If I ask people "Would you pay more for better quality or service or do you go for a lower price?" I’d imagine most people will say they don’t just go for a lower price and they would pay more for something better. However, my observation tells me people aren’t willing to pay more for better quality or service nearly as much as they say would.
My local NPR station did its twice annual fund drive last week (or is it three times a year now?). I haven’t seen any stats but I’d estimate a large percentage of regular listeners don’t contribute. They listen to the NPR programs because they like the programs. They don’t contribute because other stations are free. Then why are they not listening to those other stations? Because they like the NPR programs. It goes in circles like that.
Somehow we are able to justify paying more for better quality on physical products. Many people pay more to buy Macs because they like the quality. We all drive different cars — some are much more expensive than others. We have more trouble with the concept of paying more for better service, and maybe especially so for some types of service versus others.
I have heard and read many complaints about banks, credit cards, airlines and what not. Not once did I hear the person say they are willing to pay more for better service. No matter how good the service is, a checking account has to be free, with free online billpay and no minimum balance. A credit card must have good rewards with no annual fee.
Companies learn quickly it doesn’t pay to invest in good service. If Company A sends customer service to another country and Company B keeps customer service in the U.S., but customers are not willing to pay a higher price for the higher cost of customer service, guess where customer service will go?
Companies advertising an honest headline price can’t win business against competitors advertising a low headline price with hidden costs. Competition drives the service quality down, hidden costs up, because customers pay too much attention to the headline price.
Once you get over the mindset of refusing to pay more, you will often find better service. I recently switched to a different provider for hosting this blog. I’m paying nearly four times as much as before, but I’m very happy because I’m getting much better service.
My limited observation also tells me small business owners have less trouble with paying for quality service. Maybe they’ve been burned by bad vendors too many times. They understand the value of better service.
Next time if you find yourself not happy with something, perhaps think about paying more to someone who provides better service. Better service will disappear if people aren’t willing to pay more. If you are already doing this, I’m interested in knowing for what service you are paying more even though you know you can get away with paying less.
Say No To Management Fees
If you are paying an advisor a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.
Ted Valentine says
Interesting topic. When you talk of “hidden fees” and “headline prices” I’m immediately thinking of phone, TV, mobile, internet. The obfuscation of the pricing for these services is outlandish.
I will share an example where I believe I am paying a little, but not a lot, more than I could for a service: telecommunications. The company is one you might think has poor service: ATT. Surprisingly, I have found the opposite to be true in my case. At least 3 times I have had an unexpected issue pop up with my bill due to changes in one member of my household’s communication practices. I’m not naming names, but I think we know its, uhem, my wife.
Anyway, each time I called to disucss the problem with ATT, the CSR was quick to understand my problem, offer an economical solution and then backdate the change in my service to wipe out (and credit back) the high charges. Without extending my “contract.” The last time I called, they actually lowered my overall bill.
Now I know I could probably save $20-$30 per month on mobile and perhaps dump the land line by switching to a lower cost carrier. However, I never have a service issue (and I travel all over the country) and when I have a problem they fix it and, most important, they don’t screw me. Begrudingly I’ve become a little loyal to a huge company. Unexpected.
I think that PBS is an odd lead in for this article as that is a perfect example where no amount of extra money spent changes the quality of the service. If I pledge I still have to listen to the pledge drive, there is no actual value for the money spent at all. One place I am happy to spend money on better service is Amazon Prime, it totally changes your view of buying stuff online. I’m sure I don’t “save” money by having it but my life is better by not wandering around stores not finding the things I need. The freedom from thinking about buying $25 of stuff to get free shipping means you buy just what you are looking for. The convenience is worth the price to me.
Tom Shillock says
One reason we are willing to pay more for higher quality products as opposed to higher quality service is that we can see what we are getting before we buy it. Whereas it’s not as clear what better quality service for various services amounts to, or when it is clear how assured we are of getting it.
Even with high tech products such as the Mac it’s not usually better quality that people pay for as more or cuter features whether they use them or not. They are paying for their potential value. In the case of NPR it’s not clear what better service amounts to. When a service has deteriorated (e.g., credit cards, airlines) and then people are asked to pay more for its improvement, it is easy to feel extorted. That provides a natural reluctance to pay for better service. Again, in the case of NPR (and PBS) the quality of the programming has deteriorated so far that it’s not clear whether those running it understand what better programming (service) would be, and so for that reason alone it would be irrational to support them in the hope of improvement.
The major impediment to quality as a business strategy, whether product or service (nearly everything is a mixture of these), is that we consumers either cannot determine the quality by inspection or it takes too long (or costs too much) to determine it given the value of the good or service. Another problem is located in asymmetries of information between buyers and sellers. The unfortunate consequences of this for quality were pointed out by George Akerlof in his famous paper ‘The Market for Lemons’ (1970). This is also similar to Gresham’s Law, which basically states that the bad money drives out good. The default decision procedure is price. That’s a good part of why “companies quickly learn it doesn’t pay to invest in good service.”
Medical care and legal help are two cases where asymmetries of information are deliberately maintained by sellers in order to preserve their rents (i.e., exploitation of buyers).
I build and maintain my own PC computers. Although I do not buy the most expensive possible parts, I *never* buy the cheapest components. I’m willing to pay more for better quality, less hassle, less noise, greater reliability and lower power consumption. For example, I recently paid $170 for a SeaSonic X650 Gold 650W power supply — over three times as much as the cheapest $50 650W power supply. However, I do not regret the purchase. The SeaSonic is silent, cool, stable, clean and efficient.
I also do most of my computer shopping at Newegg these days. They’re not the bottom-of-the-barrel in price, but they do offer good prices and excellent service.
Personal finance says
In general, it depends from person to person. I personally would not pay very high for quality on most of the electronics. Having said that, I am a music freak and like hi-fi sound systems. So spending in that field will not bother me much.
One area where businesses have shown that people will pay more for better service is the airlines. For example, several airlines now will sell you coach seats with a few more inches of legroom for a fare that is $50-$100 more than the regular coach fare. Its a popular option. And the progressive unbundling of services (eg checked baggage fees) allow people to make choices about the level of service they want to pay for.