Incorporating Perceived Risk Into Models of Consumer Deal Assessment and Purchase Intent

ABSTRACT - This paper attempts to integrate two streams of pricing research dealing with perceived risk and assessments of "the deal" within the context of an expanded model based on the Dodds and Monroe (1985) model of perceived value. A sample of 245 consumers recorded their assessments of the value of the deal offered in a print advertisement, the perceived risk associated with the purchase, and their purchase intentions. The results indicate support for the basic expanded model.

Citation:

Charles M. Wood and Lisa K. Scheer (1996) ,"Incorporating Perceived Risk Into Models of Consumer Deal Assessment and Purchase Intent", in NA - Advances in Consumer Research Volume 23, eds. Kim P. Corfman and John G. Lynch Jr., Provo, UT : Association for Consumer Research, Pages: 399-404.

Advances in Consumer Research Volume 23, 1996      Pages 399-404

INCORPORATING PERCEIVED RISK INTO MODELS OF CONSUMER DEAL ASSESSMENT AND PURCHASE INTENT

Charles M. Wood, University of Missouri-Columbia

Lisa K. Scheer, University of Missouri-Columbia

ABSTRACT -

This paper attempts to integrate two streams of pricing research dealing with perceived risk and assessments of "the deal" within the context of an expanded model based on the Dodds and Monroe (1985) model of perceived value. A sample of 245 consumers recorded their assessments of the value of the deal offered in a print advertisement, the perceived risk associated with the purchase, and their purchase intentions. The results indicate support for the basic expanded model.

INTRODUCTION

The marketing literature on pricing has been developing for over 20 years, beginning with Monroe's (1973) classic piece which established price as an important focus for both marketing practice and research. Since that time, much effort has been put into understanding consumer perceptions and response to pricing in a variety of contexts (e.g. Berkowitz and Walton 1980; Della Bitta, Monroe, and McGinnis 1981; Shimp and Bearden 1982; Burton and Lichtenstein 1988; Urbany, Bearden, and Weilbaker 1988; Mobley, Bearden, and Teel 1988; Lichtenstein, Burton, and Karson 1991; Grewal, Gotlieb, and Marmorstein 1994). This paper integrates two streams of pricing research regarding perceived risk and assessments of "the deal" within the context of the Dodds and Monroe (1985) model of perceived value. It also attempts to bring coherence to the numerous measures currently being used in pricing research. Finally, it offers a model for future testing and research.

THEORY

Model and Relationship to Previous Research

Much effort has been placed in the marketing literature on defining, measuring, and predicting consumer assessment of marketing communications. Dodds and Monroe (1985) propose a model of consumer evaluation of price, perceived quality, and perceived value. They suggest that consumer willingness to buy is affected by perceived value, and that perceived value is affected by both perceived quality and perceived monetary sacrifice. This model can be viewed, however, as including specific examples of broader concepts. We take a broader view in which perceived value results from an assessment of the tradeoff between: 1) the benefits the consumer receives in the deal at hand (one of which is product quality); and 2) the costs the consumer incurs to obtain those benefits (one of which is perceived monetary sacrifice). This perspective of benefits versus costs could potentially encompass many aspects relevant to the consumer evaluation process. Figure 1 depicts a general model of perceived value and purchase intention, an enhancement of the original Dodds and Monroe (1985) model. An examination of previous pricing studies suggests several possible "expected benefits" and "expected costs."

Various potential benefits could be examined, such as perceived quality (Dodds and Monroe 1985). Other benefits previously examined include product features (Wheatly, Walton, and Chiu 1977) and "desirability" (Berkowitz and Walton 1980). All of these benefits are part of the overall product evaluation the consumer makes; in this study we examine overall product evaluation.

There are also a variety of potential costs, both tangible and intangible, that are associated with a product purchase. As for tangible costs, one could adopt the Dodds and Monroe (1985) approach and measure perceived monetary sacrifice, that is, the amount that must be paid to acquire the product. Alternatively, we chose to examine the monetary outlay relative to expectations, that is, the actual selling price minus the expected selling price. Prospect theory (Kahneman and Tversky 1979) argues that consumer evaluation and buying behavior could be impacted greatly by the extent to which the ultimate monetary outlay differs from the expected basis point. In addition, the work on perceived risk in marketing (Shimp and Bearden 1982; Grewal, Gotlieb, and Marmorstein 1994) suggests that a consumer forms perceptions regarding the intangible costs such as "psychic costs" in the form of anxiety, frustration, downtime, etc. as well as the performance and financial risk associated with a given product-price deal. Unlike the price, which is known with certainty and immediately paid, risk represents an uncertain, probabilistic potential future financial outlay. We therefore propose to examine how a broad expected benefit, product evaluation, and three cost factors C the monetary outlay relative to expectations, performance risk, and financial risk C affect consumer evaluation of the deal and likelihood of purchasing the product.

Measures

A variety of measures have addressed aspects regarding the assessment of the deal. However, there seems to be no consensus on the proper measures to use, and some scales appear to be measuring the same underlying construct. Numerous studies have examined how various presentations of price and product information impact consumer assessments of value and attitude toward the deal. For example, scales assessing the value of a deal have been used by a number of researchers under a number of names: "Value for the Money" (Berkowitz and Walton 1980); "Value of the Offer" (Della Bitta, Monroe, and McGinnis 1981); "Perceived Value of the Deal" (Burton and Lichtenstein 1988; Lichtenstein, Burton, and Karson 1991); "Perceived Offer Value" (Urbany, Bearden, and Weilbaker 1988; Mobley, Bearden, and Teel 1988). Other measures focusing on consumer attitude regarding an advertised offer have also been developed: "Perceived Savings" (Berkowitz and Walton 1980); "Attitude toward the Deal" (Burton and Lichtenstein 1988; Lichtenstein, Burton, and Karson 1991). The measures developed by Burton and Lichtenstein (1988) make a distinction between the cognitive and the affective dimensions of attitude toward the deal. We propose that these various scales all tap the same underlying construct: Overall evaluation of the deal. Thus, we include Evaluation of the deal in our model, and examine its effect on the consumers' reported purchase intention. The selected measures were not intended to encompass the entire set of constructs relevant to deal evaluation, but to build upon prior research and to sift and clarify the predominant measures previously used in pricing research. (See Appendix).

To summarize, our hypothesized model operationalizes specific examples of concepts drawn from the general model of perceived value and purchase intention. It integrates two streams of research in risk and consumer value assessment, incorporating the effects of product evaluation, performance risk, financial risk, and monetary outlay relative to expectations on evaluation of the deal and, ultimately, on purchase intent.

FIGURE 1

GENERAL MODEL OF PERCEIVED VALUE AND PURCHASE INTENTION

METHOD

Sample

Two hundred and forty-five consumers were recruited in a midwestern community for the study. In an effort to achieve a representative sample, the consumers were selected from several community, civic, and church groups representing a variety of ages, incomes, occupations, and levels of education. Each participant answered a series of questions after viewing a mock print advertisement for a television. Seventeen evaluative measures focussing on evaluation of the deal (items measuring both value assessment and attitude toward the deal), product evaluation, perceived performance risk, perceived financial risk, and purchase intention were drawn from previous scales and used in the questionnaire. (See Appendix for a list of measures used).

Prior to seeing the complete advertisement, participants were shown a picture of the television as it would appear in the advertisement, but without any price information. They were then asked to provide their estimate of the selling price of the television. After they completed this task, they were shown the advertisement with the pricing information and were asked to assess the deal using 17 scaled items. Five items measured "Value of the deal," four assessed "Attitude toward the deal," two concerned performance risk, two measured financial risk, three comprised the product evaluation measure, and one purchase intent item was used. In keeping with the majority of the existing measures, 7-point bipolar scales were used. As discussed earlier, "monetary outlay relative to expectations" was calculated as the difference between the actual selling price and the expected selling price.

Scale Creation

Exploratory factor analysis was performed on all variables in the model except for the single-item Purchase Intention dependent variable in order to examine convergent validity and discriminant validity among the four constructs of product evaluation, performance risk, financial risk, and overall evaluation of the deal. Squared multiple correlations were used as initial communality estimates, an iterated principal components method was used (SAS: Method=Prinit), and oblique rotations were performed due to the probable correlations between the factors. As discussed earlier, our measures were combinations of items from existing scales for the four constructs. We therefore expected to extract four factors: one related to evaluation of the deal; one reflecting product evaluation; and two others representing perceived performance risk and perceived financial risk. The analysis revealed three factors which were clearly interpretable: Evaluation of the deal; Perceived Risk; and Product evaluation.

We expected an item assessing the attractiveness of the product features to load with the product evaluation measures, but it loaded on the deal evaluation factor. This may have been due to confusion regarding the understanding of the phrasing of the question. Participants may have been thinking of the features of the offer, the advertisement, or the product features. We expected the item "This is a poor value..." to load with the deal evaluation measures, but it loaded most heavily on the product evaluation factor. Participants may have been thinking more about product quality as they assessed the offer considering the money that would have to be spent. Interestingly, an item directly assessing product quality loaded weakly (below 0.4) on all three factors, indicating that it may be measuring a construct distinct from those extracted. In our sample at least, product quality and product desirability appear to be distinct constructs. Product desirability seems to have a more proximal impact on evaluation of the deal as it involves an evaluation of the product based on a numerous contextual factors (e.g. price, quality, motivation) through the prism of the consumer's own orientation. This is consistent with the work of Lichtenstein, Ridgway, and Netemeyer (1993) who demonstrated that individual orientations can affect responses to advertised offers. For example, if a low-price conscious consumer views a high quality product, they are likely to associate it with a high price and view the product as undesirable. On the other hand, a prestige-oriented consumer would find a high price-high quality item as highly desirable. These individual differences in consumer perception of quality and price are also in agreement with the ideas set forth by Monroe and Krishnan (1985). For the above reasons, these three items were deleted from further analysis.

As shown in Table 1, the results of the subsequent factor analysis revealed three factors which represented Deal Evaluation, Perceived Risk, and Product Desirability. As expected, the first factor effectively combined the previous measures of value assessments and attitude toward the deal. The second factor combined the performance and financial risk items. This differs from Grewal, Gotlieb, and Marmorstein (1994) who, using a confirmatory factor analysis, established discrimination between the two constructs. We will combine these two risk elements into one scale for our purposes. The results also reveal that a single-item of product desirability discriminates from both the deal evaluation and the perceived risk factors. It also appeared as distinct from the quality measures. The reliability of the multi-item scales was assessed using Cronbach's alpha. The scales, the items that comprise the scales, and their corresponding alphas are reported in Table 1.

TABLE 1

FACTOR PATTERN

RESULTS

Research Model Examined

The factor analyses led us to slightly modify our original constructs to reflect the results and insights. The revised model that we established and set out to test is shown in Figure 2. Measures were developed for each construct based on the factor analyses. Product desirability was represented by a single item, perceived risk was measured by four items, monetary outlay relative to expectations was calculated as discussed earlier, evaluation of the deal was measured with eight items, and purchase intention was measured with a single item (Likelihood to buy).

Model Assessment

In order to demonstrate the mediating effect of Deal Evaluation on Purchase Intention, the procedures described in Baron and Kenny (1986) were followed. The procedure sets forth the following steps to test for mediation: 1) regress the mediator on the independent variable(s); 2) regress the dependent variable on the independent variable(s); and 3) regress the dependent variable on both the independent variable(s) and on the mediator. To establish mediation, the following conditions must hold: the independent variable(s) must affect the mediator in the first equation; the independent variable(s) must be shown to affect the dependent variable in the second equation; and the mediator must affect the dependent variable in the third equation. If these conditions all hold in the predicted direction, then the effect of the independent variable(s) on the dependent variable must be less in the third equation than in the second. Perfect mediation holds if the independent variable(s) has no effect when the mediator is controlled. Using the terms of Baron and Kenny, Evaluation of the deal is the hypothesized mediator in our model, Purchase intention is the dependent variable, and Product Desirability, Perceived Risk, and Monetary outlay relative to expectations are independent variables.

Three versions of the model were analyzed by multiple regression and their R-squares compared in order to determine the best model:

(1) Evaluation of the Deal = f (Product Desirability, Perceived Risk, Monetary outlay relative to expectations)

(2) Likely to Buy = f (Product Desirability, Perceived Risk, Monetary outlay relative to expectations)

(3) Likely to Buy = f (Product Desirability, Perceived Risk, Monetary outlay relative to expectations, Evaluation of the Deal)

The results of these analyses are reported in Table 2.

The results reveal that the three conditions set forth for mediation in Baron and Kenny (1986) are met: 1) the independent variables all affect the mediator (Evaluation of the deal) in the first equation; 2) Product desirability and Perceived risk affect Purchase intention in the second equation (Monetary outlay relative to expectations has no effect); and 3) Evaluation of the deal affects the dependent variable in the third equation. For the Product desirability construct, perfect mediation occurs through Evaluation of the deal since its effect on Purchase intention in equation 2 is significant and it is not significant in equation 3. It also appears from a comparison of the coefficients in Table 2 that Perceived risk has a powerful effect on both Evaluation of the deal and Purchase intention. In addition, Monetary outlay relative to expectations has no unique effect on Purchase intention directly or through Evaluation of the deal, but it does have a strong effect on Evaluation of the deal. Purchase intention is apparently driven by the perceived risk associated with the purchase as well as the overall cost/benefit tradeoff represented by Overall deal evaluation. These findings are depicted in Figure 3. This tentative, revised model is presented here for future testing and verification.

FIGURE 2

SPECIFIC RESEARCH MODEL TESTED

TABLE 2

CONTRIBUTIONS, LIMITATIONS, AND FUTURE RESEARCH

The results of the analyses make several important contributions to research in pricing. We offer a general model expanding the framework established by Dodds and Monroe (1985). The perceived risk literature and the value assessment literature are integrated in this model. A more consistent measure of deal evaluation is offered which combines various pricing measures previously examined in a piecemeal manner. Finally, the broadened general model is tested using the measures developed.

This study lends support to the basic framework proposed by Dodds and Monroe (1985), yet provides the basis for a broader conceptualization of the tradeoffs involved in consumer evaluations of deals. This broader, more general model extends the Dodds and Monroe (1985) model by incorporating the tradeoff between costs and benefits inherent in a value assessment. In this case, the risks and monetary outlay relative to expectations associated with a purchase are evaluated alongside the beneficial, desirable qualities of the product.

Future research should keep the following limitations of this study in mind. Although actual consumers were used in the sample, the data were collected in an experimental setting. Other researchers have used field studies to examine consumer price perceptions. Three of our product evaluation variables loaded unexpectedly in the factor analysis, reducing our evaluation of product desirability to a single item. Future research should attempt to develop a multi-item measure of product desirability to encompass perceived quality, consumer motivation, and individual orientations consistent with Lichtenstein, Ridgway, and Netemeyer (1993).

It is also possible that the performance risk and financial risk constructs impact this framework at different points. For example, perceived performance risk may be a determinant of product desirability as well as potential costs, while perceived financial risk may play a more important role in whether or not positive Evaluations of the deal are translated into actual Purchase intentions. Since we did not achieve discrimination between these two constructs, we could not examine these issues; future research could address these possibilities.

FIGURE 3

DEPICTION OF RESULTS

This study also has relevance to practitioners interested in achieving favorable consumer evaluations of advertised offers. By incorporating the notion of perceived risk and demonstrating its importance to consumers not only in the deal evaluation stage, but also in the purchase intention stage, this study offers insight into the importance of communicating information to consumers that allays their concerns about performance risk and financial risk (information about product quality, warranties, and money-back guarantees).

APPENDIX

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