An Exploratory Study of Price/Perceived-Quality Relationships Among Consumer Services | ACR

ABSTRACT – This paper reports two studies which were designed to extend price/perceived-quality research into -the realm of consumer services. Based on theory and previous empirical findings from the tangible product context, several hypotheses were generated and tested. Findings indicate that the extent of belief in positive price-quality relationships varies across service types. Furthermore, prior familiarity, expectations of quality variance and demographic characteristics all influence consumers’ perceptions of price-quality associations among services.

Citation:

Rose L. Johnson and James J. Kellaris (1988) ,”An Exploratory Study of Price/Perceived-Quality Relationships Among Consumer Services”, in NA – Advances in Consumer Research Volume 15, eds. Micheal J. Houston, Provo, UT : Association for Consumer Research, Pages: 316-322.

Advances in Consumer Research Volume 15, 1988      Pages 316-322

AN EXPLORATORY STUDY OF PRICE/PERCEIVED-QUALITY RELATIONSHIPS AMONG CONSUMER SERVICES

Rose L. Johnson, Georgia State University

James J. Kellaris, Georgia State University

ABSTRACT –

This paper reports two studies which were designed to extend price/perceived-quality research into -the realm of consumer services. Based on theory and previous empirical findings from the tangible product context, several hypotheses were generated and tested. Findings indicate that the extent of belief in positive price-quality relationships varies across service types. Furthermore, prior familiarity, expectations of quality variance and demographic characteristics all influence consumers’ perceptions of price-quality associations among services.

INTRODUCTION

Price may be said to have both attracting and -repelling characteristics (Monroe 1979). While traditional demand theory explains the latter, economists, with few exceptions, have ignored the potential attracting power of price (Gabor and Granger 1966). Behavioral research, however, has recognized that consumers often use price as an informational input to formulate product quality perceptions. This recognition of price as a quality cue has given rise to a considerable body of research. However, in spite of the vigorous interest in the topic over the past several decades, the literature has not dealt with the price/perceived-quality phenomenon vis-a-vis consumer services. While previous research has focused on tangible goods, the present study extends this work into the realm of intangible services.

The investigation of price/perceived-quality relationships among consumer services is important for several reasons: (1) research in the tangible product context has produced inconclusive and contradictory findings, so more research is needed to resolve a significant controversy; (2) the service sector accounts for a large and rapidly growing proportion of consumer spending (Berry 1980), yet relatively little is known about service marketing as compared to product marketing; and (3) some sources (e.g. Gabor 1977, Eiglier and Langeard 1977) have recommended pricing strategies based on the assumption that consumers use price as an indicator of quality for services; however, it has not been empirically demonstrated that this is true.

Several distinctions characterize the present study. Unlike previous research concerning price/perceived-quality relationships, this study deals with services rather than tangible goods. This is an important and relatively unexplored area Also, rather than investigating the phenomenon in the context of a single commodity, the present study examines a broad range of consumer services. This represents a significant extension of previous research as the question of external validity has been cited as a possible limitation of single-product studies (Olson 1977). The current approach allows comparisons to be made between service categories and affords an opportunity to draw broader, more general conclusions. A final point of distinction is the inclusion of several moderating variables in the study. Previous studies have generally included only one or two “non-price” cues. Using a survey methodology rather than an experiment allows more variables to be measured and controlled statistically than would be practical in an experimental setting. The survey approach is believed to be appropriate during the exploratory stages of research as a prelude to subsequent experimental work.

BACKGROUND AND HYPOTHESES

Research in the Product Area

Scitovsky (1946) provided the initial conceptualization for price/perceived-quality research. He pointed out that the economic theory of price is based on the assumption that the consumer knows what he buys. This may have been a reasonable assumption at the time economic price theory was developed. Given the subsequent proliferation of new brands/products and the increase in their complexity, however, the assumption may no longer be realistic. Consumers must now judge product quality by various indices of quality such as price.

Early empirical research in the price/perceived-quality area sought to discover the extent to which price cues influence quality judgments. These studies may be divided into single cue (i.e., price only) and multi-cue studies.

Single cue studies examined the influence of price in isolation upon quality judgments (Leavitt 1954; Tull et al. 1964; McConnell 1968; Peterson 1970; Lambert 1970, 1972; Deering and Jacoby 1972; Shapiro 1973). Different samples, products, operations of measures and experimental designs all converged on a single result. Findings were generally positive. Price was found to be significantly related to consumers’ product quality judgments. Critics have pointed out that if price is the only available cue upon which to base quality judgments, it will naturally be used. However, price is rarely the only information about a product. For this reason, some researchers have embedded price in a more naturalistic “multi-cue” setting.

Multi-cue studies have sought to assess the importance of price as an indicant of product quality in the context of multiple informational cues. This involved identifying the various cues and assessing the relative importance of each. Non-price cues which have been studied include store name (Enis and Stafford 1969), brand name (Gardner 1970, 1971; Jacoby et al. 1971), product sample (Valenzi and Andrews 1971; Cimbalo and Webdale 1973), and “ecology appeal” (Fuller 1972), among others. Findings from these studies have been somewhat inconsistent. One generalization that might be drawn, however, is that the price cue diminishes in importance as the number of other available cues increases (Rao 1970; Olson 1977).

Some research has focused on discovering the conditions under which price is used as a quality cue (e.g. DellaBitta 1971). Lambert (1972) studied economic and personality variables as moderating influences on price cue usage and found that emotional stability and income approached significance, but gender did not. Peterson and Wilson (1985) suggest that price cues are more important under conditions of risk or uncertainty. This implies that consumers may rely on their belief in a price-quality correlation as a perceived risk reduction strategy. The same authors also note the moderating influence of prior experience or familiarity with a product. This implies that price is a relatively more important cue to quality for new brands/products. The extent of price cue usage also varies according to the nature of the product (i.e., convenience/shopping/specialty goods). Price cues are relatively more important among specialty and shopping goods than among convenience goods (Toh and Berard 1984). Perhaps this is due to consumers’ more extensive product familiarity and experience with the latter.

The Nature of Services

Services are generally characterized as (1) more intangible than tangible, (2) simultaneously produced and consumed, and (3) less standardized than tangible goods (Berry 1980). Furthermore, services may be distinguished from tangible products by the degree to which they possess search, experience, and credence qualities. Search qualities refer to attributes that a consumer can determine prior to purchase. Experience qualities refer to attributes which can be assessed only after purchase or during use. The third category, credence qualities, refers to attributes which may be impossible for consumers to determine even after purchase and consumption. Whereas products are generally high in search qualities, services are lower in search qualities and higher in credence qualities (Zeithaml 1981).

Intangibility, simultaneous production and consumption, and a relative lack of search qualities all result in the availability of fewer cues upon which consumers can base prepurchase service quality evaluations. The lack of standardization among consumer services increases the perceived risk associated with service choice. Both availability of alternative cues and presence of perceived risk have been found to moderate the strength of belief in price-quality relationships.

Hypotheses

On the basis of theory and previous empirical findings as discussed in the aforegoing sections, the following hypotheses were generated.

Previous research has found price to affect quality judgments differentially across product types/categories (e.g. Toh and Berard 1984). Further, variations in the degree of tangibility and the possession of search qualities among service types is likely to result in differentially perceived price-quality relationships. Thus it is hypothesized that:

Hypothesis 1: The extent of belief in positive price-quality relationships will vary across types of consumer services.

Many previous findings in the tangible product context have indicated a significant moderating influence of prior familiarity, extent of experience and expertise on the magnitude of price/perceived-quality associations (e.g. Enis and Stafford 1969; Gardner 1970). As consumers gain more experience and become more familiar with a product through repeated purchase and usage, they tend to rely less on price as an indicant of quality in forming their personal evaluations. For this reason it is expected that:

Hypothesis 2: The degree of consumers’ familiarity with various services will be negatively associated with the extent of their beliefs in price-quality relationships.

Breadth of range in perceived quality within a product category has also been demonstrated to have a significant moderating influence on extent of price cue usage. For example, if asked for an opinion on the statement, “the higher the price of the aspirin, the higher the quality,” most consumers would disagree (Peterson and Wilson 1985). This may be because most people perceive aspirin as a generic item — i.e., all aspirin are basically the same. If the product in the above statement were changed from aspirin to diamonds, however, consumers would be more likely to agree with the price-quality statement. This may be because consumers perceive diamonds as varying significantly in quality. For this reason, it is expected that:

Hypothesis 3: The degree of consumers’ expectations of quality variance (i.e., breadth of range in quality within a service category) will be positively associated with extent of belief in price-quality relationships within a service category.

Some previous research has examined demographic influences on price cue usage. For example, females were found to be more price reliant than males in forming product quality judgments (Toh and Berard 1984). Age differences have also been reported, with older consumers showing a greater reliance on price as a quality cue (Shapiro 1973). Income effects are more controversial since they have been reported to be both positive (French et al. 1972; Toh and Berard 1984) and insignificant (e.g. Shapiro 1973). Based on these empirical findings, it is hypothesized that:

Hypothesis 4: (A) Female consumers will demonstrate a greater extent of belief in price-quality correlations among services than will male consumers;

(B) Older consumers will demonstrate a greater extent of belief in price-quality correlations among services than will younger consumers;

(C) Consumers in higher income categories will demonstrate a greater extent of belief in price-quality correlations among services than will consumers in lower income categories.

STUDY I

The purpose of Study I was twofold: to test Hypothesis 1, and to facilitate the development of an instrument for future use. The study was conducted in several phases, as described below.

Method

A list of consumer services was developed by collating service items compiled from two sources: Lovelock’s (1983) taxonomy of services and S.I.C. codes. Items were selected which were representative of a broad range of consumer services. Further, it was desired to include items which varied with respect to respondent familiarity and the degree of quality variation within the product class. The final list contained fifty-three services.

The list of services was converted into questionnaire items of the form: “The higher the price of the (service), the better the quality of the (outcome).” This operation is patterned after previous research (Peterson and Wilson 1985). Statements were then reworded into several different formats which retained the same essential meaning. For example, ‘The more one pays for (a service), the better the quality,” and “A (service provider) who charges higher prices provides better (service).” Also, randomly selected items were restated negatively (i.e., “The lower the price . . . “). A questionnaire was constructed using the fifty-three price-quality statements. Printed instructions at the beginning of the instrument asked respondents to indicate the extent of their agreement/disagreement by circling the appropriate number on the five-point scales provided (5 = “I strongly agree”; 1 = “I strongly disagree”). In order to combat potential “ordering effects” one version of the instrument ordered the price-quality statements alphabetically by service, and a second version reversed the sequence of the four pages, renumbering items appropriately.

The questionnaire was administered to a sample of volunteer undergraduate business students at a large southeastern university (n = 167). The two versions of the instrument were randomly distributed among the subjects. This sample is deemed appropriate given that no inferences as to proportions in the population are being sought (Berkowitz and Donnerstein 1982).

Study I Analyses and Results

The first analysis performed was a check for order effects. Two groups, those who received questionnaire version one and those who received version two, were compared via a univariate t test on each variable. The lack of an order effect would result in no differences between the groups; one would then expect the t-scores to be normally distributed with a zero mean. A chi-square goodness of fit test revealed no order effect (chi square = 4.8; p > .1).

In order to reveal any underlying associations among the variables, responses to the price-quality statements were factor analyzed as per Green (1978). Nine orthogonal factors were obtained. In most cases the factors were clearly interpretable by noting which services “loaded together” (factor loadings > .5 rounded). Based on these results, eight composite scales were formed: hospitality services, health services, professional services, real state and home services, art and entertainment, financial services, travel services, and public utilities. The scales were purified as per Churchill (1979). Resultant reliabilities and composite scale means are reported in Table 1.

Hypothesis 1 stated the expectation that the strength of price/perceived-quality relationships would vary across types of services. Comparisons were made using ANOVA. A single repeated-measures test comparing all 53 services showed significant differences in beliefs (F = 32.16; p < .001). Further analysis compared means of the composite scales. This was also significant (F = 103.55; p < .001). Thus, Hypothesis 1 is supported, and one can conclude that the extent of belief in a price-quality relationship is dependent on the type of services being considered.

TABLE 1

COMPOSITE SCALE STATISTICS

The analysis of variance indicated that there are differences among types of services. Based on those results, paired comparisons were performed to determine between which types of services the differences lie. Only three out of twenty-eight service pairs were not significantly different (at p < .001). The results of the paired.comparisons are presented in Table 2.

TABLE 2

T-TESTS FOR DIFFERENCES AMONG COMPOSITE SCALE

STUDY II

The second goal of Study I was to reduce the fifty-three consumer service items to a more parsimonious set for use in a subsequent study. This was done by judgementally selecting a subset of twenty items which were believed to be representative of each major group of consumer services. The items retained from Study I were used to construct an instrument for use in Study II. Study II was designed to test research Hypotheses 2, 3, and 4.

METHODOLOGY

Sample

Questionnaires were distributed to 227 volunteer undergraduate business students at a large southeastern university. The sample was comprised of 48% females and 52% males, with a racial breakdown of 80% whites, 15% blacks, and 5% other minorities. The subjects ranged in age from 19 to 52 years (mean age = 25), and total annual household incomes ranged from less than $7,500 annually to greater than $60,000.

Measures

Extent of belief in price-quality relationships was measured on five-point agreement/disagreement scales (5 = “strongly agree”; 1 = “strongly disagree”) using statements as previously described.

Degree of familiarity with each service was measured using five-point familiar/not familiar scales (5 = “very familiar”; 1 = “not at all familiar”). Familiarity was defined for the respondent on the questionnaire as including previous experience with or usage of a service, prepurchase investigation, and/or indirect exposure through the experience of another. It is intended as a proxy measure for experience/product knowledge/expertise.

Extent of expected quality variance within each service type was measured on five-point agreement/disagreement scales (5 = “I Strongly Agree”; t=”I Strongly Disagree”).

Demographic characteristics of respondents were measured using standard methods. Variables included age (measured as year of birth), gender, and income (total 1986 pre-tax household income).

RESULTS

Hypothesis 2 anticipated a negative association between strength of belief in price/perceived-quality relationships and extent of prior familiarity with the service. Partial correlations were used to test the hypothesis (controlling for perceived variability of quality within the service category). Results are presented in Table 3. If familiarity had no effect, one would expect to see positive and negative correlations randomly distributed among the twenty service items.

TABLE 3

PARTIAL CORRELATIONS – EXTENT OF BELIEF IN PRICE-QUALITY RELATIONSHIPS WITH FAMILIARITY, PERCIEVED VARIABILITY, AND DEMOGRAPHICS

However, nineteen of the twenty items (95%) were in the expected direction. Use of the sign test reveals that this is significantly different from 50% at p < .001. Further, twelve of the individual items (60%) exhibited statistically significant associations (p < .05). Thus, it may be concluded that the data support Hypothesis 2.

Hypothesis 3 concerned the degree of expected quality variance within a service category, and anticipated a positive association between quality variance and extent of belief in price/perceived-quality relationships. Partial correlations were used to test the hypothesis (controlling for familiarity). Results are presented in table 3. Eighteen (90%) of the twenty associations were in the expected direction. This is significantly different from 50% at p < .002. Twelve of these were statistically significant at the .05 level; an additional two associations approached significance at p < .06. Neither of the two aberrant associations were statistically significant. Again, the findings may be interpreted as offering support for the hypothesis. While the anticipated association does not hold true in every case, extent of belief and perceived variability cannot be said to be wholly unrelated.

Hypothesis 4- anticipated certain demographic effects on extent of belief in price/perceived-quality relationships among consumer services. Specifically, -gender differences were expected with respect to extent of belief in price/perceived-quality relationships. Positive associations were expected between extent of belief and both age and income. Partial correlations were used to test the hypotheses. Analyses for Hypotheses 4A, 4B, and 4C are presented in Table 3. Although there is a slight tendency for females to believe more strongly than males in price/perceived-quality relationships, only three significant gender differences were found. Thus, Hypothesis 4A is not supported by the data. Statistically significant associations were found in both the cases of age and income, but in neither case were the majority of the associations in the expected direction. Thus, Hypotheses 4B and 4C are not supported by the data

DISCUSSION

The present study affirms previous findings of price/perceived-quality relationships within the product context in the following ways. First, the findings suggest that familiarity with a service moderates the extent of belief by reducing the role of price in forming quality perceptions. Second, perceived variability in quality within a service category, on the other hand, may enhance the role of price as a cue to quality. Further investigation is needed to explore why perceived variability is important in some service categories but not in others.

Previous research was not affirmed by the findings relative to demographic effects. Gender differences found in previous studies might be explained by differences in product familiarity between the sexes. The list of services utilized in this study, however, was “sexually -neutral,” which may account for the findings.

Perhaps one of the most interesting results of Study 11 was the unanticipated age and income effects. The lower age group showed a tendency to believe more strongly in price-quality relationships than the older age group. Similarly, the lower income groups exhibited a greater tendency to believe in price-quality relationships than did the higher income groups. These findings contradict results of previous research in the product area. It might be argued that our results are explained by the older, more affluent subjects’ greater opportunity to consume. This may result in greater familiarity, which is negatively associated with strength of belief in price-quality relationships. However, the association was negative even when the effect of familiarity was statistically removed. An alternative explanation for the income effect may be a greater risk-aversion among lower income consumers, leading to increased use of price cues. The age effects might be alternatively explained by the limited range of ages represented in the sample. The student sample used in the present study may be too young for direct comparison with previous literature based on adult samples. These issues are commended to future investigation.

CONCLUSION

The two studies reported here have extended price research into the domain of consumer services by examining price/perceived-quality relationships and selected moderating influences in a multiple service context. Findings indicate that the extent to which consumers believe in a price-quality relationship varies across service types, and that prior familiarity, degree of perceived quality variation within a service category, and demographic factors may influence the strength of this belief vis-a-vis certain consumer services.

However, before attempting to draw any firm conclusions from these studies, one need consider a few limitations. In addition to the usual caveats associated with small “student samples” and self-report measures, the following limitations are noted. First, variation in the extent of self-reported belief in a price-quality relationship suggests but does not prove the existence of the price/perceived-quality phenomenon in the service context. While the evidence for their existence is compelling, price/perceived-quality relationships are axiomatically assumed rather than proven in these studies. Second, belief in a price-quality relationship does not necessarily imply actual price reliance in the context of real purchase decisions and behaviors. Both Deering and Jacoby (1972) and Szybillo and Jacoby (1974) showed “willingness to buy” to be unrelated to “perceived quality.” Olshavsky (1985) points out that there is actually little evidence to support the assumption that perception of quality is always related to purchase/patronage behavior. Thus the findings of these studies may be generalized to pre purchase service evaluation, but not directly to behavioral intent or actual purchase. Third, one might question the representativeness of the specific services used in the studies (i.e., the external validity issue). Further study is needed before the results can be generalized across the entire-domain of consumer services.

These limitations notwithstanding, several implications of the research may be cautiously drawn. Concerning the variation in the magnitude of price/perceived-quality relationships across service types, one may conclude that the attracting/repelling characteristic of price depends upon the nature of the service. For example, increasing a checking account service charge is not likely to result in an enhanced quality perception among prospective consumers. However, higher-priced nursing home care may be perceived differentially as a higher quality service.

The findings on familiarity effects imply that price may serve as a more important cue to service quality for (1) new services, or in (2) new markets where familiarity is limited. This finding would-seem to favor skimming strategies over penetration pricing strategies given an appropriate service category. For example, this may hold true for new hospitality and health-related services, but is less likely for movie theaters, taxi cabs, etc.

Marketers may have an opportunity, in some service industries, to attenuate the repelling attribute of price and “buy” more attracting power by altering consumers’ perceptions of the extent of quality variation within a service category. This might be done through promotional communication which emphasizes the differential qualities of various services or service providers within a category. Increasing the degree to which consumers expect quality variation across alternative offerings within a service type/category should have the effect of making price a more important cue to quality judgments in consumers’ minds. Thus, all else being equal, consumers might be willing to pay a higher price in return for greater perceived quality.

Because of the possible moderating influence of demographic variables such as age and income, markets characterized by different demographic profiles may be targeted differentially via pricing strategy. For example, the “attracting power’ of price may be stronger among younger and less affluent consumers. Therefore, high-price/high-quality services may be more likely to appeal to this group, subject to the constraint of their ability to afford the purchase.

In addition to these managerial implications, there are several implications for future research. First, conceptual and measurement issues need to be developed further. This would involve the conceptual explication of the price/perceived-quality construct, and the development and testing of better measurement instruments. Only then can the fundamental issue of the existence of the price/perceived-quality phenomenon be addressed. Second, in order to afford stronger generalizations, the matter of grouping services should be further explored. Service type was shown in Study l to be a predictor of the strength of price/perceived-quality relationships. Underlying dimensions may explain differences in the magnitude of these relationships across service types. The specific nature of the differences underlying groups of services is an issue in need of further study. Third, future research should address the untested proposition that price cues are relatively more important in the formation of service quality judgments than in tangible product quality judgments. Fourth, extent of belief in price-quality relationships among services may serve to distinguish between different groups of consumers. Profiles of these segments should be developed using key demographic and psychographic variables in order to gain a better understanding of how different consumers respond to prices in different service categories. Finally, the price/perceived-service-quality phenomenon should be studied in relation to other outcomes of interest, such as preference formation, purchase intentions, and behaviors. The real value of studying price/perceived-quality relationships among consumer services lies in the impact of service evaluation on subsequent choice behavior.

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