Customer knowledge of service prices

Answer 1

Consumers have what is known as internal reference prices for services. A reference price is a price point in memory for a good or a service and can consist of the price last paid, the price most frequently paid, or the average of all prices customers have paid for similar offerings.

A) Service variability limits knowledge.

Eg In life insurance, it is very difficult to get comparable price quotes. Firms can offer an infinite variety of combinations and permutations leading to complex and complicated price structures.( Whole life vs. term), features (different deductibles) variations associated with customers( age, health risk, smoking or non - smoking).

Very few insurance companies offer exactly the same features and the same prices. Only expert customers can specify the options across providers and find an accurate comparison base.

B) Providers are unwilling to estimate prices.

Many providers are unable or unwilling to estimate prices eg in the legal or medical profession. Lawyers (in a trial) and doctors (for an operation) often cannot tell what the services will involve until the delivery is well underway.

In B2 B situations companies obtain bids or estimates for complex services such as consulting or construction, but this is typically not undertaken with end consumers. Therefore they often buy without advance knowledge about the final price of the service.

C) Individual customer needs vary.

(Eg, Type of haircut, length of hair, conditioning treatments). In a hotel (size of room, time of year, type of room availability, AC/non- Ac, individual vs. group rate).

Getting braces/ tooth replacements from a dentist or help from a lawyer are highly dependent on customer's idiosyncrasies and hence differences in customer's needs play a strong role in pricing.

D) Collection of price information is overwhelming

Rarely are price comparisons available for competing services under a single roof (as opposed to consumer goods in a retail shop where prices can be readily compared).

Implications for managers

• The fact that consumers often possess inaccurate reference prices for services has several important managerial implications.

• Promotional pricing (as in couponing or special pricing) may be less meaningful for services for which price anchors typically do not exist. This is probably the reason why price does not feature as frequently in service advertising as it does in product advertising.

• Promotional pricing also has the danger of the customer taking the promotional price which he sees in as the anchor price for future reference.

• The general absence of accurate reference prices also suggests that advertising actual prices for services that the customer is not used to purchasing, may reduce uncertainty and overcome an inflated price expectation for some services.

• Thus a market research firm that quotes USD 10,000 for its market research would be informative to a business customers who only had a vague idea and would be guessing it would cost around USD 100,000.

• By featuring price in advertising, the company overcomes the fear of high cost by giving readers a price anchor.