The Accuracy of Reported Reference Prices For Professional Services

Valarie A. Zeithaml, Texas A&M University, College Station
Karen L. Graham, Texas A&M University, College Station
ABSTRACT - A consumer's accumulated information about the price of a product or service forms an internal or standard price typically termed the reference price (Monroe 1973, Monroe and Petroshius 1980; Helson 1964). The accuracy of consumers' reported reference prices for professional services was investigated in the study reported here. Results indicate that reference prices for fifteen dental, medical, and legal services recalled by 311 respondents were largely inaccurate. Respondents felt relatively uncertain about their knowledge of prices for these services, but were for the most part unable to differentiate between accurate and inaccurate self-reports.
[ to cite ]:
Valarie A. Zeithaml and Karen L. Graham (1983) ,"The Accuracy of Reported Reference Prices For Professional Services", in NA - Advances in Consumer Research Volume 10, eds. Richard P. Bagozzi and Alice M. Tybout, Ann Abor, MI : Association for Consumer Research, Pages: 607-611.

Advances in Consumer Research Volume 10, 1983      Pages 607-611

THE ACCURACY OF REPORTED REFERENCE PRICES FOR PROFESSIONAL SERVICES

Valarie A. Zeithaml, Texas A&M University, College Station

Karen L. Graham, Texas A&M University, College Station

ABSTRACT -

A consumer's accumulated information about the price of a product or service forms an internal or standard price typically termed the reference price (Monroe 1973, Monroe and Petroshius 1980; Helson 1964). The accuracy of consumers' reported reference prices for professional services was investigated in the study reported here. Results indicate that reference prices for fifteen dental, medical, and legal services recalled by 311 respondents were largely inaccurate. Respondents felt relatively uncertain about their knowledge of prices for these services, but were for the most part unable to differentiate between accurate and inaccurate self-reports.

INTRODUCTION

An internal or standard price in memory that functions as a cognitive reference point for incoming price stimuli has been proposed and confirmed by research in psychology and marketing (Rosch 1975, Helson 1964, Monroe 1973). Adaptation-level theory (Helson 1964), for example, postulates that the meaning a consumer assigns to an incoming price stimulus depends upon the consumer's accumulated information stored in memory. The existence of an adaptation-level price or reference price, as the anchoring price is most frequently called, has been verified empirically in a number of studies (Alexis, Hanes and Simon 1968, Cooper 1970, Emery 1970, Kamen and Toman 1970. Monroe 1973. Uhl-1970).

The mechanisms by which consumers form reference prices are largely unspecified, but most research assumes that the anchoring price derives from experience with the product or from readily accessible information in the environment. The importance of experience with the product is reflected in the designations assigned by several researchers: "price normally paid" (Gabor and Granger 1970), "price last paid" (Uhl 1970), "price most frequently charged" (Olander 1970). Kamen and Toman (1970) operationalize the reference price as the "fair price," which suggests adequate knowledge to evaluate fairness. Finally, Monroe and Petroshius (1980) claim that the reference price need not be an actual price of a particular product but instead may be an average of the range of prices for similar products. All of these conceptualizations assume either experience with the product or the presence of information concerning prices.

Professional services are offerings for which price information is limited or inaccessible (Zeithaml 1982), especially prior to purchase. Prepurchase information is difficult to obtain because bans on professional advertising traditionally have prevented the communication of all service attributes, including price, through mass media sources. While advertising of prices is now permitted in some states for some services, professionals often resist its inclusion (see Upah and Uhr 1981). Pre-purchase information from sources other than mass media (e.g., calling doctors' offices or asking friends) can be obtained only at high search costs (Bloom 1977). Further, few professional services can be standardized and may vary from visit to visit depending on the extent of work that must be performed; consequently, standard prices may not exist and professionals may refuse to quote prices in advance even when consumers explicitly request such information. Finally, third-party payment mechanisms (e.g., medical or dental insurance) are often available for professional services, allowing price information to bypass the consumer completely.

In the purchase of professional services, where price information is limited or inaccessible, how do consumers obtain the data to form a reference price? How accurate are consumers' stored or inferred reference prices for professional services, especially when consumers make purchases for the first time? What are the implications of inaccuracy of reference prices for professional services? The research reported here attempts to investigate the accuracy and sources of reference prices for professional services recalled bs respondents who are relatively inexperienced with the services.

THEORETICAL BACKGROUND

A conceptual model which depicts the steps in the processing of price information, thereby offering a framework for discussion of reference prices, is illustrated in Figure 1 (Jacoby and Olson 1977). The model classifies consumer reactions to price into stages corresponding to cognitions (encoding of O-price and storage of P-price), affect (attitude toward P-price), and behavior (responses such as purchase). As represented in the schema, the consumer receives price input in a form isomorphic to the external stimulus, but may alter the information in the process of encoding it. The resultant interpretation of the external price stimulus by the organism is called the psychological price (P-price). The next step in the schema is storage of P-price, which represents the accumulated information about price stored in consumer memory, i.e., the reference price. Comparison of P-price with reference prices stored in memory results in attitude toward P-price. The final step in the processing sequence with-in the organism involves integration of P-price with other information, which leads ultimately to a response (e.g., purchase,non-purchase of the offering).

FIGURE 1

CONCEPTUAL SCHEMA FOR DISCUSSING CONSUMER REACTIONS TO PRICE (JACOBY AND OLSON 1977)

According to this schema and to adaptation-level theory (Helson 1964), a reference price is essential as an anchor point for interpreting incoming stimuli (in the encoding stage) and as a comparison mechanism for evaluation of prices (in the attitude-toward-P-price stage). The theory implies that some information is stored in memory for all products and services (if only the prices of similar products and services), yet the universality of the reference price construct has not been confirmed. While empirical evidence has verified the existence of reference prices for some products (Alexis, Haines, and Simon 1968, Cooper 1970, Emery 1970, Kamen and Toman 1973, Monroe 1973, Uhl 1970), Jacoby and Olson (1977) question the meaning and implications of these findings. They claim that the data do not provide unambiguous evidence that P-price is cognitively stored. The existence and accuracy of reference prices, especially for products with which consumers have no experience and no price information, is subject to question. Professional services, for which information on prices is limited and inaccessible, may be offerings for which reference prices do not exist and are difficult to infer. Among the unanswered questions, which are addressed in this research. are:

1. How accurate are the reference prices stored by consumers for professional services?

2. Do consumers know when their reference prices are inaccurate representations of reality?

3. From what sources do consumers obtain reference prices for professional services?

METHODOLOGY

The study reported here is an exploratory investigation of the accuracy of reference prices recalled by consumers for professional services. Although specific hypotheses could be framed to predict the answers to each of the research questions (see, for example, the hypotheses regarding prices in Zeithaml 1982), study on the topic may not be advanced enough to pose hypotheses and predict specific outcomes.

Data for the study were collected in a self-administered questionnaire which was divided into three parts. The first part listed five dental, five medical, and five legal services (see Table 1) which were selected based on their standardization and high frequency or purchase compared to other professional services. Respondents were asked to fill in a space ($___) following each of the services with the price they would expect to pay in the community where the survey was conducted. Displayed next to each of the spaces was a five-point certainty scale ranging from "very certain" to "very uncertain". Respondents were instructed to circle the number which represented how certain they felt about the accuracy of the price they quoted. The second section of the questionnaire contained an itemized rating scale which measured respondents' extent of purchase for each professional service. The final section included questions concerning demographic characteristics, existence of insurance for each service, extent of previous information search for the services, and the sources from which respondents obtain price information.

Sample

The original sample consisted of 352 senior undergraduate marketing students. Consumers inexperienced with the purchase of professional services were desired. Therefore, students were selected as respondents because they were less likely than other groups of consumers to have purchased and paid for professional services (due to dependence on campus health centers or payment by parents, and lack of previous need for some services, e.g., wills). Senior students were deemed appropriate because they would become consumers of dental, medical, and legal services within the next few years.

Measurement of Variables

Reference Price. While the concept of reference price is believed to represent accumulated price information in memory, the mechanisms involved in its formation are not yet fully understood. Measurement could have been 0 designed to capture the "price normally paid" (Gabor and Granger 1970), the "price last paid" (Uhl 1970) or the "price most frequently charged" (Olander 1970). However, these descriptions would have eliminated all respondents who had not made or paid for purchases in the past. Since inexperienced consumers were of primary interest in the study, the construct of reference price was captured by asking respondents the price they expected to pay for the service in the local community. Consumers' reference prices for the professional services were recorded as the prices quoted in the spaces following a description of each professional service. The prices quoted were believed to represent the respondents' accumulated or inferred information concern, the prices of the professional services.

Actual Price. In order to obtain measures o, accuracy for the respondents' reference prices, the real prices of each professional service in the community were required. Monroe and Petroshius (1980) point out that reference prices are not always actual prices of particular products, but instead may be averages of the ranges of prices for similar products. To obtain these averages for the study, all professionals in the community were telephoned and queried concerning the price they currently charge for each service. Responses concerning the actual prices of professional services were obtained from 14 doctors (87.5% of total general practitioners and internists in the community), from 28 dentists (81% of the dentists in the community), and from 52 lawyers (66% of the attorneys in the community). The average of the prices of all providers in each profession served as the measure of the actual price for each service.

Error in Reference Prices. The reference price for each respondent was subtracted from the actual price of each service to obtain a measure of respondent accuracy. Essentially, this variable represented the amount of money by which a respondent's reference price departed from the actual price of the service.

Percent of Error in Reference Prices. The percentage of error as a function of the actual price of the professional service was measured using the following formula:

Error =   |  Actual price - Reference price  |

              |               Actual price                 |

Calculation of this variable allowed examination of the magnitude of error in relation to the actual price.

Sources of Information. Consumers were asked the question, "How do you find out what a particular service costs?" for each of the three categories or professional services. Five sources were listed (see Table 3), followed by an "other" category which allowed subjects to indicate sources of information in addition to those typically cited by other research.

RESULTS AND DISCUSSION

Accuracy of Reference Prices

Data concerning the accuracy of the respondents' reference prices are shown in Tables I and 2. Actual prices and the means, standard deviations, and ranges for the reference prices are listed in Table 1, while error calculations, certainty scores, and correlations between error and certainty are shown in Table 2.

TABLE 1

REFERENCE PRICES FOR PROFESSIONAL SERVICES

Comparison of the actual prices with the mean reference prices provided by respondents indicates substantial differences in almost all of the fifteen services. The amount and direction of these differences are shown in the first column of Table 2. In half of the professional services, respondents' reference prices were higher than the actual prices. Observation of the percentage of the error as a function of actual prices (also in Table 2) reveals that the magnitude of error ranges from 6.74% (for braces) to 259.18% (for initial visit with a lawyer).

The standard deviations and ranges for subjects' reference prices demonstrate high variability. In some cases (e.g., four out of five legal services), the standard deviations exceeded the means, most often reflecting a number of extremely high (and inaccurate) prices reported by respondents. The minima and maxima for the services offer additional evidence of high variability. While several of the minimum and maximum reference prices appear to be outliers (e.g., $1 for an office visit or $0 for an initial visit to a lawyer), review of subject questionnaires provides explanations for most or the extremely low or extremely high prices. The $1 office visit, for example, was reported by a student with medical insurance; under many medical insurance plans, the cost to the individual is as low as $1. The no-cost first visit to a lawyer is also understandable: many lawyers now advertise a free consultation to overcome fears of high costs.

TABLE 2

ACCURACY AND CERTAINTY OF REFERENCE PRICES REPORTED BY RESPONDENTS

Two measurement problems, which could account for some of the error in respondents' reference prices, are important to note. First, some error exist in the accuracy of the actual prices used as standards in the study. The reference price reported by some respondents, for example, could be an accurate representation of the cost of a service from one physician but would contain some error when compared to the average price of all physicians in the community. Second, the nonstandardization of most professional services may have led to ambiguity regarding the exact nature of a service. While the services chosen for study were selected because they were standardized compared to other professional services, heterogeneity may still have existed in the services as envisioned by the respondents (e.g., regular check-ups with different degrees of thoroughness, different types of braces).

Certainty Concerning Accuracy of Reference Prices

For each reference price, subjects indicated the degree of certainty they felt regarding the accuracy of their estimate. Scores ranged from 1 (very certain) to 5 (very uncertain). Averages for certainty for each professional service are shown in Table 2, and reveal low to moderate certainty for most of the services. Overall, respondents reported less certainty for legal services than for other services. Each respondents's certainty score was correlated with the absolute value of the respondent's error (AP-RP) to measure the extent to which consumers were cognizant of the accuracy of their reference prices. In only four cases (braces, office visit, blood test, and pap smear) did significant correlations exist between certainty scores and error. In just one of those four cases (braces) a negative relationship between error and certainty surfaced (which means that errors either increased as certainty decreased or decreased as certainty increased.) In the other eight situations-, non-significant correlations existed between certainty a.,d error. These results offer evidence (albeit limited) that consumers could not differentiate between accurate and inaccurate self-reports.

Sources of Price Information

Sources of price information for the three categories of professional services are listed in Table 3 with the percentages of respondents who indicated that they used each source.

TABLE 3

PERCENTAGES OF RESPONDENTS WHO OBTAIN PRICE INFORMATION FOR PROFESSIONAL SERVICES FROM VARIOUS SOURCES

In dental and medical services, most respondents (51.5% for dental and 53.3% for medical services) waited until -they received bills from the professionals to find the costs or the services. The second most frequent source of price information involved calling the professional before the appointment (32.6% for dental and 30.1% for medical services). A small percentage of subjects used advertising or independent agencies as sources for price information.

Sources of price information for attorneys differed from sources for the other two professional services. The highest percentage of respondents (51.7%) claimed that they would call the professional before the appointment. Only 11.9% would wait to get the bill. While approximately one quarter of the respondents checked the "ocher" category, analysis of their responses reveals that most involved the non-use of legal services and consequent inability to pinpoint a source.

The absence or past experience with legal professionals may explain why different sources were used to obtain price information. Since most or the respondents had not used the services of an attorney in the past and since some evidence exists to suggests that non-usage or legal services is due in part to misconception of high fees (Bernacchi and Kono 1979), respondents may be so concerned about the price that they would not invest the time and energy to call. The high uncertainty about legal prices implicit in this explanation is supported both by the higher levels or uncertainty expressed for legal services and with the higher levels or error disclosed with legal services than with other services.

CONCLUSION

The study reported here offers evidence to suggest that consumers inexperienced with professional services do not store reference prices in memory which accurately reflect the real prices of these services. While respondents reported moderately high levels of uncertainty, they did not appear to be able to differentiate between accurate and inaccurate self-reports. The major information sources for these reference prices differed among services, but consisted primarily of waiting to receive the professional's bill or calling the professional's office.

FUTURE RESEARCH

Future studies should expand the sample of respondents to include consumers who are experienced in the purchase Of professional services. Using non-students as subjects would permit investigation of the relationship between demographic variables and accuracy of reference prices. In the current sample, age and income did not vary substantially because all subjects were students in a study with actual consumers, these variables may help explain some of the difference in accuracy of recall. Similarly, the effects of third-party payment systems and extent of experience with services could be better incorporated with the use of experienced subjects.

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