Original Research: Earn More By Lowering A Customer’s Perceived Risk

THE BIG IDEA:

Our original research suggests that all else equal, homeowners are willing to pay substantially more for a product and/or service which carries a lower perceived risk than a different option. Lowering a customer’s perceived risk through a strong needs analysis and drawing a contrast with other firms who may have quoted, or will be quoting, can result in higher margin opportunities, as well as higher gross close ratios.

Demographics At A Glance

Introduction:

Not long ago I saw a study by Modernize that looked at the most important factors that homeowners cite when selecting a contractor. The biggest factor in Modernize’s Homeowner Consumer Trends study, by far, was price. Nothing else was even remotely close.

Respondents were given options like price, finance options, personal preference, materials used, and time frame to complete. 72% chose price, and the next closest was finance options at 9%.

Is that really true? Are 72% of buying decisions in home improvement made on the basis of cost? I don’t think so, and I have a statistically significant sample of data to back up that view.

If you only read Modernize’s survey results you would have left with the impression that cost drives consumer behavior, but my research gives a window into consumer behavior that is far more nuanced and suggests that Modernize may have asked the wrong question.

Large Sample Risk vs. Cost Experiment

I constructed a study with a national sample of 1,004 homeowners (statistically significant with a standard error of +/- 3%) who were at least 45 years old and had a household income of at least $75,000 – a primary target of many remodeling companies. I gave them a hypothetical scenario involving a roof replacement and simply asked them to tell me which of two quotes they would be most likely to choose.

Imagine that you want to replace your roof and got two quotes. The first quote was conducted professionally and was delivered at $10,000. The second quote was more thorough, the contractor found something that the first contractor missed, and the quote was delivered at $15,000. With this information, which quote would you be most likely to choose?”

The scenario was designed to test the effect of risk on decision making, and specifically get the homeowner to value how much lowering risk was worth to them. The idea is that both quotes were professionally conducted, but the second one is perceived to be more complete. Finding a detail the first contractor missed casts further doubt on the completeness of the first quote, which equates to a higher level of risk that the project would not be done correctly if selected.

Note that I did not include any details that would allow the homeowner to assess the actual value of what the first contractor missed. As such, there is no objective reason that the missed item, which could have been very small, should account for the cost difference alone.

Finally, notice the cost difference between the quotes. I’ve increased the cost by a whopping 50% in the second quote. While we are only talking about $5,000 which is not a huge amount of money in the context of a full roof replacement, the percentage difference is a big deal. Because the respondent has no way of assessing what a “fair” or “average” price would be for this kind of project, the percentage really stands out.

Results

With no more information than just what I provided above, 82% of the homeowners surveyed said they would choose the more expensive option with the 50% cost premium. Think about that! The vast majority of homeowners would pay you 50% more than your competitor if you lowered their perceived risk by more completely scoping the job.

It gets even better.

These results raise the question as to whether this same principle would hold on a higher cost project. I ran the same question again with a smaller sample (n = 102) to get a directionally accurate answer to that question.

Using the same scenario, I anchored them to a $15,000 price tag with the first contractor and a $25,000 price tag with the second, more complete quote.

“Imagine that you want to replace your roof and got two quotes. The first quote was conducted professionally and was delivered at $15,000. The second quote was more thorough, the contractor found something that the first contractor missed, and the quote was delivered at $25,000. With this information, which quote would you be most likely to choose?”

That’s a 50% increase in base project cost on the first quote as compared with the first scenario, as well as a much larger 66% risk premium.

72% of the homeowners surveyed said that they would chose the more expensive contractor!

That’s 10% fewer than the first scenario now that the numbers have gotten a lot bigger, but that’s still 72% of people who would pay you $10,000 more than someone else simply because their perceived risk is lower.