The Four Factors of Risk

 The size of the sale. The larger the sale, the more money involved, the greater the risk. ...

 The number of people who will be affected by the buying decision. ...

 The length of life of the product. ...

 The customer's unfamiliarity with you, your company, and your product or service.

AMA- American Management Association

The Four Factors of Risk

Jan 24, 2019

The critical factor in selling today is risk. Because of continuous change and rapid obsolescence, the risk
of buying the wrong product or service becomes greater as change intensifies. Our greatest single need
is for security of all kinds and any buying decision that puts us out on a limb triggers the feeling of risk
and threatens that security.

There are four main factors that contribute to the perception of risk in the mind and heart of the
customer.

1. The size of the sale. The larger the sale, the more money involved, the greater the risk. If a person is
buying a package of Lifesavers, the risk of satisfaction or dissatisfaction is insignificant. But if a person is
buying a computer system for his company, the risk factor is magnified by hundreds or thousands.
Whenever you are selling a high-priced product, you must recognize that risk enters into the buyer's
calculations almost immediately.

2. The number of people who will be affected by the buying decision. If you go out for lunch alone to a
new restaurant, the risk is very low. But if you invite a group of business customers to a restaurant to
discuss a large transaction the risk factor can be very high.

Almost every complex buying decision involves several people. There are the people who must use the
product or service, the people who must pay for the product or service, there are the results expected
from the installation of the product or service and there is the reputation of the person making the final
buying decision. If a person is extremely sensitive to the opinions of others, this factor alone can cause
him or her to put off a buying decision indefinitely.

3. The length of life of the product. A product or service that, once installed, is meant to last for several
years, generates the feeling of risk. The customer thinks, "What if it doesn't work and I'm stuck with it?"

How many times have you bought something personally that turned out to be the wrong item and you
were stuck with it? You couldn't replace it with something more appropriate because of the amount you
had already paid.

4. The customer's unfamiliarity with you, your company, and your product or service. A first time
buyer--one who has not bought the particular product or service before or who has not bought it from
you—is often nervous and requires a lot of hand-holding. Anything new or different makes the average
customer tense and uneasy. This is why new products or services, or new business relationships with
your company have to be presented as a natural extension of what the customer is already doing.

What you can do to overcome the customer’s sense of risk.

There are two things you can do immediately to put these ideas into action.

 First, demonstrate and prove to your customer that the people affected by this purchase will be
happy and satisfied. Tell stories about other happy customers.

 Second, show the customer that this purchase, even if it is new or unfamiliar to the customer, is
a logical extension of what the customer is already doing. Show the customer it makes perfect
sense.

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Once you understand the feelings that may be holding your customer back from making a purchasing
decision, you'll be able to make him feel confident that he'll have no regrets once he signs on the dotted
line.

Concerned about risk? See how your worries stack up against other global companies. In its most
recent Global Risk Management Survey, AON Risk Solutions identified the top 10 risks facing
organizations today as:

1. Economic slowdown/slow recovery

2. Regulatory/legislative changes

3. Increasing competition

4. Damage to reputation/brand

5. Failure to attract or retain top talent

6. Failure to innovate/meet customer needs

7. Business interruption

8. Commodity price risk

9. Cash flow/liquidity risk

10. Political risk/uncertainties

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What are the major risk areas in Procurement?

Some major risk in procurement.

 Failure to secure ongoing supply critical to the organization.

 Insufficient lead-time.

 Misrepresentation of facts by potential suppliers.

 Selection of inappropriate procurement strategy.

 Use of inappropriate evaluation criteria

 Unethical practice

 Breach of confidentiality

 External factors like: Natural calamity, unstable government etc.

Contracting is all about risk allocation and minimizing risk to include cost, schedule and performance.
The more vague the contract work statement, the more risk that the Government assumes.

Risk from Program Manager, Contracting and Investor's Perspective:

Risk. A measure of the inability to achieve program objectives within defined cost and schedule
constraints. Risk is associated with all aspects of the program, for example, threat, technology, design
processes, Work breakdown structure (WBS) elements, etc. It has two components, the probability of
failing to achieve a particular outcome, and the consequences of failing to achieve that outcome.

Risk from a Lawyer’s Standpoint:

Does this contract adequately describe all essential work / expectations, is there a schedule and is it
enforceable? What are our remedies, if any?

Requiring activities and frequently contracting officers want to get an acquisition on contract as quickly
as possible; sometimes too quickly. Thus, contracting officers and acquisition attorneys will frequently
have to carefully review the overall acquisition to identify risks to cost, schedule and performance and
recommend mitigation measures to decrease these risk areas.

Risk from an Investor's perspective:

What is my expected payoff? The larger the expected payoff, the larger the associated risk, and vice
versa. An Investor, who is a shareholder in a contracting company, will seek to carefully balance the
expected payoff with the associated risk, and he is incentivized to seek a large payoff, as long as the risk
is acceptable. This perspective is unique in the sense that risk represents both opportunity and danger
to the Investor, while it only represents danger to the Program Manager and the Lawyer.

In other words, there is a misalignment in the perception of risk between the Program Manager, the
Lawyer, and the Investor. It is ultimately the Investor who owns the contracting company, and this
misalignment will have an effect on the Investor's behavior and the stock's performance.