ACHIEVING THE BALANCE BETWEEN SERVICE QUALITY AND PRICE CAO CHAOLAN NATIONAL UNIVERSITY OF SINGAPORE 2005 ACHIEVING THE BALANCE BETWEEN SERVICE QUALITY AND PRICE CAO CHAOLAN (B.Eng., NPU) A THESIS SUBMITTED FOR THE DEGREE OF MASTER OF ENGINEERING DEPARTMENT OF INDUSTRIAL & SYSTEMS ENGINEERING NATIONAL UNIVERSITY OF SINGAPORE 2005 Abstract Quality and price are considered as two important elements of marketing mix. It was believed that the higher quality is, the higher customer satisfaction is and thus the higher purchase intention is. However, it was also accepted that price was a motivator for customers’ buying decision making. Recently, value which is to achieve the balance between service quality and price attracts more attention in research world, since it seems that customers put more emphasis on value when making buying decisions. Nonetheless, among quality, value and price, which element, that customers value more for their buying decisions remains untouched. Through a survey and the used of MANOVA and ANOVA, this paper investigates this important issue and factors that influence the decision by consumers that could help companies to develop a proper marketing strategy. Key word: customer value, consumer behavior, airlines i ACKNOWLEDGEMENT The author would like to show her deepest appreciation to her main supervisor Prof. Goh Thong Ngee and project supervisor Prof. Xie Min for their critical comments and professional guidance throughout the course of the project. In addition, the author would also like to thank Dr. Chai Kah Hin for accepting her to attend his research group discussion. Furthermore, the author especially would like to express special gratitude to her parents for incessant encouragement throughout the study. At last, thanks also are given to my friends Philippe, Henry and Tingting, as well as other seniors and juniors for sharing weal and woe with me. ii CONTENTS ABSTRACT…………………………………………………………………………… (i) ACKNOWLEDGEMENT……………………………………………………………… (ii) CONTENTS……………………………………………… (iii) LIST OF FIGURES……………………………………… (v) LIST OF TABLES…………………………………………………………………. … . (vi) CHAPTER PAGE 1. INTRODUCTION 1.1 Research Background………………………………………………… . 1.2 Research Objective and Structure of the Thesis . ………………………. 2. LITERATURE REVIEW 2.1 Introduction……………………………………………………………… . 2.2 Understanding Consumer Behavior-Road to Success…… 2.3 Three Models of Buying Behavior…………………………………………6 2.4 The Stages of Buying Decision Processes………………………………… 2.5 Dimensions of Purchase Intention………………………………………….11 2.6 Factors Affecting the Consumer Decision Making……………………… . 12 2.7 Influences on Consumer Decision Making… . 19 2.8 Customer and Their Needs Typology……………………………………… 26 2.9 Gap and Research Questions…………………………… . ………… … 30 3. FORMULATION OF HYPOTHESES 3.1 Factors Affecting Consumer Behavior…………………………………… . 34 3.2 Conclusion………………………………………………………………… 38 4. RESEARCH METHODOLOGY DEVELOPMENT 4.1 Introduction……………………………………………………………… . 40 4.2 Questionnaire Design Methodology………………………………………. 40 4.3 Questionnaire Structure…………………………………………………… 42 4.4 Questionnaire Translation…………………………………………………. 43 4.5 Measures……………………………………………………………………43 4.6 Targeted Population and Survey Implementation…………………………. 46 4.7 Analysis Methodology…………………………………………………… 48 4.8 Conclusion……………………………………………… 55 5. ANALYSIS OF RESULTS 5.1 Introduction………………………………………………………… . … 56 5.2 Preliminary Analysis……………………………………………………….56 5.3 Descriptive Analysis………………………………………………………. 59 5.4 Manipulation of MANOVA and ANOVA………………………………… 69 5.5 Summary………………………………………………………………… .79 iii 6. DISCUSSION 6.1 Introduction……………………………………………………………… 81 6.2 Research findings………………………………………………………… 81 6.3 Future Airline Industry – Mixed Business Model……………………… 105 6.4 Conclusion………………………………………………………………… 111 7. CONCLUSION 7.1 Introduction………………………………………………………………….113 7.2 Summary of Research Findings…………………………………………… 113 8. IMPLICATIONS FOR SERVICE DEVELOPMENT 8.1 Implications and Strategic Insights in Airline Industry……………… … . 117 8.2 Application in Other Areas……………………………………… ……… 123 9. LIMITATIONS AND FUTURE DEVELOPMENTS 9.1 Design Questionnaire More Scientifically………………… … . ……… . 128 9.2 Limited Targeted Population………………………………… ……………. 130 9.3 Limited Affecting Factors in Research……………………… ……………. 131 9.4 Limited Research Field… ………………………………… …………… 132 REFERENCES…………………………………………………………………………. 134 APPENDICES A1: Questionnaire in English……………………………………………………158 A2: Questionnaire in Chinese………………………………………………… . 160 A3: Summarization of the Survey Data………………………………………… 162 iv LIST OF FIGURES Figure Page 2.1 : Stimulus-response model……………………………………………………… 2.2 : Five-Stage model of the consumer buying process……………………………… 11 2.3 : KANO Model……………………………………………………………… … . 27 3.1 : Factors affect the consumer behavior . 39 4.1 : Hotelling’s T (Simplest MANOVA)………………………………………………51 5.1 : Nationality summary chart…………………….………………………………… 57 5.2 : Income chart…………….……………………………………………………… 58 5.3 : Gender chart…………………….……………………………………………… . 59 5.4 : Category of customers……….……………………………………………… … . 60 5.5 : Categories of customers from four countries . 62 5.6 : Customers’ preference on Airlines based on nationalities……………………… 63 5.7 : Categories of customers based on gender……………………………………… . 64 5.8 : Customers’ preference on Airlines based on income……………………………. 65 5.9 : Categories of customers based on income………………………………………. 66 5.10: Customers’ preference on Airlines based on purpose……………………………. 68 8.1 : Removal of services with the KANO model…………………………………… 121 v LIST OF TABLE Table Page 2.1 : Reviews of literature on some factors influencing consumer behavior………… 18 2.2 : Comparison between No-frills airlines and flag airlines………………………… 31 5.1 : Choice among FA, EA and BA………………………………………………… . 60 5.2 : Choice among FA, EA and BA based on nationality…………………………… 62 5.3 : Choice among FA, EA and BA based on income……………………………… 65 5.4 : Customers’ preference based on purpose of flying……………………………… 68 5.5 : MANOVA summary………………………………………………………………69 5.6 : Correlation Test………………………………………………………………… 70 5.7 : ANOVA for Flag Airlines………………………………………………………… 71 5.8 : Pairwise Comparison for Flag Airlines………………………………………… 72 5.9 : ANOVA for Economical Airlines………………………………………………… 74 5.10 : Pairwise Comparison for Economical Airlines………………………………… 75 5.11 : ANOVA for Budget Airlines…………………………………………………… 77 5.12 : Pairwise Comparison for Budget Airlines……………………………………… 78 7.1 : Hypotheses testing summary……………………………………………………. ……115 8.1 : Proposed future research fields………………………………………………… . 126 vi CHAPTER INTRODUCTION 1.1 RESEARCH BACKGROUND As business competition intensifies and customers become more mature, the interests of researchers, as well as practitioners, in purchase intention and its affecting factors heighten. Because only after understanding why customers choose certain kinds of products or services can companies know the direction where they would better develop their services to cater for demanding customers. The relationship between service quality, price, value and purchase intentions has confused the research world for a long time. Some researchers believe that high service quality leads to purchase intention (Sawyer and Dickson 1984; Zeithaml 1988, Ong 1999). Meanwhile, others hold the opposite view that high service quality does not necessarily attract customers to patronize (Dodds and Monroe 1985; Zeithaml 1988, Chang and Wildt 1994), and they put value as a media construct between quality and purchase intention. By the same token, when referring to prices, it is difficult to decide whether high prices or low prices lead to purchase intention. Researchers believe that a positive relationship has been observed between price and perceived quality (Zeithaml 1988; Rao and Monroe 1989; Chang and Wildt 1994). Since perceived quality leads to purchase intention, according to these researchers, high price, to some extent, should have positive influence on customers’ purchase intention. However, in the real situations, it is the low price that attracts customers’ attention more. Apart from the above two aspects, one popular point of view in the purchase intention is that high customer value directly influences customers’ purchase intention. Durvasula et al. (2004) proposed that service quality had an indirect relationship with behavioral outcome measures via satisfaction and value. However, value involves tradeoff of costs and benefits, making it more difficult to measure (Holbrook and Corfman 1984). This is why many researchers are more willing to believe in direct relationship between perceived quality and purchase intention. This confusion happens in the real world as well, e.g. airline industry. Before deregulation, service quality of the airline (Flag Airlines) undoubtedly was the main affecting factor in customers’ choices of airlines, since the price was controlled by the authorities. Not long after the deregulation, due to the overcapacity of the industry, airlines lowered their prices by more than half to maintain the market share. Many Budget Airlines gained their fame at that time. Initially, the pricing strategy attracted a lot of passengers. But as the customers became more mature, they were more likely to choose airlines that achieve the balance between service quality and prices (Economical Airlines), because of their needs and price sensitiveness. Until now, there is no paper dealing with the issue that whether customers prefer Flag Airlines, Economical Airlines or Budget Airlines. 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For Long distance seeing-relative trip Flag airlines Intermediate airlines Budget airlines 4. For Short distance seeing-relative trip Flag airlines Intermediate airlines Budget airlines 5. For Long distance leisure trip Flag airlines Intermediate airlines Budget airlines 6. For Short distance leisure trip Flag airlines Intermediate airlines Budget airlines 158 II. Please circle the number that best indicates the willingness that you give up the followings in order to get lower air fares? Give up? Very willing very unwilling 1. Good departure time 2. Attendance to special personal needs 3. Snacks & drinks for short flight 4. Meals for long flight 5. Pillows and blankets 6. Reclining seats 7. Cleanliness onboard 8. Movies and music 9. Boarding/deplaning at near gates to the departure/arriving hall 10. Trash bag 11. Seat pockets 12. Free Newspaper & magazines 13. Flight-cancellation permission 14. Connection arrangements 15. Pre-assigned seat number 16. Wet tissue 17. Delay arrangements 18. Spacious and comfortable aircraft III. Nationality ______________ IV. Please tick your total household Income per month: Below S$1,000 S$1,000-3,999 S$4,000-6,999 S$7,000-9,999 S$10,000 and above 159 Appendix II Survey (Chinese) I. 对于不同的目的，请您选择您乘坐不同航空公司飞机的可能性。. 星旗航空: 高价，服务一流; 中层航空: 价格中等，拥有必要的服务； 廉价航空: 价格低廉，基本没有机上服务，或者服务需要付费。. 表示非常不可能坐，8 表示非常可能坐，2-7 介于之间。 1. 长途的商务乘机 星旗航空 中层航空 廉价航空 2. 短途商务乘机 星旗航空 中层航空 廉价航空 3. 长途探亲乘机 星旗航空 中层航空 廉价航空 4. 短途探亲乘机 星旗航空 中层航空 廉价航空 5. 长途旅游乘机 星旗航空 中层航空 廉价航空 6. 短途旅游乘机 星旗航空 中层航空 廉价航空 160 II. 如果减少一项服务，就能够降低票价，那么对于以下的选项， 您有多愿意放弃这项服务呢？ 代表非常不愿意，4 代表非常愿意。 1. 适宜的起飞时间（不是在早上 点） 2. 特殊的要求给与特殊的服务 3. 短途的饮料和点心 4. 长途的饭菜供应 5. 长途的枕头和毛毯 6. 可以后仰的椅子 7. 舱内的清洁 8. 电影和音乐 9. 离出境口近的登机口 10. 垃圾袋 11. 座椅后面的口袋 12. 免费的报纸和杂志 13. 允许取消航班，退部分金额 14. 转机安排 15. 提前安排好的座位号 16. 湿纸巾 17. 误机后的安排 18. 宽敞且舒适的飞机舱 III. IV. 国籍 ______________ 您全家的月收入: 少于 S$1,000 S$1,000-3,999 S$4,000-6,999 S$7,000-9,999 高于 S$10,000 161 Appendix III Summarization of the survey data Table 1: Demographics of Respondents Nationality Singaporean 70 Chinese 42 Malaysian 27 Indian 21 Others* 47 33.8% 20.3% 13.0% 10.2% 22.7% Income Group S$3,999 and below S$4,000-6,999 S$7,000 and above 81 42 37 50.6% 26.3% 23.1% Gender Male Female 85 75 53.1% 46.9% * Others are not included in the analysis since targeted populations are Singaporean, Chinese, Malaysian and Indian. Table 2: Summary of Question First question Nationality Singaporean (n=70) Chinese (n=42) Malaysian (n=27) Indian (n=21) Mean Std. Mean Std. Mean Std. Mean Std. Flag Airlines 5.05 1.93 3.75 2.54 5.34 2.09 5.03 2.75 Economical Budget Airlines Airlines 5.51 4.24 1.59 2.24 6.06 4.72 2.05 2.78 5.40 3.16 1.75 2.13 5.71 3.71 1.39 2.71 Income S$3,999 and below (n=81) S$4,000-6,999 (n=42) S$7,000 and above (n=37) Mean Std. Mean Std. Mean Std. 4.27 2.23 4.83 1.22 5.75 1.02 5.54 1.64 5.94 1.20 5.60 1.32 4.26 2.34 4.53 2.23 3.32 2.53 Gender Male (n=85) Mean Std. 4.96 1.49 5.71 1.07 4.20 1.58 162 Female (n=75) Mean Std. 4.52 1.49 5.61 1.19 4.01 1.74 Flying Purpose Long Biz (n=160) Short Biz (n=160) Long Visiting (n=160) Short Visiting (n=160) Long Leisure (n=160) Short Leisure (n=160) Mean Std. Mean Std. Mean Std. Mean Std. Mean Std. Mean Std. 6.22 1.80 4.01 1.92 5.25 2.31 3.27 2.13 5.77 2.28 4.03 2.32 5.17 1.84 5.79 1.72 5.49 1.64 5.52 1.81 5.39 1.75 5.63 1.82 2.54 1.97 4.69 2.56 3.58 2.32 5.64 2.34 3.21 2.08 4.83 2.33 All (n=160) Mean Std. 4.75 1.50 5.66 1.13 4.11 1.65 163 Table 3: Summary of Question Second question Nationality Income Gender S1 S2 S3 S4 S5 S6 S7 S8 S9 S10 S11 S12 S13 S14 S15 S16 S17 S18 2.94 0.93 2.43 1.09 3.33 0.96 3.33 0.97 2.56 0.94 3.10 1.03 2.67 0.96 2.00 0.84 2.29 0.97 2.62 1.10 2.00 0.00 1.67 0.48 3.04 0.98 2.48 0.97 3.00 0.00 2.62 1.24 2.37 1.01 2.33 0.85 3.00 0.00 2.00 0.84 2.89 0.89 2.43 0.97 3.33 0.48 2.71 1.31 3.37 0.89 2.21 1.09 3.67 0.48 3.33 0.48 2.63 1.07 2.38 1.06 2.33 0.96 1.33 0.48 2.3 0.89 2.52 1.15 2.33 0.48 2.67 0.97 2.13 0.92 2.14 0.72 1.67 0.48 2.00 0.84 1.93 0.75 2.43 0.99 1.67 0.48 1.33 0.48 2.06 0.95 2.14 1.00 2.26 1.32 1.95 0.22 2.89 1.00 2.52 1.19 3.67 0.48 1.67 0.97 2.93 0.73 2.48 1.11 3.33 0.96 3.00 0.84 2.67 0.99 2.29 1.09 3.67 0.48 3.33 0.97 1.73 0.76 2.33 1.10 1.59 0.5 1.67 0.48 3.23 0.68 2.52 1.19 3.33 0.96 2.33 0.48 3.21 0.83 2.4 0.94 3.67 0.48 2.33 0.48 2.63 2.84 2.37 2.68 2.46 2.53 2.74 2.62 2.35 2.07 2.05 2.04 2.59 2.53 2.56 2.02 2.68 2.78 Std. Mean Std. Mean 1.01 3.14 1.00 1.01 2.17 0.93 0.93 1.9 0.88 1.02 0.96 0.87 2.21 0.95 0.94 2.98 0.98 1.08 3.31 0.75 0.93 1.13 0.95 2.45 1.02 0.77 2.17 0.82 0.88 1.74 0.66 0.9 2.05 0.73 1.13 2.29 1.04 0.88 3.14 0.72 0.99 3.1 0.93 0.91 1.67 0.65 1.01 2.98 0.75 0.94 2.86 0.72 3.32 2.76 2.35 2.97 2.57 3.27 3.7 2.14 2.51 1.81 1.92 2.3 3.68 3.38 3.11 1.70 3.49 3.49 Singaporean (n=70) Chinese (n=42) Malaysian (n=27) Indian (n=21) Mean Std. Mean Std. Mean Std. Mean Std. S$3,999 and below (n=81) S$4,000-6,999 (n=42) S$7,000 and above (n=37) Mean Std. 0.94 0.93 0.86 0.76 0.87 0.8 0.74 1.13 0.77 0.84 0.86 1.31 0.63 0.95 1.22 0.85 0.80 0.90 Male (n=85) Female (n=75) Mean Std. Mean Std. 3.01 1.06 2.83 0.99 2.74 0.99 2.53 1.02 2.26 0.91 2.23 0.92 2.93 0.86 2.72 1.06 2.44 0.87 2.4 0.93 2.95 0.89 2.67 1.03 3.22 1.06 2.99 0.94 2.14 1.12 2.57 0.95 2.46 0.93 2.36 0.92 2.08 0.89 1.99 0.71 1.94 0.86 1.93 0.79 1.96 0.96 2.25 0.97 2.88 1.11 2.63 1.15 2.99 0.93 2.77 0.92 2.86 1.09 2.79 1.03 1.78 0.88 1.95 0.80 3.07 0.94 2.80 0.96 3.07 0.95 2.84 0.87 164 [...]... to their evaluation of service quality If they believed the service quality was high, they would intend to repurchase again No matter what the antecedent role of service quality and customer satisfaction, there is a constant link that high service quality leads to buying intentions 20 There are notable efforts to improve the understanding the relationship between service quality and purchase intentions... service quality and satisfaction Cognitive customers always evaluated the service quality of the delivered service and then decided whether they were satisfied or not If they were satisfied, this would contribute to their behavioral intentions On the other hand, affective customers were thought to be satisfied or dissatisfied with the service providers first This emotional judgment then led to their... products more on the basis of price than other attributes (Kotler, 2000) Thus, price decrease will increase demand, which in turn will increase the market share (Hoch, Drèze and Purk 1994) On the other hand, price increase can lower the attractiveness and utility of the product, which can then lead 22 to lower sales or even customer boycotts (Sen, Gurhan-Canli, and Morwitz, 2001) Therefore, after the deregulation,... that customers perceive high prices as the sign of good quality and brand identity Thus, high prices will arouse their interest of buying, since there is an assurance of high quality products or services Another one is the negative way Customers will use all the strategic methods to get lower prices Moreover, normally low price products or services are more likely to attract them by showing a high value... off the normal price Moreover, there are some customers called quality- sensitive Their motivation is to buy something that really meets their expectations and up to high standards The customers in -between are called economy-conscious customers They are not that picky on quality, but still want to enjoy comfort The differences among these three customer categories are on the basis of price elasticity and. .. elasticity and quality elasticity Here, price /quality elasticity is a measure of responsiveness of some other variable to a change in price /quality For example, if for a premium product /service, the quality decreases a bit but the price decreases a lot (not up to 40%), quality- sensitive customers may or may not buy this product /service since the quality might not satisfy their high standard However,... OBJECTIVE AND STRUCTURE OF THE THESIS This paper aims to find out what will exert more influences on customers’ choices, quality, price or the balance between quality and price - value Furthermore, the paper tries to explore factors that bring significant differences in customers’ buying behavior The paper is arranged in 7 sections In Chapter 2, we present an overview of the literature review The purpose... including service quality, product quality and price (Johnson, 2003) However, companies cannot excel in all aspects; thus, they have to make trade-off on the basis of what they are doing and what they could do best, as well as weighing what criteria matter most to their customers In the reality, some customers are price- sensitive Their motivation for buying a certain product is that the price offered... prices that consumers encountered The organism component reflected the psychological processing of price cues and included the acquisition, encoding, and storage of price information, as well as the development of an attitude toward price and the integration of price with other information Outputs or responses of the process were consumer behaviors such as purchase intentions Therefore, purchase intentions... assumptions or intentions (Belasco and Stayer, 1993; Anderson and Narus, 1998; Woodruff and Gardial, 1996; Zeithaml, 1988) In all, from the viewpoint of Cost-Benefit Model, if customers believe that the benefit they receive is more than the cost incurred by acquiring products or experiencing services, they will choose the responding products and services 2.8 CUSTOMER AND THEIR NEEDS TYPOLOGY 2.8.1 KANO . products or services can companies know the direction where they would better develop their services to cater for demanding customers. The relationship between service quality, price, value and purchase. ACHIEVING THE BALANCE BETWEEN SERVICE QUALITY AND PRICE CAO CHAOLAN NATIONAL UNIVERSITY OF SINGAPORE 2005 ACHIEVING THE BALANCE. Initially, the pricing strategy attracted a lot of passengers. But as the customers became more mature, they were more likely to choose airlines that achieve the balance between service quality and prices