It seems everyone has an opinion about cholesterol. Most people know there are two types, good and bad. If you ask a friend, he or she will tell you to eat more of the good kind, and less of the bad. Makes sense to me.
Now, I’ve learned that’s bunk. There’s a bad version of good cholesterol that causes disease. And I learned there’s a good version of bad cholesterol. Confused? Me too. From now on, I’m just going to refer to cholesterol by its chemical designation, C27 H46 O. That seems so much simpler.
The word risk suffers from the same confusion. Like cholesterol, risk is a thing. Neither good nor bad. What gives risk its mojo is context. As The Economist reported “Though changing appetites for risk are central to booms and busts, economists have found it hard to explain their determinants . . . the willingness to run risks varies enormously among individuals and over time.”
What is risk? Webster defines it as “possibility of loss or injury.” In most business contexts, risk has broader meaning, which I describe as uncertainty toward achieving a goal. Risks live in the gap between predictions and the actual result. The outcomes can be positive or negative.
Marketers and business developers have long used risk as a competitive weapon. “Buying from our company right now will protect you from falling hopelessly behind your competition.” Such a great pitch! We’ve all used a flavor of it. But risk has always been a two-edged sword. Myths about risk skew assumptions and drive expectations into weird places.
Myth #1: “Customers decide based on facts!” Facts are only part of the decision-making apparatus. “Any decision relating to risk involves two distinct and yet inseparable elements: the objective facts and a subjective view about the desirability of what is to be gained, or lost, by the decision,” wrote Peter Bernstein in his book, Against the Gods.
Myth #2: “Most customers perceive risks the same way.” If every person had the same risk appetite or capacity, our financial markets could not function.
Myth #3: “Anything a vendor can do to mitigate risk will be rewarded with more and faster sales.” If only it were that straightforward. Using that logic, wouldn’t it be compelling for many executives to simply stick with the status quo? While most buyers don’t want to absorb unnecessary risk, every solution creates new risks. So promoting the singular message of risk reduction might ring hollow. The key is to help buyers identify opportunities for eliminating unneeded risks, and to help them identify intelligent risks that are likely to return value to the company.
Myth #4: “Products with short time-to-value are less risky than those with longer time-to-value.” Contrary to some sales assertions, there is rarely certainty about value achievement. If you latched onto this logic, buying a lottery ticket for next week’s drawing would be less risky than buying a US savings bond.
Myth #5: “Showing a prospect the cost of inaction will lead to a sale.” But that’s only one side of the coin. Once funds are committed and a project has been initiated, companies often can’t turn back. That can put them in a riskier position than companies that have retained their financial and technological options.
Myth #6: “Our strategy is fine. We just need to execute!” Strategic risk can have devastating consequences for shareholder value. Boo.com, Pets.com, The Learning Company. During the Tech Bubble, these companies and many others suffered significant losses in market capitalization because they had strategies that proved disastrous.
Myth #7: “My company doesn’t have ethical risks.” I often hear, “that sort of problem can’t happen here.” But it can. Almost everyone knows of a former co-worker (or more) who pushed the ethical envelope when selling to customers.
Myth #8: “Most risk can be managed with careful measurement.” Measurements help, but not every major risk can be easily measured or predicted.
Just like cholesterol, what’s bad risk in one context might be good in another. So it’s best to recognize that the labels people slap on aren’t necessarily accurate in every situation. Debunking myths about risk, and moving beyond its pejorative meaning will help people think about risk in new ways. Not as something that always has to be faced down and avoided, but as something that, when embraced intelligently, opens new opportunities.