Original Article

An exploratory study of divided

pricing effects on financial service
quality expectations
Received (in revised form): 6th February 2010

Hooman Estelami
is 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 of
Marketing 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

Correspondence: Hooman Estelami
Graduate School of Business, Fordham University, 113 West
60th Street, New York, NY 10023, USA
INTRODUCTION
The 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

© 2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 1, 19–31
www.palgrave-journals.com/fsm/
 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 split
into 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 context
of 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 as
insurance 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
20 © 2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 1, 19–31
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 be
examined, 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 and
services 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 quality
inferences,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 practical
complexities 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
 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 be
perceived.
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 encourages
consumers 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 in
the 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
© 2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 1, 19–31
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 consumption
and 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 IN
FINANCIAL SERVICES
Although past research on multi-dimensional
and divided prices practices hints at the
potential 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 effects
of multi-dimensional pricing in financial
services.
Effects on perceptions of
offer flexibility
The dividing of prices into multiple
payments allows consumers to make
21
 Estelami and De Maeyer
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 can
be 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 to
consumers 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) in
a 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 outlined
above, 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
22 © 2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 1, 19–31
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 at
great 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 to
actively 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 into
multiple 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 quality
of the service will improve with the dividing
of the price into multiple payments, rather
than charging a lump-sum amount.
Firm reputation effects
The reputation of a firm has been shown to
significantly affect consumers’ perceptions of
 Exploratory study of divided pricing effects on financial service quality expectations
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 which
consumers 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 and
price, 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 cues
such 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.
© 2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 1, 19–31
Interaction of reputation and price
Although 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 discussed
earlier, 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 institution
with 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 out
that, 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 may
expect 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.
23
 Estelami and De Maeyer
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 services
promise 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’s
lack 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 considerably
vary 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 relevance
in 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
24 © 2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 1, 19–31
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 QUESTIONS
The 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?
METHODOLOGY
In order to explore the effects outlined
above, an experiment, utilizing a between-
subject design, was conducted. Subjects
were recruited through intercept surveys
conducted 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 them
an 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
 Exploratory study of divided pricing effects on financial service quality expectations
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 laptop
computer. 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 the
rest 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 whose
name 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.
© 2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 1, 19–31
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. Subject
assignment 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 good
quality’, ‘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 each
multi-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
25
 Estelami and De Maeyer
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 three
manipulations 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.
RESULTS
In 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 (F11,217 = 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 is
3.45. 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; F2,217 = 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 reputable
company. This shift is indicative of the
perceived benefits and peace of mind that
consumers may find in dealing with a
reputable company (F1,217 = 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’
26 © 2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 1, 19–31
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 interactions
as predictors, an ANOVA was run. The
ANOVA is significant at the P < 0.01 level
(F11,217 = 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 average
service 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 (F1,217 = 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 is
lower. 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
 Exploratory study of divided pricing effects on financial service quality expectations

5.5

Price Perception
4.5 Lump Sum
4 Divided

3.5 Divided-plus

2.5

2
Low High
Reputation

5.5

5
Price Perception

4.5 Lump Sum

4 Divided

3.5 Divided-plus

2.5

2
Low High
Reputation

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

money. This difference, which is statistically
significant (F2,217 = 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. The
low 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 interaction
between price format and reputation
(F2,217 = 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

© 2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 1, 19–31 27
 Estelami and De Maeyer

Service Quality Expectations

5.5

4.5 Lump Sum

4 Divided

3.5 Divided-plus

2.5

2
Low High
Reputation

6
Service Quality Expectations

5.5

4.5 Lump Sum

4 Divided

3.5 Divided-plus

2.5

2
Low High
Reputation

Figure 2: Factorial plot of service quality expectations. (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 (F2,217 = 3.38;
P < 0.05).
DISCUSSION OF THE RESULTS
The 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

28 © 2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 1, 19–31
 Exploratory study of divided pricing effects on financial service quality expectations
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 the
sampling 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 financial
commitments 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 behavioral
decision 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.
© 2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 1, 19–31
MANAGERIAL IMPLICATIONS
The 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 effect
in 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 payment
pattern 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 also
helps 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 consumers
not 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
29
 Estelami and De Maeyer
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 RESEARCH
Research in this area is ripe for new studies.
The impact that consumer-friendly pricing
methods can have on customers, especially in
financial 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 introduce
context-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.
30 © 2010 Macmillan Publishers Ltd. 1363-0539 Journal of Financial Services Marketing Vol. 15, 1, 19–31
ACKNOWLEDGEMENT
The authors acknowledge the financial
support of Singapore Management University
Faculty Research Fund and the Fordham
University Graduate School of Business
Research Grant Fund.
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