2. an Exploratory Study of Divided Pricing Effects on Financial Service Quality Expectations

8/6/2019 2. an Exploratory Study of Divided Pricing Effects on Financial Service Quality Expectations

http://slidepdf.com/reader/full/2-an-exploratory-study-of-divided-pricing-effects-on-financial-service-quality 1/13www.palgrave-journals.com/fsm/

© 2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 1, 19–31

Correspondence: Hooman Estelami

Graduate School of Business, Fordham University, 113 West

60th Street, New York, NY 10023, USA

INTRODUCTIONThe practice of breaking down the price of

an offer into sub-components is often

referred to as divided or multi-dimensional

pricing.1,2 In this practice, instead of charging

Original Article

An exploratory study of divided

pricing effects on financial servicequality expectationsReceived (in revised form): 6th February 2010

Hooman Estelamiis professor of marketing at the Graduate School of Business, Fordham University. His research has been published in journals such as

the Journal of Financial Services Marketing , Journal of Retailing , Journal of the Academy of Marketing Science , International Journal

of Research in Marketing , Journal of Business Research , Journal of Product and Brand Management , Journal of Services Marketing ,

Journal of Service Research and elsewhere. He is the author of the two books: Marketing Financial Services and Marketing Turnarounds ,

and has advised numerous financial institutions in the United States on target marketing, pricing and service enhancement practices.

Peter De Maeyer

is an assistant professor of marketing at Singapore Management University. Before this appointment he was an assistant professor ofMarketing at Georgetown University. He has an MSc in Electrical Engineering from the University of Ghent (Belgium), an MBA from

Helsinki School of Economics, and a PhD in marketing from Columbia University. His work experience includes internal consulting for

Neste Oy, a Finnish oil and chemicals group, and management consulting with the Monitor Group. His research has been published in

journals such as Journal of Retailing , Journal of Service Research , Journal of Consumer Satisfaction / Dissatisfaction and Complaining

Behavior , and Journal of Business Research .

ABSTRACT Financial services are often provided to consumers over an extended period

of time. In pricing these services, financial services marketers have the ability to charge

lump-sum amounts in advance, of the time period during which the service will be

provided, or to divide their prices into a sequence of payments extended over the length

of the service agreement. Consumer perceptions of the offer and their subsequent

expectations regarding service quality may be affected by the marketer’s choice of divided

or lump-sum pricing. Service quality expectations may be further affected by the reputation

of the financial services provider and the risk associated with the financial transaction.

The goal of this article is to explore the perceptual effects of divided versus lump-sum

pricing, and potential interactions that may exist with company reputation and financial

service risk. Using an experimental design, the results indicate that divided pricing has

varying effects on consumer expectations of service quality, depending on firm reputation

and the underlying risk associated with the financial service. The article concludes with

a discussion of the findings and implications for practitioners and researchers.

Journal of Financial Services Marketing (2010) 15, 19–31. doi:10.1057/fsm.2010.4

Keywords: pricing; financial service; firm reputation


http://slidepdf.com/reader/full/2-an-exploratory-study-of-divided-pricing-effects-on-financial-service-quality 2/13


Estelami and De Maeyer

consumers a single price, the price is charged

as a series of payments. For example, the

price of an automobile may be charged as

either a lump-sum amount or divided into a

stream of monthly payments. Similarly, an

insurance policy may be sold based on a

yearly premium or the price may be splitinto a sequence of monthly, quarterly or

bi-annual payments spread over the length

of the insurance contract.

Research in marketing has examined the

variety of cognitive effects that occur because

of dividing the price into multiple payments.

Such prices can become more difficult for

consumers to evaluate3 resulting in lower

levels of price sensitivity and shifting

consumer choice.4 Although these effects

have been extensively studied in the contextof goods, in the domain of services, and

specifically financial services, they are less

understood. Nevertheless, financial services

represent an area in which divided pricing is

widely used, and is likely to increase in usage

in the coming years. The potential growth in

the use of divided prices in financial services

is largely attributed to the growing levels of

consumer hardship because of distressed

economic times, consumer desire for more

flexibility in handling their financial lives5

and competitive pressure in the marketplace.These conditions make flexible offers, such as

those facilitated by divided prices more

attractive to consumers, and necessitate a

closer examination of the topic.

Although the dividing of financial services

prices may improve price perceptions, the

effects on other critical constructs, such as

perceptions of the quality of the service

being offered, may follow a different path.

Financial services are often associated with

different levels of risk and some – such asinsurance and investment products – are

largely centered on issues of risk

management. These products often pass on

financial risk from the consumer to the

financial institution through some form of

contractual obligation. In such cases,

perceptions of the quality of an offer may

be affected, not only by the company’s

choice of pricing but also by the reputation

of the company. The goal of this article is

therefore to examine consumer service

quality expectations resulting from the use of

divided prices. The effects of firm reputation

and financial service risk will also beexamined, utilizing a systematic experimental

design. We will first discuss the theoretical

foundation for the effects of these factors on

consumer perceptions. The results of an

empirical study will then be presented. The

article will conclude with a discussion of the

findings and implications for managers and

future research.

LITERATURE REVIEW

Early research in pricing for both goods andservices largely viewed price as a one-

dimensional construct. Price was, for the

most part, considered to be a single number

to which consumers responded.6 Research

following this traditional view of pricing has,

for many years, examined the effects of

variations in prices on consumers’ perceptions

and their behavioral responses. Such

examination has probed consumers’ responses

to changes in price endings,7 their

perceptions of specific discounting tactics,8

the effects of price variations on qualityinferences,9 and price-based comparison

shopping and information search behavior.10

Furthermore, research has studied how

consumers respond to changes in prices

compared to past sequences of observed

prices,11 and how bundling practices can

influence these price perceptions.12

Although the view of price as a single

number has practical appeal from a research

perspective, it often over-simplifies the

realities of the marketplace. The practicalcomplexities of pricing goods and services,

and the consumer desire for more flexibility

in pricing have, over the years, given rise to

the use of complex, multi-dimensional forms

of price.1,4 Therefore, instead of pricing a

product using a single number (for example,

US$200), prices can often also be presented



© 2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 1, 19–31 21

Exploratory study of divided pricing effects on financial service quality expectations

to consumers in more complex divided

forms consisting of multiple dimensions (for

example, $20 a month for 10 months). This

increased complexity in price presentation

challenges consumers’ ability to comprehend

prices and introduces new cognitive

phenomenon in how offers may beperceived.

The use of multi-dimensional pricing

and the dividing of price into multiple

components can, for example, considerably

increase the amount of information

processing that the human brain must

undertake in order to evaluate an offer. This

increased load is created because of the effort

necessary to process numeric information and

to conduct the mental arithmetic required to

evaluate the lump-sum value of the offer.The effect is further influenced by the nature

of computations required such that prices

that require arithmetic operations, such as

multiplication, are significantly more difficult

to evaluate than those that require more

basic arithmetic functions, such as addition.

One direct result of dividing the price into

multiple payments is a decline in consumer

ability to evaluate the price offers because

of its increased complexity and the need to

conduct mental arithmetic. A second effect

of this practice is that it encouragesconsumers to focus only on a subset of the

presented price information (for example,

monthly payments) rather than the entirety

of the information related to the offer, and

to focus less on other diagnostic aspects of

offer, such as the number of payments,

penalties, balloon payments, and so on. As

a result, consumers tend not to undertake the

elaborate sequence of computations needed

to accurately evaluate the offer when the

price is divided and communicated inthe form of multiple payments. Furthermore,

research has shown that complicating the

presentation format of the individual

components of the price, for example by

using difficult-to-process numbers (for

example, $16.83 versus $20), which inhibit

mental computations can prevent consumers

from objectively processing the price

information.13 Corroborating this, research

in mental arithmetic has demonstrated that

the increased cognitive load because of

complications introduced to computational

tasks can raise physiological stress levels as

measured by the rate of oxygen consumptionand heart rate, and provide a psychophysical

barrier for consumers to engage in price

evaluations.14 The effects are further

influenced by the level of salience of the

dimensions of the price2 and the form of

price promotion offer.

DIVIDED PRICING EFFECTS INFINANCIAL SERVICESAlthough past research on multi-dimensional

and divided prices practices hints at thepotential for such prices to confuse

consumers, they are widely used in many

financial and non-financial markets. This

may partially be attributed to the fact that

dividing the price into separate components

can introduce conveniences to consumers’

experiences and may become a source of

attraction for the offers being presented to

them.1,5 In addition, although past research

has focused on consumers’ ability to

understand complex price information and

the resulting price perceptions, research has,for the most part, not examined quality

perceptions and expectations that may result

from complicating the price. This is

especially important in financial services

as quality is often a non-tangible feature,

which consumers cannot readily observe.

Consumers’ use of price as a source of

speculation on financial service quality, in

combination with the wide use of divided

prices in financial services signifies the

importance of examining non-price effectsof multi-dimensional pricing in financial

services.

Effects on perceptions ofoffer flexibilityThe dividing of prices into multiple

payments allows consumers to make





payments over an extended period of time,

instead of making a lump-sum payment.

This benefit is of importance to consumers

for a variety of reasons. One reason is the

potential lack of consumer access to the

funds in order to pay for the product or

service in advance of receiving it. This canbe an especially critical issue in cases where

the lump-sum amount is large and consumers

can use the flexibility offered by dividing the

payments.15 The dividing of the payments

allows consumers to blend the expenditure

associated with the service with their

monthly spending and avoid the financial

shocks of making a large upfront payment.

The dividing of payments is highly

relevant in the context of financial services

because financial services are provided toconsumers over an extended period of time.

A financial service is rarely provided as a

one-shot transaction and often the service

benefits are provided over the length of

the service contract.16 For example, an

insurance policy is valid for a finite length

of time (for example, 6 months, 1 year, 20

years) and a home mortgage has a specific

maturation date. As a result, divided prices

allow the consumer to access the financial

service (for example, gaining access to

insurance coverage for six months) ina way that matches the payment cycles

(for example, bi-annual premiums paid for

insurance coverage). This enables the

consumers to match their consumption

patterns of a given financial service to

short-term (for example, monthly, quarterly,

yearly) budgets, and thereby simplifies their

household budgeting process.

The dividing of financial services prices

into multiple payments not only provides

consumers with greater flexibility, as outlinedabove, but also can reduce risks perceived

by the consumer to be associated with a

financial services provider. The failure of a

financial institution can have dramatic effects

on its customers. For example, the financial

collapse of an investment or deposit-taking

institution could easily place its customers in

a state of distress, and compromise their

financial stability. Research indicates that the

increased occurrence of failures by financial

institutions in banking, insurance and

investment markets, in recent years, has hurt

public confidence in the financial services

sector.17 Such failures place the consumer atgreat risk in case the service provider to

which they subscribe fails on a large scale, or

is in such a dire financial situation that it can

no longer provide the same quality of service

to its customers. For example, a policyholder

for a property and casualty insurance policy

whose insurance underwriter goes out of

business may not only lose coverage, but

may also have to undertake considerable

search effort to find a new insurer. In this

process, not only will the consumers have toactively seek out new coverage, but they

may not be provided with immediate refund

for the premiums paid to the failing

company. In such cases, divided payments

enable the consumer to reduce such risks

by matching consumption (for example,

monthly insurance coverage) to payments

(for example, monthly premiums).

The matching of consumption timing to

payment cycles reduces consumers’ risks both

from a practical perspective and perceptually.

By dividing the lump-sum payments intomultiple payments, a financial institution is

providing its customers with a greater sense

of financial security in case it fails to function

properly. This benefit not only reduces

consumers’ hesitations about engaging in

the transaction, but can also signal a greater

confidence by the management of the

company in its operations, and convey a

sense of security, stability and quality in the

firm. It is therefore expected that in the case

of financial services, the perception of qualityof the service will improve with the dividing

of the price into multiple payments, rather

than charging a lump-sum amount.

Firm reputation effectsThe reputation of a firm has been shown to

significantly affect consumers’ perceptions of





service quality, even in circumstances in

which the objective level of quality is

equivalent between a reputable firm and an

unknown one.18 This is because firm

reputation serves as an information cue in

consumer decision making. Research

indicates that in situations in whichconsumers are unable to judge quality

objectively, are overwhelmed with

information, or where the nature of the

product or service makes it difficult to

observe tangible measures of quality,

consumers rely on a subset of the available

information to form an assessment of the

quality of the offer.19 This process, referred

to as cue utilization, reflects the human

desire to simplify decision making, and make

the most out of the available subset of information that is perceived to be diagnostic.

Cue utilization has been extensively

documented in consumer studies related to

country-of-origin effects, whereby consumers

perceive products manufactured in specific

countries to be of higher quality.20 Cue

utilization has also been observed in price

perception studies in which higher priced

offers, despite representing higher degrees of

financial sacrifice, may be perceived by many

consumers as representing higher quality

products. Similar to country-of-origin andprice, firm reputation can serve as a cue

for evaluating a financial services offer. The

use of this cue is very relevant in financial

services because research indicates that

consumers typically navigate toward

better-known and familiar companies and

shy away from unknown financial services

providers, especially in cases in which the

financial service involves risk – such as

insurance and investments. Furthermore,

Adaptation-level Theory21

suggests that cuessuch as brand name or firm reputation can

raise consumers’ standards and expectations

for service quality, with subsequent effects

on their satisfaction levels. It is therefore

possible that consumers will expect offers

from reputable financial services providers to

be of higher levels of service quality.

Interaction of reputation and priceAlthough the direct effects of firm reputation

on service quality expectations can be

established based on a long stream of past

research, the nature of this relationship may

vary as function of the form of pricing used

to present the offer. Since, as discussedearlier, the dividing of price into smaller

payments reduces consumer risk by spreading

the payments across the length of time

during which a service is provided, this may

be perceived as a more beneficial offer in

cases in which the financial services provider

is unknown to the consumer. The risk

reduction benefit gained by divided pricing

is of more value in this case, versus a case in

which the financial services provider is

reputable. In contrast, a financial institutionwith an unrecognized name or unknown

reputation presents more risks to the

consumer, and the dividing of the price into

multiple payments reduces such perceptions

of risk.

Furthermore, well-established reputable

financial services providers typically exercise

a great deal of market power, and by doing

so can be more demanding, and less willing

to demonstrate flexibility in their interactions

with consumers. Recent consumer surveys in

the United States banking sector point outthat, as banking institutions grow in size

because of consolidation and competitive

elimination, the large well-recognized

institutions may choose to reduce their level

of customer care, because of their increased

share of local markets and a reduced sense

of urgency to compete for customers.22 This

form of localized monopoly power may be

expected to result in lower degrees of

marketing flexibility and customer care, and,

from a pricing perspective, consumers mayexpect and tolerate reputable financial

institutions to exercise such power by being

less flexible in their pricing structures. As a

result, lump-sum offers may be perceived as

more acceptable for reputable institutions

than those financial institutions with

unrecognized names.





Effect of product risk The relationship between firm reputation,

price format and service quality expectations

may be further influenced by the level of

risk associated with a given financial service.

Risk is an inherent characteristic of most

financial offers. Many financial servicespromise consumers to reduce their risks for

a pre-specified period of time. Insurance

products, for example, financially protect

consumers against defined categories of losses

during the period for which the insurance

policy is valid. However, the transfer of risk

from the consumer to the insurer is not

guaranteed and the consumer may still bear

certain levels of risk. This risk could be

a result of financial failure (and potential

bankruptcy) of the insurer, or the insurer ’slack of willingness to honor its promised

benefits if a claim is filed. In fact, research

indicates that such concerns over the fair

transfer of risk are among the leading

reservations that the consumers express about

the intentions and ethics of insurers,23

especially in categories in which the potential

for filing a claim or the associated financial

losses may be great (for example, health

insurance, property and casualty insurance).

Nevertheless, the degree to which a

financial service bears risk can considerablyvary across the range of financial services

available in the marketplace. Although

financial services such as insurance and

warranty products are heavily focused on

risk management, other services such as

financial information exchange, transaction

processing and deposit-taking present much

lower levels of risk for both the consumer

and the financial institution. Therefore, when

divided pricing is used, it is likely that its risk

reduction benefits will be of lesser relevancein categories in which a lower level of risk is

perceived by the consumer to exist in the

financial service. In contrast, where a

financial service has greater perceived risks,

consumers may gravitate toward divided

prices because poor service and other failures

by the financial services provider can be

partially offset by the potential to terminate

the divided payments, thereby reducing the

monetary commitment that the consumer

may have toward an ill-functioning financial

services provider.

RESEARCH QUESTIONSThe objective of this article is to investigate

the following questions:

1. Do consumers expect financial services

offered using divided prices to be of

higher service quality than those that

require lump-sum payments?

2. Does the difference in service quality

expectations between service providers

using divided prices versus those using

lump-sum prices vary as a function of the reputation of the company?

3. Are the above relationships affected by

the risk characteristics of the financial

service?

METHODOLOGYIn order to explore the effects outlined

above, an experiment, utilizing a between-

subject design, was conducted. Subjects

were recruited through intercept surveysconducted in three public areas in

northeastern United States. Consistent with

earlier research in services marketing, each

subject was provided with a written

description of a financial services offer.

Across the subjects, the descriptions

systematically varied in the experimental

conditions, and subsequent questions asked

from each subject provided the dependent

measures for analysis. The descriptions

provided to the subjects explained to theman offer that is being made by a financial

institution. Subjects were then asked to rate

their expectations for the quality of service

of the financial services provider using

multi-item scales. The descriptions provided

to the subjects varied in order to examine

the effects of the various factors under





examination. A full-factorial orientation of

the following factors was used:

(i) Financial service category risk was

manipulated at two levels. In the high-

risk category, the financial service offer

was a one-year warranty for a laptopcomputer. In the low-risk condition,

the financial service was the online

access to a financial newsletter. Pre-tests

with graduate business students had

established significant differences

between these two services with respect

to service category risk, which was

further validated by the manipulation

tests used in the main study.

(ii) Price format was manipulated at three

levels. In the lump-sum condition,subjects were provided with the price

for the financial service as a one-time

yearly payment of $24. In the divided

format, the same dollar amount was

split into 12 monthly payments of $2.

An additional divided pricing

condition was added (monthly

payments of $2.50) in order to account

for possible discounting effects that

might explain consumer preference for

delayed payments (this condition will

be referred to as ‘divided-plus’ in therest of the article).

(iii) Firm reputation was manipulated at

two levels. In the well-known

reputation condition, the financial

services provider was described to have

been ‘an established company with

many years of history and a well-

recognized name’. In the unknown

reputation condition, the financial

services provider was described as ‘a

recently established company whosename is not widely known by the

public’. Pre-tests with graduate business

students and subsequent manipulation

checks in the main experiment validated

the use of this manipulation for firm

reputation, which is also consistent with

prior research.

The resulting experimental design consisted

of 12 (3×2×2) between subject cells. A total

of 252 subjects were recruited through

intercept interviews in three shopping malls

and public areas in northeastern United

States and compensated with a souvenir key

chain for their participation. Subjectassignment to each cell of the between-

subject design was done randomly. Following

the description of the scenario, each subject

was asked to provide responses to a series of

measures, using 1-to-7 Likert rating scales

(with 1 = ‘Strongly Disagree’, and

7 = ‘Strongly Agree’), which measured service

quality expectations and price perceptions.

Service quality expectations were measured

using three items: ‘I expect this (financial

newsletter /product warranty) to be of goodquality’, ‘The services provided by the

company offering this (financial newsletter /

warranty) are likely to be satisfactory to

customers’ and ‘The (information provided

by the financial newsletter /service offered

by the warranty) is reliable’. These items

were drawn from earlier studies on service

quality, and had been pre-tested on a sample

of 18 graduate business students, before field

administration. To measure price perceptions,

the following questions were asked: ‘The

price being offered is reasonable’, ‘The offer being made provides good value for the

money’, ‘I am likely to find lower prices for

this service elsewhere’ (reversed) and ‘This is

a very competitive price’. These items

were based on earlier research in pricing

and pre-tested on a convenience sample of

18 graduate business students before field

administration. The coefficient alpha for

service quality expectations was 0.92 and for

price perceptions was 0.89, indicating a high

level of measurement reliability. For eachmulti-item scale, the averages of the measures

were used to quantify the scale.

Manipulation checks at the end of the task

ensured subjects’ understanding of the three

factors being manipulated. The manipulation

checks examined the subject’s understating of

the financial service, the format of the price





offer and the reputation of the company

that had been described in the scenario.

Three questions were included at the end

of the experimental task to test the subjects’

understanding of the conditions specific to

the experimental cell to which they were

assigned. Only subjects for whom all threemanipulations were valid were included

in the analysis. Of the original sample of

252 respondents, 23 failed in one or more

of the manipulation checks, resulting in a

final sample of 229 subjects. Cell sizes ranged

from 17 to 22 subjects.

RESULTSIn order to determine the individual and

combined effects of the independent variables

on the two dependent variables, Analysis of Variance (ANOVA) was used. First, an

ANOVA was run with price perceptions

as the dependent variable, and the three

independent variables and their two-way

and three-way interactions as the predictors.

The resulting ANOVA was found to be

statistically significant (F 11,217= 7.93;

P < 0.01). Consistent with the discussions

presented, price perceptions improve as a

result of divided pricing. The average price

perception rating in situations in which the

price is quoted as a lump-sum amount is3.45. This figure increases when the price is

divided (mean = 4.31), even in the condition

in which the total amount of the divided

payments is increased to account for the time

value of money (mean = 4.19; F 2,217= 3.59;

P < 0.05).

Similar results are observed with respect

to company reputation. The average price

perception rating for a company with a low

level of reputation is 3.65. This figure

improves to an average of 4.3 for a reputablecompany. This shift is indicative of the

perceived benefits and peace of mind that

consumers may find in dealing with a

reputable company (F 1,217= 4.36; P < 0.05),

and is a result consistent with prior research

on the value of brands and the role of

established brands in reducing consumers’

perceptions of transaction risk and increasing

their views of the value gained in transacting

with the company. Figure 1 provides a

factorial plot of the price perception measure

across the various experimental cells. As can

be seen, the patterns of response are similar

for both high-risk (warranty) and low-risk(financial newsletter) product scenarios, and

the remaining predictors and interactions do

not exhibit statistical significance (all P -values

in excess of 0.1).

To examine the effects of the predictors

on service quality expectations, an additional

ANOVA was run. Using service quality

expectations as the dependent variable, and

the three manipulated factors of product risk,

price format and company reputation, as well

as their two-way and three-way interactionsas predictors, an ANOVA was run. The

ANOVA is significant at the P < 0.01 level

(F 11,217= 7.41). To visually observe the

effects of the predictors on service quality

perceptions, factorial plots were then

produced and are shown in Figure 2.

As can be seen, company reputation has

a positive impact on service quality

expectations. Consistent with prior research

findings, a high-reputation service provider

has higher levels of service quality

expectations associated with it.24 The averageservice quality expectation for a company

with a high reputation is 4.76, and this

figure drops to 3.74 in the case of low

reputation. Furthermore, this shift is evident

in both high-risk and low-risk scenarios and

is statistically significant (F 1,217= 5.37;

P < 0.01).

In addition, the price format seems to

influence service quality expectations. When

the price is quoted as a lump-sum amount,

the average service quality expectation islower. The average service quality

expectation measure for all scenarios in

which the price is presented as a lump-sum

is 3.81, compared to 4.52 where the price

is divided into multiple payments, or 4.46

where the divided payments are boosted in

order to compensate for the time value of





money. This difference, which is statisticallysignificant (F 2,217= 3.82; P < 0.05), indicates

that consumers may have reservations about

service providers that require upfront lump-

sum payments, and have more faith in those

that spread their prices over the life of the

service. The spreading of these payments

through divided prices can be perceived by

consumers as a means to motivate a service

provider to continuously deliver on its

promise of quality service, thereby increasing

consumers’ service quality expectations.As shown in Figure 2b, the relationship

between price format and company

reputation may be more complex in

scenarios in which the product risk is high.

In these conditions, consumers may find

added security in having the price divided

into multiple payments, especially when the

service provider has a low reputation. Thelow reputation of a service provider may

create the context, whereby divided prices

are viewed as means for finding added

security in transacting with the company.

However, this perceived benefit may no

longer be relevant when the company

has a high reputation, and results in the

fanning effects shown in the factorial plot

of Figure 2b. This effect is found to be

statistically significant, as indicated by the

significance of the two-way interactionbetween price format and reputation

(F 2,217= 4.18; P < 0.01). Furthermore, as is

evident in Figure 2a, such a relationship does

not seem to be significant for a low-risk

product (newsletter). Under these conditions,

the lower risk of the transaction may make

the relative variations in the benefits gained

2

2.5

3

3.5

4

4.5

5

5.5

6

HighLowReputation

HighLowReputation

P r i c e P e r c e p t i o n

Lump Sum

Divided

Divided-plus

Lump Sum

Divided

Divided-plus

2

2.5

3

3.5

4

4.5

5

5.5

6

P r i c e P e r c e

p t i o n

Figure 1: Factorial plot of price perceptions. (a ) Newsletter (low-risk) and (b ) Warranty (high risk).





by divided pricing across high- versus low-

risk products irrelevant, because consumers

are not faced with great risk and do not

need to seek security through the dividing of

the price into multiple payments. This shift

in the role that price format plays in affecting

service quality expectations was found to be

statistically significant in the three-way

interaction between price format, product

risk and company reputation (F 2,217= 3.38;

P < 0.05).

DISCUSSION OF THE RESULTSThe results of this study indicate that

company reputation has a significant effect

on both price perceptions and service quality

expectations. This result is consistent with

earlier research in services marketing and

highlights the value of brand-building

strategies, and the significance of pursuing

and protecting a positive company

reputation. Furthermore, the results indicate

that in a financial services setting, the

dividing of prices into separate payments

stretched over the length of the service

engagement can influence consumers’

expectations of service quality. Dividing the

payments over an extended time was found

to be associated with higher levels of anticipated service quality. This effect was

found to be especially evident when the

financial service is of a risky nature and

the company providing it does not have a

well-recognized name. This is an important

finding for smaller players in the financial

services marketplace, who may lack large

2

2.5

3

3.5

4

4.5

5

5.5

6

HighLowReputation

HighLowReputation

S e r v i c e Q u a

l i t y E x p e c t a t i o n s

Lump Sum

Divided

Divided-plus

Lump Sum

Divided

Divided-plus

2

2.5

3

3.5

4

4.5

5

5.5

6

S e r v i c e Q u a l i t y E x p e c t a t i o n s

Figure 2: Factorial plot of service quality expectations. (a ) Newsletter (low risk) and (b ) Warranty (high risk).





advertising budgets and whose brand name

and company identity may not be well

established in consumers’ minds.

It is important to acknowledge that the

results presented are primarily applicable to

the empirical setting presented to the subjects

and influenced by the constraints of thesampling approach used. Use of a broader

probabilistic national sample may show

results that vary from those obtained from

the convenience sampling method by which

subjects were recruited. Furthermore, the

context of the experiment engaged the

subjects in one of two forms of financial

services. The results may vary if a broader

range of financial services were tested. The

price level of the experimental stimuli might

also affect the results, and larger financialcommitments may magnify or reduce some

of the effects observed in this study. Future

research could therefore examine the

relationships established in this study, for a

broader range of financial services that may

be more demanding of consumers’ spending

budgets, such as property and casualty

insurance, investment advisory services, and

credit products. Furthermore, consumer

response to divided prices is likely to vary as

a result of the interest rates implied when a

lump-sum price is divided into smaller periodically charged prices, where the sum

of the payments exceeds the lump-sum.

Although the ‘divided-plus’ condition in

the experiment was designed to account for

such possibility, variations in the implied

interest rate evident in different periodic

payments associated with divide pricing,

can be examined. Surely at some point,

consumers may opt to shy away from

divided prices if the implied interest in such

offers is excessive, as research in behavioraldecision theory has long established that the

magnitude of the monetary amount of such

time-delayed payments can predictably shift

decision maker preferences. The effects of

variations in the implied interest rate on

consumer perceptions can, therefore, provide

further avenues for research on the topic.

MANAGERIAL IMPLICATIONSThe results of the study reported highlight

the significance of pricing practices in

affecting consumers’ perceptions and

expectations. These perceptions, which guide

market interest in the offerings of a financial

services provider, can have a profound effectin consumer engagements with the company,

with subsequent effects on transaction

outcomes, firm profitability and market

share. Dividing the price of a financial

service into multiple payments can raise

consumers’ expectations of service quality

by providing them with the assurance that

payments for services received will be spread

over the course of service delivery, thereby

providing the financial services provider with

an incentive to perform well. This paymentpattern also reduces the financial risks of the

transaction for the consumer, when a

financial services provider fails to deliver on

its promises. It is noteworthy that, although

the contractual nature of certain financial

services transactions may obligate customers

to make all the required payments over the

course of the service, the dividing of the

payments may create the (mis)perception of

security in the consumer ’s mind and cause

positive inferences regarding service quality.

Dividing financial services payments alsohelps consumers cope with their constrained

short-term spending budgets. Therefore, for

example, instead of spending hundreds of

dollars on a lump-sum payment for an

insurance product, they may be able to

spread these payments over a longer time

period, with each payment being a fraction

of the lump-sum commitment. The

flexibility facilitated through such a payment

approach is of great importance during

distressed economic times when consumersnot only need to find security in their

dealings with financial services providers, but

also because of their own financial constraints

lack the ability to make large lump-sum

payments.

One of the strategic concerns arising from

dividing payments in a financial services





setting is the rising expectations that may be

created with respect to service quality, which

may eventually backfire if the company fails

to deliver quality service. Customer

satisfaction research and the expectancy

disconfirmation models have long established

the harmful effects when customer expectations are raised beyond levels at

which a company can deliver. Therefore,

the overall long-term strategic impact of this

pricing approach needs to be closely

scrutinized before deployment.

FUTURE RESEARCHResearch in this area is ripe for new studies.

The impact that consumer-friendly pricing

methods can have on customers, especially infinancial services settings, is largely

unexamined. How these pricing practices

interact with fundamental company

characteristics, such as the types of financial

services provided to the public, the nature

of the industry and the context in which

such services are provided is even a less

studied area of research, which can have

many practical implications for financial

institutions. Future research can, therefore,

extend this work by examining a broader

range of financial services, and introducecontext-specific variables into the analysis.

Furthermore, the effects of consumer

characteristics, both from a demographic and

a psychographic perspective can be studied.

The effects of price as well as contextual and

consumer-specific variables on dependent

variables other than those measured in this

study can also be further examined. For

example, the effects on consumers’ long-term

loyalty toward a financial services provider,

their word-of-mouth endorsements and their responsiveness to cross-selling efforts by the

financial services provider can open fruitful

avenues for future research. These studies

may provide further results on the long-term

perceptual effects that may arise in

consumers’ minds from various pricing

approaches.

ACKNOWLEDGEMENTThe authors acknowledge the financial

support of Singapore Management University

Faculty Research Fund and the Fordham

University Graduate School of Business

Research Grant Fund.

REFERENCES1 Estelami, H. (2008) Reflections and emerging

perspectives on the strategic implications of a multi-

dimensional pricing environment. In: S. Rothenberger

and F. Siems (eds.) Pricing Perspectives . London:

Springer .

2 Kim, H. and Kachersky, L. (2006) Dimensions of price

salience: A conceptual framework for perceptions of

multi-dimensional prices. Journal of Product and Brand

Management 15(2): 139 – 147.

3 Estelami, H. (1999) The computational effect of price

ending in multi-dimensional price advertising. Journal of

Product and Brand Management 8(3): 244 – 256.4 Morwitz, V.G., Greenleaf , E.A. and Johnson, E. J. (1998)

Divide and prosper: Consumers’ reaction so partitioned

prices. Journal of Marketing Research 35(November):

453 – 463.

5 Niemi, J., Ramsay, I. and Whitford, W. (2009) Consumer

Credit, Debt and Bankruptcy: Comparative and International

Perspectives . London: Hart Publishing.

6 Monroe, K.B. (2003) Pricing: Making Profitable Decisions ,

3rd edn. New York, NY: McGraw-Hill Publishing.

7 Guido, G. and Peluso, A. (2004) Consumers’ perception

of odd-ending prices with the introduction of the

Euro. Journal of Product and Brand Management 13(3):

200 – 210.

8 Lichtenstein, D.R., Burton, S. and Karson, E. J. (1991)

The effect of semantic cues on consumer perceptions of reference price ads. Journal of Consumer Research

18(December): 380 – 391.

9 Dodds, W.B., Monroe, K.B. and Grewal, D. (1991)

Effects of price, brand, and store information on buyers’

perceptions of product quality and value. Journal of

Marketing Research 28(3): 307 – 319.

10 Urbany, J.E., Bearden, W.O, Kaicker , A. and Borrero,

M.S. (1997) Transaction utility effects when quality is

uncertain. Journal of the Academy of Marketing Science 25(1):

45 – 55.

11 Monroe, K.B. and Lee, A. Y. (1999) Remembering

versus knowing: Issues in buyers’ processing of price

information. Journal of the Academy of Marketing Science

27(2): 207 – 225.

12 Yadav, M. (1994) How buyers evaluate product bundles:A model of anchoring and adjustment. Journal of

Consumer Research 21(September): 342 – 353.

13 Estelami, H. (1997) Consumer perceptions of multi-

dimensional prices. In: M. Brucks and D.J. MacInnis

(eds.) Advances in Consumer Research , Vol. 24. Provo, UT:

Association for Consumer Research, pp. 392 – 399.

14 Turner , J. and Caroll, D. (1985) Heart rate and oxygen

consumption during mental arithmetic, a video game and

graded exercise: Further evidence of metabolically





exaggerated cardiac adjustments? Psychophysiology 22(3):

261 – 267.

15 Warren, E. and Tyagi, A.W. (2003) The Two Income

Trap: Why Middle Class Mothers and Fathers Are Going

Broke . Chicago, IL: Basic Books.

16 Estelami, H. (2007) Marketing Financial Services .

Indianapolis, IN: Dogear Publishing.

17 Moss, D. and Cisternino, J. (2009) New Perspectives on

Regulation . Washington, DC: The Tobin Project.18 Wernerfelt, B. (1988) Reputation, monitoring and effort.

Information Economics and Policy 3(3): 207 – 219.

19 Grewal, D., Krishnan, D., Baker , J. and Borin, N. (1998)

The effect of store name, brand name and price discounts

on consumers’ evaluations and purchase intentions.

Journal of Retailing 74(Fall): 331 – 353.

20 Roggeveen, A., Bharadwaj, N. and Hoyer , W. (2007)

How call center location impacts expectations of service

from reputable versus lesser known firms. Journal of

Retailing 83(4): 403 – 412.

21 Helson, H. (1964) Adaptation-Level Theory . New York:

Harper and Row.

22 Mazur , M (2007) Community banks win in customer

satisfaction. Community Banker 16(1): 61.

23 Brinkmann, R. and Lentz, K. (2006) Understandinginsurance customer dishonesty: Outline of a moral-

sociological approach. Journal of Business Ethics 66(2): 177 – 195.

24 Dawar , N. and Parker , P. (1994) Marketing universals:

Consumers’ use of brand name, price, physical

appearance, and retailer reputation as signals of product

quality. Journal of Marketing 58(2): 81 – 85.

Documents

2. an Exploratory Study of Divided Pricing Effects on Financial Service Quality Expectations