- The Marketer's Playbook
- Why Are We Taking Less Risks?
Why Are We Taking Less Risks?
Younger generations are taking less risks. Why is that, and what impact does this have on consumer behaviour and marketing?
Humans are becoming more risk-averse, and generally speaking, this is a good thing. Sure, risk aversion is important in marketing when looking at consumer psychology, but what's most interesting about it, in my opinion, is how it evolves. Alec Stapp shared a series of charts from Axios in a tweet recently that highlighted exactly this. The TLDR version is simple: younger generations become more risk-averse over time – meaning that they are less likely to take risks. This included getting a driver's license, trying alcohol, going on dates, and joining the workforce. Sure, there are likely to be macroeconomic factors guiding this behaviour, but I believe this is a normal evolution as society becomes smarter.
WHY THE RISK AVERSION?
In my opinion, two major factors are affecting the risk aversion of younger generations over time. One good and one bad. The good: Greater access to information and the ability to research and consider potential risks. The bad: general economic and social uncertainty that encourages risk-averse behaviour.
Starting with the bad, let's take a look at the World Uncertainty Index. For those unfamiliar, the World Uncertainty Index is a measure that tracks uncertainty across the globe by text mining the country reports of the Economist Intelligence Unit for the world 'uncertain' and its variants, then converts this into a usage metric. Let's take a look at the WUI from 1990 to 2022.
One thing that the WUI doesn't show by fault is a trendline, so in this example, I exported the data and rebuilt it to demonstrate this. Since 1990 there has been a clear, gradual uptick in economic uncertainty, having tripled on average in only 32 years. Another helpful indicator missing would be events, of which we've recently had the war in Ukraine, COVID-19, U.S. Trade tensions with China, Brexit, and U.S. political events – the list is nearly endless if we dig into it.
The point is that there doesn't appear to be a slowdown in this trend, which is worrying for many. With younger generations having greater access to information, it makes sense that they can sense this trend and that it would impact their behaviour. The bottom line here is that risk aversion is here to stay.
When looking at the good, it's quite straightforward. As we evolve and adapt to our environment and become more comfortable, we are afforded the luxury of innovation. In first-world countries, this is especially true. With greater stability in security – food, shelter, etc. – we can refocus our attention on what's next.
As we progress through generations, we gain access to technologies that provide us with the information required to inform our actions. With more information, we can better guide our exposure to risks. Whether taking 'risks' is an inherent human desire or something we subconsciously try to avoid is another conversation. Still, the fact remains that younger generations are using technology to guide this behaviour towards being more reserved regarding risk-taking.
So, now that we're all on the same page about what risk-aversion is and how it's being influenced let's take a look at how this applies to marketing.
IMPLICATIONS OF RISK AVERSION ON MARKETING
In consumer psychology, 'risk aversion' refers to the tendency of people to avoid situations that involve uncertainty or potential loss. This can manifest in various ways in consumer behaviour, such as a preference for familiar brands or products, a tendency to stick with tried-and-true options rather than trying something new, or a willingness to pay a premium for products or services that offer a guarantee or some other form of protection against potential loss.
Risk aversion can also influence how consumers perceive and evaluate options or choices. For example, a risk-averse consumer may be more likely to choose a product or service with a proven track record of reliability, even if it is more expensive because they perceive it as a safer or more predictable option.
Overall, risk aversion is an important consideration in consumer psychology because it can shape how people make decisions about what to buy and how to allocate their resources. When developing your marketing strategies, it is important to consider how you can appeal to customers by leaning into risk-averse messaging.
WHAT ARE SOME EXAMPLES?
Buy-Now-Pay-Later (BNPL) payment platforms such as Klarna, AfterPay, and Sezzle are great examples of this. It's no secret that BNPL has had a meteoric rise in recent years, and I suspect that we could pretty accurately correlate charts demonstrating the WUI and BNPL market size over the last five years. The rise in BNPL is often credited simply to the increase in eCommerce shopping over the years, though this isn't a 1:1 correlation. With BNPL options rising at a more exponential rate, I believe there are other factors at play here, including the psychology of risk-aversion fitting into the BNPL model so well.
A note on the above: With Klarna's revenue being in the millions compared to eComm's total revenue being in the billions, there is a clear difference in the datasets. There is something to be said about the ease of growth in a market at those different sizes, though the point is to demonstrate the rate of growth of Klarna vs. the market it serves.
Outside of 'financing' models, subscription models appeal to this behaviour as well. If a customer is comfortable and familiar with a product, it makes sense that they would want to remove the guesswork for the equation. By offering subscriptions, many companies have successfully provided customers with a risk-free environment to continue engaging with their products. According to this article by Forbes, "The global subscription e-commerce market size is expected to increase from $72.91 billion in 2021 to $120.04 billion in 2022. And it is expected to reach $904.2 billion by 2026." That is dramatic growth, which I believe we can attribute, at least in part, some of its success to catering towards the behaviour of risk aversion.
How can we appeal to a potential customer's risk-averse behaviours? By leaning into mechanisms that respond to it. For example, using customer testimonials, reviews, and ratings in your ad creative and landing pages can signal to a consumer that your product is tried and tested. Leaning into UGC in your creative, assuming it doesn't feel scripted, can also help convey the message that your product is already endorsed by people similar to the consumer.
Another method of allowing consumers to find a level of security with your offering is to use messaging across your marketing materials such as 'risk-free,' 'money-back guarantee,' 'free returns,' etc. Having the customer understand that there is no inherent risk in 'giving it a shot' can help tremendously in quelling the nagging uncertainty one experiences when considering something new.
To understand where risk aversion plays into future commerce, it's important to understand how consumers value things differently. You might already be familiar with Maslow's Hierarchy of Needs. If you're not, it's a pyramid that presents the different needs of humans, organized from the 'nice to haves' at the top and 'need to haves' at the bottom.
Regarding our current situation, it's safe to say that most people in first-world countries aren't too worried about the bottom portion. Sure, we will always be risk averse when it comes to fundamentals such as shelter, food, etc., though this is something we are very used to and have developed methods of adapting to and working around.
Consumerism is supported by many categories, with many major brands spanning all of the Hierarchy of Needs categories, though most consumer products (especially eComm) lean primarily toward Esteem and Belonging.
When we think about risk aversion in consumerism, this is currently where we sit. For example, it's within this realm that you'd find consumers reading testimonials to determine if people agree that a certain makeup foundation sits on the skin well or if a cologne really does smells of the earthy notes described on the product page.
That said, as the trendline on the WUI continues to increase, it's reasonable to assume that consumers will refocus their behaviour away from frivolous purchases towards those that provide more security, shifting the bracket where risk-averse behaviour is most common further down the pyramid.
Based on this, fashion is likely to be greatly affected by increasing risk aversion. Fashion, on its own, can transcend any one category here, connecting many of them. Still, if we assume that global crises will shift our consumer behaviours from Esteem towards Physiological Needs, it puts some fashion categories at risk. Namely, luxury.
Suppose we consider that people might start purchasing clothing again as a baseline requirement first and not something that signals recognition or connection. In that case, the desire to signal status through this mechanism disappears, along with any desire to spend frivolously on it.
This same principle can apply to any category, whether tech, beauty, health & wellness or other, as uncertainty grows, a desire to take risks – such as spending excessively to signal status – decreases.
On the flip side, we can assume the opposite about a few categories – primarily commodities. Food, energy, fuel, etc., serve our Physiological Needs, which puts them at the top of the list for many people in a world where uncertainty remains high. If you want to be more explorative, 'vices' usually do well in recession-like scenarios, such as cigarettes, alcohol, etc.
So, with that, take caution. If you aren't already leaning into risk-averse messaging and imagery in your marketing materials, consider testing it. Consider BNPL options for customers, and strategize how you can cater to the category of consumers who are slightly more cautious. As the younger generations enter the markets, these behaviours will only be more prevalent.
Get ahead of the curve, and win.