Customer Knowledge of Services Pricing

By Priya Chetty on October 30, 2010

To what extent do customers use price as a criterion in selecting services? How much do consumers know about the costs of services?

If you are like many consumers, you feel quite uncertain about your knowledge of the prices of services, and the reference prices you hold in memory for services are not as accurate as those you hold for goods. There are many reasons for this difference:


Service heterogeneity limits knowledge

As services are intangible and are not created on a factory assembly line, service firms have great flexibility in the con figurations of services they offer. Firms can conceivably offer an infinite variety of combinations and permutations, leading to complex and complicated pricing structures.

As an example, consider how difficult it is to get comparable price quotes when buying life insurance. With the multitude of types (such as whole life versus term), features (different deductibles), variations associated with customers (age, health risk, smoking or nonsmoking), few insurance companies offer exactly the same features and the same prices. Only an expert customer, one who knows enough about insurance to completely specify the options across providers, is likely to find prices that are directly comparable.

Providers are unwilling to estimate prices

Another reason customers lack accurate reference prices for services is that many providers are unable or unwilling to estimate price in advance. Consider most medical or legal services. Rarely are legal or medical service providers willing—or even able—to estimate a price in advance. The fundamental reason in many cases is that they do not know themselves what the ser vices will involve until they have fully examined the patient or the client’s situation or until the process of service delivery (such as an operation in a hospital or a trial) un folds. In a business-to-business context, companies will obtain bids or estimates for complex services such as consulting or construction, but this type of price estimation is typically not undertaken with end consumers; therefore, they often buy without advance knowledge about the final price of the service.

Individual customer needs vary

Another factor that results in the inaccuracy of reference prices is that individual customer needs vary. Some hairstylists’ service prices vary across customers on the basis of length of hair, type of haircut, and whether a conditioning treatment and style are included. Therefore, if you were to ask a friend what a cut costs from a particular stylist, chances are that your cut from the same stylist may be a different price. In a similar vein, a service as simple as a hote1 room have prices that vary greatly: by size of room, time of year, type of room availability, and individual versus group rate. These two examples are for very simple services.

Now consider a service purchase as idiosyncratic as braces from a dentist or help from a lawyer. In these and many other services, customer differences in need will play a strong role in the price of the service.

Price information is overwhelming in services

Still another reason customers lack accurate reference prices for services is that customers feel overwhelmed with the information they need to gather. With most goods, retail stores display the products by category to allow customers to compare and contrast the prices of different brands and sizes. Rarely is there a similar display of services in a single outlet. If customers want to compare prices (such as for dry cleaning), they must drive to or call individual outlets.

Prices are not visible

One requirement for the existence of customer reference prices is price visibility – the price cannot be hidden or implicit. In many services, particularly financial services, most customers know about only the rate of return and not the costs they pay in the form of fund and insurance fees.

IDS Financial Services recently discovered how little customers know about prices of the company’s services. After being told by the independent agents who sell their services to customers that IDS was priced too high, the company did research to find out how much customers know about what they pay for financial services and how much price factors into customer value assessments.

The study surprised the company by revealing that customers knew even less than expected: not only did they not understand what they were paying for many of their services, very few consumers understood how they pay for financial services in general. Only for financial products where price was visible – such as with securities and term life insurance—were customers aware of fees.

When price was invisible, such as in certificates, whole-life insurance, and annuities (which have rear-load charges), customers didn’t know how they were charged and what they paid. Further, when customers were asked to indicate how important 10 factors (including price) were, price ranked seventh. Finally, the company found that shopping behavior in the category of financial services was extremely limited.

Of course in situations of urgency, such as in accident or illness, customers must make the decision to purchase without respect to cost at all. And if cost is not known to the customer before purchase, it cannot be used as a key criterion for purchase as it often is for goods. Price is likely to be an important criterion in repurchase, however. Furthermore, in repurchase monetary price may be an even more important criterion than in initial purchase

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