin et al., 2000; Tam, 2004; Yu et al., 2006; Chang et al., 2009 found consumers satisfaction (or trust) to be positively correlated with consumers perceived service quality. Moreover, sales of online retailers were only 2.2% of total goods sold in the U.S. in 2005 (Lien 2010). Analysts have predicted that even by 2011, online e-commerce sales would account for only 7%. Thus, the internet is far from achieving its potential due to high amount of potential consumers being reluctant to engage in its use (Lien 2010).

11 Commitment as defined by Lien (2010) is a customers psychological attachment to a vendor or an implicit or explicit pledge of relational continuity. Satisfaction and value were found to be antecedents of commitment which is an antecedent of consumers loyalty (an important dependent variable in marketing literature) Lien 2010). Furthermore loyalty was found to be a major factor causing positive word of mouth, consumers recommending vendors to each other and it has been empirically proved that majority of online shoppers prefer vendors whose credibility is already established by someone whom they know (Lien 2010). Organizations should strive for customer loyalty, because it can help them compete efficiently with fierce competition and to ensure their long term growth Lien 2010).

Academic research in online and interactive marketing has focused on the factors influencing the use and adoption of online platforms. Furthermore, each of the factors causing customer trust and satisfaction are considered more and more important to maintain relationships in the long term (Casalo et al. 2007).

Another variable influencing trust in online settings is the time of customer business relationship (Flavian et al. 2005). The greater the time spent between the two parties the greater will be consumers trust hence encouraging them to not only sustain such relationships but will also make them experiment with business other new features.

Trust involves three components: honesty (promise fulfillment and sincerity (Doney and Canon 1997); benevolence (the interest of one party that both parties reach a common objective (Ganesan 1994); and competence, (the consumers perception of suppliers knowledge and skills to provide satisfaction through high quality service (Coulter and Coulter, 2002).

Yet, the rational expectation is that trust in online transactions can reduce customer perceived risk (Pavlou 2003) and influence customer loyalty (Macintosh and Lockshin 1997), resulting in repeated uses in the near future. Business reputation is also an important factor determining consumers trust in certain companies as Doney and Cannon 1997 said Reputation is defined as peoples perceptions of an organizations honesty and concerns for its stakeholders.

12 Reputation involves the credibility of a company or brand by its consumers (Herbig and Milewicz 1993; Hyde and Gosschalk 2005). It is a signal of a history of fulfillments by the supplier recognized and acknowledged by its stakeholders and users (Doney and Canon 1997). A positive reputation favorably affects consumers trust (Doney and Cannon 1997), by emphasizing the fact that the company has been able to fulfill its past promises (Kim et al. 2008).

A good reputation affects both the start of a relationship (Einwiller 2003) and the continuation of an established relationship (Anderson and Weitz 1989). Hence business reputation is not only important as the starting point but also helps business to hold up to their existing and new consumers. Hence, high monetary benefits of reputation calls for increased investment in areas which help businesses to establish and maintain their reputation.

Because in online contexts lack of persona contact increases risk perception of consumers therefore the need for good business reputation is greatly increased than what would have been required for physical sale. Not very brand conscious people might try new business/products in case of physical sale because it is more easy to evaluate quality of various vendors before the actual purchase of the products which is hardly the case in online purchase. The role of familiarity on trust has been studied in commercial contexts (Jennings et al. 2000). Familiarity is a requirement in the pursuance of trust (Noteboom 1996). Greater consumer knowledge of a providers services increases the consumers trust in the provider (Garbarino and Johnson 1999). Some authors suggest that in online environments familiarity plays a key role in the evaluation and adoption of web-based services (Maenpaa et al. 2008).

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Framework

Reputation

Service Quality Consumers Trust Consumers Behavioral Attitude

Risk Aversion

Website Friendliness

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Questionnaire
INSTRUCTIONS: Please read each statement below and circle number that best describes how much you agree or disagree with each one:

1 = strongly agree 2 = agree 3 =Neutral (neither agree nor disagree) 4 = disagree 5 = strongly disagree

Reputation (adapted by Jarvenpaa, Tractinsky & Vitale (2000)) I use famous websites.. 1 2 3 4 5 I use online websites that have high quality reputation 1 2 3 4 5 I use online websites that are well known. 1 2 3 4 5

Service Quality (adapted by Doney & Cannon (1997)) The products on online websites are always available. 1 2 3 4 5 Online websites have fast delivery speed. 1 2 3 4 5 Online websites have high delivery reliability. 1 2 3 4 5 Online websites provide guarantees. 1 2 3 4 5

Risk Aversion (adapted by Raju (1980)) I am cautious in trying new/different products. 1 2 3 4 5

15 I never buy something I dont know about at the risk of making a mistake 1 2 3 4 5 I would rather stick with a brand I usually buy than try something I am not very sure of 1 2 3 4 5

Website Friendliness (adapted by McKnight, Choudhury& Kacmar (2002)) Online websites usually work very well technically. 1 2 3 4 5 Online websites are simple to navigate. . 1 2 3 4 5 On online websites, it is easy for me to find the information I want. 1 2 3 4 5 Online websites clearly show how I can contact or communicate with the company.. 1 2 3 4 5

Consumers Trust (adapted by McKnight, Choudhury& Kacmar (2002)) I believe that online websites would act in my best interest. 1 2 3 4 5 I believe that online websites are trustful in their dealings with me. .. 1 2 3 4 5 I believe online websites would keep their commitments. 1 2 3 4 5 I am prepared to give my private information to online websites. . 1 2 3 4 5 I am willing to give my credit card number to online websites.. 1 2 3 4 5

Consumers Behavioral Attitude (adapted by McKnight, Choudhury& Kacmar (2002)) I am willing to use my credit card to purchase products on online websites. 1 2 3 4 5 It is very likely that I buy products from online websites in the future. 1 2 3 4 5 I am willing to buy online products again from websites I have used once. .. 1 2 3 4 5

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