A Plan For Consumer Information System Development, Implementation and Evaluation

ABSTRACT - The idea of consumer information systems for local services has not truly been implemented. Complete implementation in the U.S. could lead to benefits of $100 billion annually. This paper, based on an NSF-sponsored project at Stanford University, presents a plan for widespread development, implementation and evaluation of such systems.

Citation:

Donald A. Dunn and Michael L. Ray (1980) ,"A Plan For Consumer Information System Development, Implementation and Evaluation", in NA - Advances in Consumer Research Volume 07, eds. Jerry C. Olson, Ann Abor, MI : Association for Consumer Research, Pages: 250-254.

Advances in Consumer Research Volume 7, 1980     Pages 250-254

A PLAN FOR CONSUMER INFORMATION SYSTEM DEVELOPMENT, IMPLEMENTATION AND EVALUATION

Donald A. Dunn, Stanford University

Michael L. Ray, Stanford University

[The authors gratefully acknowledge the contributions of their co-workers, Gabriel Biehal, Mary Ann Kriewall, Dingo Lucena, Panayotis Stoucas, Richard Urso, and Richard Zackon, as well as the helpful suggestions of George Brosseau of NSF and members of our advisory committee, Roy Alper, Joan Z. Bernstein, John M. Richardson, Mary K. Ryan, and Robert W. Pratt. The Stanford study of consumer information systems was supported by the National Science Foundation Grant No. APR 75-23685. Preparation of this paper was facilitated by a grant from The Quaker Oats Company to the Graduate School of Business, Stanford University.]

ABSTRACT -

The idea of consumer information systems for local services has not truly been implemented. Complete implementation in the U.S. could lead to benefits of $100 billion annually. This paper, based on an NSF-sponsored project at Stanford University, presents a plan for widespread development, implementation and evaluation of such systems.

INTRODUCTION

The basic concept of improving the operation of markets through the provision of better information to consumers is at least as old as Consumers Union, which was founded in 1936. Consumers Union has built a successful, self-supporting information service that provides both general information and comparative ratings on nationally advertised products and some other items of general interest to consumers. The question posed here is, can this concept be extended to local services, such as retail sales, auto repair, medical care, and real estate? If a financially self-sustaining service were to be developed, what would its effects be on local service markets?

These are the questions which drove a several year study of the potential of local consumer information systems which was conducted at Stanford with the support of the National Science Foundation.

Our tentative answers to these questions are as follows. The concept can be extended to local services, but it will not he easy. It has not yet been done in a systematic or comprehensive way. The concept should be developed if possible, because the benefits to consumers and to the economy are likely to be favorable and large, of the order of a hundred billion dollars per year (Dunn and Ray, 1979). The costs should be a small fraction of the benefits, because only a small fraction of consumers need to be given improved information in order to induce providers to lower prices or improve the quality of their service. Non-users as well as users of the information service will benefit from the operation of the service.

The Information Avoidance Phenomenon

We conducted a survey of consumer organizations that might offer services to consumers that would include pre-purchase information in the form of comparative ratings of local service providers, similar to those of Consumers Union on manufactured products. Out of 600 listed organizations, we found 15 active local consumer information services in the U.S. in 1977, but only about half of these provided any pre-purchase information and only a few of these provided a regular systematic coverage of any local service market. None provided a comprehensive service covering a range of local services. It is evident that, if it were easy to provide such a service on a financially self-supporting basis, there would be far more operating services of this type than there are today. Similar results have been reported by the Thorelli's (1977).

The basic concept from economic theory that consumers are made "as well off as they can be" through the operation of a competitive market only has validity if consumers have perfect information with respect to both prices and the quality characteristics of the services being provided. The contrast between perfect information with respect to what a consumer needs to know to make a good decision in choosing local services and the information that is presently available in the market is extreme. In such areas as auto repair, medical services, and legal services the consumer usually confronts the need for a decision at a time of crisis. The costs and terms of the purchase are often vague and not resolved until after the choice as to which provider to use has been made.

Comparative information regarding costs, honesty and competency of local service providers is usually totally lacking. In this type of situation, when a consumer is offered information that might be of assistance, the consumer often rejects it, perhaps on the assumption that it will be too technical to understand. Choices with respect to major service decisions are made infrequently and little learning by individual consumers can take place. Thus, very little information processing takes place in many of these situations, even though the decisions being made may be very important ones. A majority of consumers in these cases can better be characterized as "information avoiders" than as "information seekers" (Ray & Dunn, 1978). Perhaps this pattern of information avoidance is rational, in complex markets with very little trustworthy information available. But whether it is rational or not, we should not expect to find a large, eager group of consumers waiting to purchase information with respect to local services as soon as it is put on the market. Perhaps the market for information will grow when it is found that useful information can be acquired, but as an initial assumption, it seems reasonable to project a startup market for a consumer information service in the range of only one to ten percent of the local consumers who would be potential users of the service. Therefore, the consumer information service should, in our opinion, be designed to serve, and to break even financially serving, the small group of information seekers in any market. The much larger group of information avoiders may also be served indirectly by such a service, as will be explained below, but cannot be expected to become users. This business strategy is exactly the strategy followed by Consumers Union which has as subscribers less than one percent of American consumers. In our study of various specific markets, we have found that there are information seekers in every market. In most markets information seekers tend to be near the upper end of the national income distribution; they have a high value of time and are accustomed to pay for services that save them time. In the auto repair market, information seekers are likely to be patrons of an auto diagnostic service, if one is available. In the health field, information seekers are likely to go outside the medical establishment for information on nutrition, exercise, and various self-help medical aids. The design of a consumer information service should take into account these aspects of information seeker behavior.

Three Types of Information Need

The types of information that a consumer normally wants and needs are closely related to the three levels of information need that seem to be common to any type of decision making: (1) problem recognition; (2) search for alternatives; (3) choice and implementation of decision. After the decision has been made, the consumer may want assistance with complaints. At the problem recognition stage, the consumer needs to be alerted to the characteristics to look for in a service and ways of getting information about a service. In searching for alternatives, the consumer needs comparative information on alternative sources of service, presented in a way that facilitates comparison. Honesty and competency are obviously key characteristics of any provider. At the choice and implementation stage, the consumer needs information on business practices and assistance in actually making a purchase.

Two Broad Sources of Information

Consumer information services can acquire information in two fundamentally different ways. First, tests and experiments can be performed to acquire a sample of a service provider's honesty and competency. For example, test vehicles known to be in excellent condition except for a loose wire on the distributor have been taken to a number of auto repair shops in tests of this type. Some shops make no charge for reconnecting the wire. Others run up bills for hundreds of dollars.

Second, the accumulated experience of consumers can be sampled and the results of the sample analyzed and combined to present a picture of consumers' opinions about honesty, competency, price and other characteristics of a local service provider. Maynes, Morgan, Vivian, and Duncan (1977) have proposed a design for a system of this type using telephone interviews. A properly conducted sample of this type avoids the bias inherent in a com-plaint-oriented system, because it samples satisfied users as well as dissatisfied users. However, this approach has the limitation that it can only learn what consumers know from their own experience. In some cases, the knowledge gained by experts through tests or other investigations would also be extremely helpful. In most cases the two approaches can provide useful complementary data. Consumers Union now uses consumer opinion surveys to supplement its test data in some cases. A consumer information service can expect to obtain useful information from its customers who use recommended service providers and report back their experience to the information service.

Business and Economic Effects

Once the information has been acquired, a consumer information service encounters the usual difficulty of all information service providers in recovering the costs of information creation from users. Once the information is made available to some users, copies can be made and either resold Or shared with other users. The price charged per user by the information service cannot therefore exceed the cost of sharing by very much. Of course, copyright law is intended to encourage the creation of information products by protecting the provider from large-scale resale competition. But copyright protection is limited and has a negligible effect on sharing.

A variety of delivery techniques are available, ranging from magazines or newsletters to computer data bases and cable television. For many users and many classes of information, a magazine or newsletter like Consumer Reports, combined with a book that summarizes and classifies past data by subject matter, like the annual Consumers Union buying guide, provides an adequate delivery system. However, some users need, and are willing to pay for, a personalized consultation on their information needs on major purchases like real estate. Consultants may want and be willing to pay for access to continuously updated computer data bases. Telephone-based consulting could probably be provided at a fairly modest cost per inquiry, such as $5, for a simple request for information.

Once an information service is in operation, it can be expected to have two effects. First, it will provide benefits to its users, both in the form of savings of time formerly used in search and as a result of obtaining the best price/quality combination available in the market. Consumers Union has sometimes been criticized for not reaching a larger cross-section of American consumers; most of its subscribers are in the upper-middle income range. While it would, of course, be desirable to have a broader spectrum of income groups among its subscribers, this criticism ignores the second (and most important) effect of a consumer information service, its effect on provider behavior in the market. In our view, this second effect is likely to produce consumer benefits much greater than the direct benefits conferred on subscribers. A provider, faced with a low quality rating or a report that its prices are above those of other providers in a consumer information service, is quite likely to alter its price and/or quality to bring it in line with the market, even though the number of information service subscribers represents only a small percentage of the consumers in the market. One reason for such a response is the potential danger that a provider's poor performance will become news and reach a much wider audience than the information service users.

An example of the effect of comparative rating information on provider behavior is presented by a shopping guide to banking services in the San Francisco area prepared by Consumer Action, a San Francisco consumer group (1976). This shopping guide was sold for $3 as a booklet, and it was available in both bookstores and magazine stands. The banking industry purchased a number of booklets, and one of the low rated banks changed its practices in response to the booklet, benefiting all of its customers. For whatever reason, the market is likely to respond to an information service report, and the resulting price and quality variances will be smaller than before.

Even more significant is the potential role of a consumer information service in increasing innovation in the local service market. For example, new products and services that receive favorable ratings can experience a growth rate far in excess of normal, because of the trust that subscribers have in the information service. Consumer Reports sometimes rates the product of a new small firm a best buy and causes the small firm to become established much more rapidly than would be the case in the ordinary course of events. Thus, the market can both respond more rapidly to new products and act to eliminate overpriced and poor quality providers more effectively in the presence of an information service than without it. The market's behavior in this case benefits both subscribers and non-subscribers, and if subscribers represent only a few percent of the consumers, it is evident that the benefits to non-subscribers far outweigh the benefits to subscribers.

This favorable result has only one negative aspect. If the market is functioning well, as a result of the operation of the information service, the incentive to subscribe to the service is reduced. Consumers can receive the benefits without paying the price of a subscription. If the service went out of business, market practices would then become less competitive, and eventually a new information service could enter the market and obtain enough subscribers to survive. This prospect of working itself out of a job is a problem that should be faced by any information service initially, and a business plan should be developed that takes this possibility into account. In our opinion, there are business strategies that can be adopted that will protect a consumer information service in this situation. The basic concept that underlies a sound strategy is simply diversification, i.e., the provision of information regarding a wide range of local markets rather than a single market. Diversification can work, both because of the substantial and different time delays for different markets to adjust and because of the different kinds of provider responses to be expected in different local service markets. Local service markets differ widely, both in market structure and in the nature of the services offered. The role of consumer information in these markets may also vary widely, which suggests that a careful study of each type of service market is an appropriate first step in the design of an information service for that market.

A PLAN FOR A LOCAL CONSUMER INFORMATION SYSTEM

Some suggestions for overcoming the obstacles to establishment of viable local consumer information systems have already been mentioned. The service should provide information on a diverse set of markets so that there are always markets with true information needs. A clear segmenting strategy should be used which concentrates effort on the information-seeking segment of each market. These and other suggestions are offered in the plan described in the following paragraphs.

Viable System Characteristics

In order for a local consumer information system to be viable it should provide information on all three of the levels of consumer information need mentioned earlier--general orienting information, information on alternatives and personal diagnostic information which relates to the ultimate choice.

It should provide information on local services, including information relevant to important consumer decisions, such as the choice of a community and the choice of home. It should adopt a business strategy that makes the consumer information service financially self-supporting, so that it can be independent, impartial, and responsive to consumer needs. It should seek to serve the information seeker segment of the market directly, and it should adopt policies, such as diversification, that will enable it to cover the costs of serving this group of consumers over the long term. By serving the information seekers, it will indirectly serve other consumers by causing local service providers to lower their prices, improve the quality of their services and introduce innovative new services.

Starting the System: Real Estate

There are three major decisions that an organization seeking to start a local consumer information service has to make in order to get started. First, what specific markets should be served initially? Second, on how large a scale should the information service be established initially? Third, for how long a period should the service be able to operate at a loss? We assume that the long-term objective of a new service would be to come as close as possible to the ideal information service described above.

There are many options open to the service with respect to the markets to be served initially. The organizers will, of course, wish to make use of their own specialized knowledge of the community and of any specific markets in which they have experience. Our suggestion here is simply that the most conservative choice, the market most likely to provide a strong financial base for future operation, is real estate. In the long run, the safest course of action is diversification. But it doesn't make sense to start in too many markets at once. Real estate is our preferred start-up choice, because there is no question about consumers' willingness to pay for information in this market. Uncertainties about the demand for a service of the type of interest here are much fewer in this field than in any other, because the private sector is now providing information in this market on a profit-making basis. The only disadvantage of starting in real estate is competition from existing brokers, but even here there is a special situation that favors the introduction of a new consumer-oriented service, at least at the present, and this is a result of the artificially high commissions that are maintained by the present brokerage industry. Very little real estate is presently sold by brokers at fees below the "standard" percentage (6 percent of the sales price in California and a number of other states, Owen 1977).

In California, the broker charges 6 percent of the sales price as a commission, and there are additional title search and transfer costs. The average home now sells for over $50,000, so an average fee of over $3,000 per sale is obtained (Moffit, 1978). From the point of view of the average consumer who is a house or condominium owner-purchaser, a move that takes place every three years requires an average fee of about $1,000 per year.

It is this $1,000 or more per year that is already being spent by consumers for information on real estate that we believe could form the core funding of a consumer information service. Because real estate is now a large, profitable information service market, it is served by the private sector, and entering this market will require that the new service become an effective competitor. We believe that the real estate market can be entered successfully by a new consumer organization, and our proposed strategy is as follows.

The real estate sales market can be described as a two-segment market. Most sales are made through brokers. But a substantial fraction of the contacts between buyers and sellers is made through direct advertising by sellers or buyers, without the services of a broker. In any such market the split of the market between direct sales and the use of brokers is an important factor affecting the choice of a seller or buyer as to which way to handle a sale or purchase. If the market is dominated by brokers, as it is in real estate, most sellers will see it to their advantage to use a broker, because most buyers will be contacting brokers and hence be reached most easily through brokers. If the market is dominated by direct advertising by sellers, as it is in the job market, only a minority of sellers will use brokers.

An important information service that has developed in the real estate brokerage field is the "multiple listing service", a listing of real property for sale in a given area that is contributed to by all the brokers in the area. Brokers are willing to let other brokers know of the properties they have available, because the commission obtained by any broker that sells a piece of property must be split with the broker who contributed the listing. A broker who does not have access to this service is almost totally unable to compete with brokers who have access. This service is usually organized by the local real estate brokers association. It is believed that it is only made available to brokers that maintain the established percentage rate for commissions (Owen, 1977). Thus, a broker who seeks to do price-cutting to attract customers will be denied access to the service. The use of the service by a listing broker implies that half of the standard fee is expected from any other broker that sells the listed property (Owen, 1977).

A crucial first decision for a new consumer information service operating in the real estate market is whether to operate within the existing real estate brokerage system, using the multiple listing service and maintaining standard commission rates, or to attempt to seek out a different segment Of the real estate market. There may be excellent reasons for getting started as a regular broker charging standard fees and only later considering a less orthodox strategy. Nevertheless, there is a valid additional option that we believe should be considered, and that is to go after the market segment in the real estate market that is not now using brokers, i.e. sellers who are seeking to sell their homes through direct advertising. The essential requirement for a successful service of this type is the development of an independent listing service that lists sellers who are not using regular brokers. If the consumer information system offers a useful service to sellers who are seeking to sell their own properties and does it at a lower fee than regular brokers, these independent sellers will subscribe, because of the possibility of finding a buyer in this way. Similarly, buyers seeking to find properties without paying the full broker's fee will be attracted to the system, given proper advertising. Thus, the consumer system will be offering sellers a supplement to newspaper advertising as a means of contacting buyers, and the cost of this service could be much below the standard broker's fee. There is at least a good possibility that a system operating in this mode could quickly capture a substantial segment of the market. The segment captured must be sufficient in size to provide enough listings to make the service of interest to buyers and thus, in turn, to sellers.

Whichever option is chosen for its fee policy, a consumer information system has a good chance to compete effectively with conventional brokers in the long term, because it will be able to offer valuable supplementary services. In the long run, the consumer system should be able to establish a national network and to provide national coverage of both neighborhoods and jobs. National coverage is now available from some large conventional brokers, but again the consumer service should be able to achieve a competitive advantage through its diversity of complementary services.

The specific details of the consumer service's fee policy could take several forms, if it chooses to operate outside the regular broker system. Percentage fees, even if much lower than the Standard percentage, cannot accurately reflect costs. One option is to charge by the hour for optional services, such as showing properties. Close connections with local attorneys and title insurance firms should help the consumer system offer its customers a complete service, if desired.

Initial Requirements

The major requirements for entering this field are enough capital and a management team with sufficient capability and experience, just as is the case for any business. A rough estimate is that an absolute minimum starting capital is that required to cover the cost of operating an office, the salary of one person with a real estate broker's license, and the salary of one assistant for a period of about six months, which turns out to be a sum in the range from $30,000 to $50,000. In addition, capital would be needed as a legal defense fund on a contingency basis. Perhaps $20,000 would be adequate for this purpose. If salaries were contributed initially, a start could be made with as little as about $50,000.

In addition to the straight brokerage functions that would be the most important activity during the first year, we believe a significant effort should go into starting a publication, probably a newsletter, and establishing ties with the consumer community. An established consumer group would, presumably, already have this part of the project in operation. In our opinion, the new information system should emphasize not only its alignment with the consumer's interests and its independence of business interests, but also high quality and the professional character of its service.

POLICY IMPLICATIONS

Our principal conclusion from this study is that our society should make a serious effort to develop successful local consumer information services. The real estate and job markets are the segments of the market for local information services that are most profitable and they are occupied by the private sector. But the rest of the local information service market is not likely to be as profitable, especially if developed apart from the real estate market. Therefore, we cannot say that such services will evolve without any further action. How then should our society proceed, if it is to encourage the development of such information services?

We believe that it would be counterproductive for government to seek to provide local consumer information services. Since a government-operated service is bound to be ineffective in the long run, because of, its political inability to make comparative ratings of private firms, any attempt to start such a service will simply compete with consumer groups or private firms seeking to enter this market and possibly forestall or delay the eventual entry of a successful non-governmental provider.

In our opinion, the most positive step that government can take is to provide grants to existing organizations that are already providing some parts of the complete ideal local consumer information service package. Such grants should be designed to assist these organizations to extend their services to new markets and new services and to evaluate and redesign existing service programs. We believe this type of grant should receive first priority, because any organization that has already solved some of the startup problems and has some form of comparative rating service in operation has demonstrated its ability to perform in a difficult environment.

As there will only be a few such organizations seeking grants, a second step should be to provide a reasonable number of grants to organizations seeking to establish altogether new local information services.

A third category of governmental action that could contribute to the development of this type of activity would be support of research into consumer-oriented innovation in both local service delivery and local consumer information services. In order to assure that such research is actually consumer-oriented, it would be appropriate to see that proposals for such research be reviewed by consumer group representatives and given ratings on this aspect of the research. Much of the most important research in this field, in our opinion, will be of a type that questions the validity of existing arrangements for the delivery of local services. For example, most professional association restrictions concerning advertising, fees, and commissions are designed to limit price competition in the profession. A consumer information service might provide a way of introducing price competition into a local professional market where none now exists. Studies of information services of this type will not be favored by members of the profession but would be favored by consumer group representatives.

In many fields of research, proposed studies are uniformly oriented toward understanding the existing system. For example, consumer information processing research provides a major part of our present understanding of consumers' use of information. But very little research in this field has been directed to non-laboratory situations in which consumers have access to a source of comparative ratings of services or products as would be the case if a consumer information service were in operation. More research that relates to situations in which consumers can obtain unbiased comparative information could be of great value in designing information services to provide comparative rating information services. Thus, for example, consumer information processing research in the setting of an automobile or medical diagnostic service (Biehal, 1978),in which a particular way of providing comparative ratings to consumers is used would be much more relevant than a study of consumer information processing in a commercial advertising setting or in some generalized situation not involving the use of comparative ratings. Development and applied research coupled closely to experiments in the field with particular techniques for providing a local information service should, in our opinion, receive the bulk of the funding in this area, in order to encourage the rapid establishment of successful systems that can be copied.

The policy implications of this work for non-governmental organizations are, with one exception, much the same as for government. The priority for research and development is the same. The real issue is funding. We believe a case can be made for existing local consumer organizations using some of their efforts and limited funds to expand into this field. We believe that there is also an opportunity for foundations and national consumer organizations to obtain highly significant results in this field from modest levels of funding. Some steps have already been taken. For example, Consumers Union and other foundations have contributed funding to an information service of this type in the Washington, D.C. area that is now in operation (Krughoff, 1979). Present federal and state funds in this area are negligible, so an opportunity exists to provide seed money for local consumer organizations to do the planning and preparatory work that is needed before any major development work can begin. A certain amount of learning is required on all sides, in order for this field to develop successfully. The most important first step in this learning process is the preparation of detailed plans by local groups that can bring their years of experience to bear on this problem. One unique contribution that private foundations and national consumer organizations could make to this field would be to create a national legal defense fund or legal insurance service for local information services. While our legal analysis has indicated that consumer information systems would not be legally responsible for honest mistakes in comparative ratings (if it takes reasonable care to avoid errors), even unwarranted legal attack has been known to destroy systems. If local producers and producer associations find that local consumer information services cannot be put out of business by exhausting their capital in lawsuits, consumer information services will only have to protect themselves against legal actions with real substance. A national legal defense fund or insurance service could provide the necessary resources to protect local information services against unwarranted legal attacks.

We hope that the ideas presented here will stimulate further activities in this area and will encourage local consumer groups to develop information services that are designed to be self-supporting and to provide the type of information that is so badly needed in local markets today.

REFERENCES

Biehal, Gabriel J. (1978), "The Effects of Prior Information and Information Search Costs on External and Internal Information Search Behavior," Ph.D. Dissertation and Technical Report No. 63, Stanford, California: Graduate School of Business, Stanford University.

Dunn, Donald A. and Ray, Michael L. (1979), "Local Consumer Information Services," Report No. 16, Program in Information Policy, Stanford Engineering-Economic Systems Department, Stanford University.

Krughoff, Robert (1979), Washington Consumer Checkbook, Washington, D.C.: Center for the Study of Services.

Maynes, E. Scott; Morgan, James N.; Vivian, Weston; and Duncan, Greg J. (Summer 1977), "The Local Consumer Information System: An Institution to Be?", J. Consumer Affairs, 11, 17-33.

Moffit, Donald (November 27, 1978), "Your Money Matters," Wall Street Journal.

Owen, Bruce M. (1977), "Kickbacks, Specialization, Price Fixing, and Efficiency in Residential Real Estate Markets,'' Stanford Law Review, 29, 931-967.

Ray, Michael L. and Dunn, Donald A. (1978), "Local Consumer Information Systems for Services: The Market for Information and its Effects on the Market," in The Effect of Information on Consumer and Market Behavior, Mitchell, A. A., ed., Chicago: American Marketing Association.

San Francisco Consumer Action (1976), Break the Banks, A Shopper's Guide to Banking Services, San Francisco: San Francisco Consumer Action.

Thorelli, Hans B. and Thorelli, Sarah V. (1977), Consumer Information Systems and Consumer Policy, Cambridge, Massachusetts: Ballinger.

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