Reference prices | Meaning | Reason for Inaccuracy

What are reference prices?

Prices that help customers to perceive the value of goods and services offered to them are called reference prices. Generally, customer’s use price as a criterion in selecting services. So, customers should know about the costs of each and every services offered to them.

Definition of reference price

K. Monroe defines reference price as

a price point in memory for a good or service and can consist of the price last paid, most frequently paid price, or the average of all prices customers have paid for similar offerings.

Reason for inaccuracy in reference prices

Customers compare the reference prices with the actual price of these services from the providers. However, the reference prices are not accurate for the following reasons:

  1. Service heterogeneity limits knowledge,
  2. Providers are unwilling to estimate prices,
  3. Needs of individual customers vary,
  4. Price information is overwhelming in services; and
  5. Prices are not visible.

1. Service heterogeneity limits knowledge

Services are intangible. They are not created in a factory. Moreover, service firms have great flexibility in the configuration of services they market. As firms offer varieties of combinations of service, pricing structure gets complicated.

For example, the Life Insurance Corporation of India offers a wide range of policies, Syndicate Bank offers a variety of novel deposit schemes, post office schemes are many and varied, etc.

Since the service provider offers multitude of services, a common customer finds it difficult to compare the prices. Only an expert customer is able to specify the options he desires.

2. Providers are unwilling to estimate prices

Many service providers are unable to estimate price in advance. With regard to services such as medical or legal, the service providers are unable to estimate a price in advance. They do not know themselves the type of service they are required to provide until the patient is examined or the client’s case is grasped.

In a b2b context, companies get price estimates for complex services (Consultancy, construction etc). However, the service providers are reluctant., to undertake price estimation for end consumers. So, the customers are compelled to buy services without adequate knowledge about the final price of the service.

3. Needs of individual customers vary

Individual customers have varying needs to fulfill. Perhaps these varying needs result in the inaccuracy of reference prices.

For example, the service price of hairstylists vary depending upon length of hair, type of hair cut, conditioning treatment, etc. So, the cost of hair cut from the same stylists is bound to vary for each customer. Similarly, the rent of hotel rooms vary by size of room, time of year, type of rooms available, and individual versus group offer.

4. Price information is overwhelming in services

One of the important reasons for the lack of accurate reference prices for services is that price information is sometimes, abundant. In other words, customers feel overwhelmed by the information they need to gather.

Retail stores display the products by category. This allows customers to compare the prices of different brands and sizes. If consumers felt the lack of accurate reference prices for services, it reflects upon the promotional efforts of the service provider.

  • First, promotional pricing (couponing or special pricing) is less meaningful for services.
  • Secondly, price is not specified in service advertising. But advertising for goods features the price factor.
  • Thirdly, if price is not featured in services advertising, the readers of such advertisements may fear high cost.
  • Finally, in case of non-existence of accurate reference price, customers do not get price anchors. So, by featuring price in advertising, the service provider overcomes the fear of high cost.

5. Prices are not visible

Price visibility is essential for increasing customer’s knowledge about prices of services. The price factor cannot be hidden or implicit. Price invisibility means that many customers never see the price until after they receive certain services. In emergencies, such as accident or illness, consumers buy services without knowing their prices. But this will not be the case with all purchases.

Price is an important criterion deciding repurchase. Monetary price in repurchase is even more important criterion than in initial purchase.

In many services, particularly in financial services such as insurance, customers do not know about the costs they are paying. They know only about rate of return. Investments in equity funds is made without even knowing the rate of dividend.