Adding value to retail financial services

James F. Devlin
Lecturer in Marketing, City University Business School, London, UK
Introduction
Delivering offerings which comprise a
competitive bundle of benefits, or value, to
the consumer is seen as crucial to an
organisation's ability to compete effectively
in a particular market (Mathur, 1988, 1992;
Czepiel, 1992). In this respect, the process of
adding value, in essence differentiating one's
offerings effectively in the eyes of the
consumer, is seen as a key consideration.
Porter (1985) stressed the importance of
differentiation but said little about how to
differentiate offerings, i.e. which factors to
stress in adding value. Issues relating to
which elements of the offering to emphasise
when adding value may be particularly
important in the case of services. For
offerings which are highly intangible,
mentally, or cognitively, as well as
physically, options for adding value and,
hence, achieving competitive advantage may
be limited due to customer reliance on
experience and credence qualities during the
purchase decision. Financial services are
arguably highly typical of services offerings
in general, with more complicated financial
services in particular being highly intangible
as well as problematic in terms of consumer
cognition. This paper investigates such
matters by offering a study of those factors
perceived by retail financial services
marketing managers to be important to the
process of adding value to service offerings
and, hence, achieving competitive advantage
in UK retail financial services markets. In
particular, the investigation will focus on
how factors judged by managers to be
important in adding value may be influenced
by the complexity of some financial services
offerings. In effect, the implications for the
marketing of service offerings, due to
managers holding certain assumptions about
their products, are explored.
It is accepted that the area under
investigation is a potentially broad one,
covering the nature of customer needs,
customer evaluation of offerings and even
elements of relationship marketing.
However, it is managers within financial
services organisations who make decisions
regarding how to add value to offerings. As a
result, the empirical work in this paper will
focus specifically on managerial perceptions
of the relative importance of different
elements of the service offering in adding
value and, thus, achieving differentiation.
The objective is to arrive at an enhanced
understanding of how managers attempt to
add value in the light of their perceptions of
consumer evaluation of services and how
attempts to add value may be influenced by
service characteristics. A ``market-led'' view
of competitive advantage will also be
adopted, which incorporates the notion that
the external positioning of the offering in the
relevant market forms the focus of
competitive strategy (Mathur, 1992). As
Lovelock (1994) points out, positioning is
fundamental to the competitive efforts of
service providers, being concerned with all
substantive attributes that may be important
to consumers when choosing between
services, rather than mere imagery and
communication. In effect, positioning also
captures the notion of effective
differentiation against competing offerings,
as communicated through the market to
consumers. Hence, once the market-led
approach is accepted, the process of adding
value and gaining competitive advantage
becomes central to a firm's competitive and
marketing strategy. To investigate the
process of adding value from a market-led
perspective in retail financial services
markets, propositions are developed
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International Journal of Bank
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18/5 [2000] 222232
# MCB University Press
[ISSN 0265-2323]
Keywords
Competitive advantage,
Financial services,
Services marketing,
Value analysis
Abstract
Explores practitioner views as to
how to formulate strategies for
adding value and, hence, gain
competitive advantage, given the
characteristics of many services
and the resultant implications for
consumer evaluation of offerings.
In particular, the case of retail
financial services is employed to
develop propositions regarding
managerial decisions as to how to
attempt to add value when offering
services exhibiting increased
complexity, intangibility and
impalpability in the eyes of most
consumers. Perhaps surprisingly,
it is found that the features and
quality of the core service
provided are judged by managers
to be more important in adding
value to more complex services,
as are organisational factors such
as image and reputation. In
addition, price is perceived to be
significantly more important in
adding value to more simple,
rather than complex, offerings.
Conclusions are presented and
managerial implications explored.
concerning the factors felt by managers to be
important in strategies for adding value to
financial services, with the potential for
differences in emphasis between more simple
and more complex services being explored.
The paper is structured as follows: section
two introduces the study of competitive
advantage as a market-led phenomenon,
while section three focuses specifically on
competitive advantage in retail financial
services markets and develops propositions
for investigation. The methodology is
explained in section four before results are
presented and discussed in section five.
Finally, conclusions are drawn in section six.
Competitive advantage as a
market-led phenomenon
The following argument and analysis seek to
justify studying the process of gaining a
competitive advantage in the marketplace
from a market-led perspective. The starting
point is the work of Porter (1980, 1985, 1987)
which is almost omnipresent in the
competitive strategy literature. In turn,
criticisms of his work have also flourished.
Some such criticisms are indicative of a
fundamental difference of approach between
the various schools of thought contained
within the competitive strategy literature,
with two main strands being apparent. One
school of thought, the market-led perspective,
sees the firm's outputs or offerings as the
main focus of competitive strategy, with the
primary aim of strategy being to compete
effectively in particular markets by
delivering a competitive bundle of benefits,
or value, to the consumer. The positioning of
the offering relative to competing offerings is
of prime importance (Mathur, 1992). The
other main school of thought concentrates on
the resources of the organisation and
postulates that superior resources and
processes, designed to utilise such resources
efficiently, will lead to competitive advantage
(Wernerfelt, 1984; Barney, 1991; Peteraf, 1993).
While these two approaches can be linked
(Verdin and Williamson, 1993; Hunt and
Morgan, 1995) and valuable conclusions
drawn from both areas, it is argued here that
the market-based approach provides the most
complete and theoretically sound basis for a
study of competitive advantage in UK retail
financial services. The primary focus of
competitive strategy is to deliver an offering
which provides customers with superior
value, thus achieving competitive advantage
in the marketplace.
In order to proceed with the analysis of
competitive strategy it is necessary to
introduce and explain the language of the
output based approach. A clear language for
competitive strategy, with precise,
unambiguous terms, is an essential
prerequisite to a clear understanding of the
competitive strategy process. The focus of
competitive strategy is competing for
customers' patronage. A group of customers
with a similar set of needs constitutes a
market. Therefore, the act of competing takes
place in a market and the market is the
appropriate unit of analysis for the
investigation of competitive strategy. Indeed,
the notion of the single competitive market
(SCM) has been introduced (Mathur, 1992;
Devlin, 1996) to represent a technically sound
description of a set of customers with similar
needs and the group of services or products
competing in that market. It is accepted that
different market segments may, to an extent,
have varying needs and as a result the use of
the SCM concept may represent a
simplification. However, the concept is of
value, as the appropriate focus for
competitive strategy is a market and not an
industry or other supply side concept such as
strategic groups. As the act of competing
takes place in a market, that which is
actually competing is what the firm in
question introduces to the market, known as
the offering. Offerings compete, not firms,
business units or any similar supply side
concept. Once this simple, stark truth is
accepted the study of competitive strategy
becomes more straightforward.
Competitive advantage in retail
financial services
Any discussion of generic competitive
strategies will necessarily begin with the
works of Porter (1980, 1985, 1987). Porter has
dominated the writings on competitive
strategy, presenting the main options
available to firms in terms of a choice
between cost leadership and differentiation,
either across a broad range of markets or
concentrating on a particular segment or
niche. However, his writings on the subject
have been increasingly criticised as
simplistic and, ironically, ``stuck in the
middle'' between a demand side view and a
supply side perspective. Porter's policy
prescription, to avoid being stuck in the
middle in terms of generic strategies, has
been comprehensively analysed and to a
large extent discredited by Cronshaw et al.
(1994). In addition, strategy writers have
found problems with Porter's notion of cost
leadership as a means of securing a
sustainable competitive advantage (Johnson
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International Journal of Bank
Marketing
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and Scholes, 1993; Speed, 1989). Low cost is
not a competitive advantage, as such, as it
does not in itself motivate the consumer to
purchase a firm's product over any other.
Low cost is a measure relating to input
variables, which may in turn have an effect
on output variables depending on how the
firm in question chooses to utilise any cost
advantage it might have. Porter himself
seems to have confused this point as he is
seen on occasions to use the terms low cost
and low price as meaning one and the same
thing (see Porter, 1987). The advantage of low
cost can be used to create a competitive
advantage if the benefit is transferred on to
the consumer, for instance, in the form of
lower prices. In essence, low cost is the
language of input concerns and as such
cannot be interpreted as a competitive
advantage.
Another point of potential confusion is that
a firm attempting to follow a low cost
strategy is, according to Porter (1985),
required to retain parity in differentiation, so
must also be a differentiator. In the same way
companies that attempt to adopt a strategy of
differentiation have to attempt to control
costs in order that the enhanced returns from
the differentiation are not consumed by the
costs associated with the efforts of
differentiating. This would appear to be
looking at the same problem, ``how to achieve
cost-efficient differentiation'', from two
different angles. Speed (1989) further points
out that only one firm in any particular
industry can occupy the low price generic
strategy position and it will, therefore, be
irrelevant to the vast majority of companies.
He questions whether cost leadership should
be treated as a separate generic strategy. He
substantiates his argument by stating that all
firms must take steps to differentiate their
products, either in a broad or in a focused
manner, and it could be argued that the low
cost firm is the one with the most potential to
reduce prices and remain profitable in a
price war and which may be able to sustain a
policy of differentiating its equally attractive
product/service by lower pricing.
This is really a formalisation of the notion
that consumers are interested in a particular
price quality combination which is construed
to offer value or, less formally, ``value for
money''. The notion of perceived value being
important to the process of obtaining a
competitive advantage is well supported in
the literature. Czepiel (1992, p. 35) talked of
the principle of value which would determine
``who wins in business competition'',
pointing out that such value may be
``functionally utilitarian or psychosocial''.
Czepiel's notion of value being the
important variable in determining
competitive advantage is similar in approach
to Bowman's (1992) work on generic
strategies. He analyses the ``perceived use
value'' of particular offerings and then
relates this to the price being charged, thus
implicitly introducing some notion of overall
value as perceived by the customer. Further
discussion and analysis of price and
perceived use value are provided in Bowman
and Faulkner (1997).
As effective differentiation represents the
primary option for adding value to offerings,
its importance is arguably beyond dispute
and it is to advanced discussions of strategies
for differentiation that attention now turns.
The empirical work included in this paper
incorporates the work of Mathur (1988),
which introduces the most advanced
classification of generic strategies. He
presents an array of options of generic
strategies to be employed by introducing a
distinction between merchandise and
support differentiation. He uses the term
merchandise to mean ``that which is being
made available to the consumer'' (p. 33), be it
tangible or intangible. Support is the ``advice,
training or assistance'' (p. 33) which is
provided along with the merchandise.
Merchandise, support or both elements of the
offering may be differentiated. Merchandise
may be differentiated using content, image,
or both, whilst support may be differentiated
using expertise, personalisation or both. The
dichotomy of merchandise differentiation
options into content and image elements
appears intuitively to make sense, although
the particular domain of content and image
needs to be clarified for retail financial
services offerings. However, the limiting of
support differentiation to expertise and
personalisation does appear, to say the least,
arbitrary and it is suggested here that in the
case of retail financial services offerings
support should encompass other dimensions
of service quality, such as those outlined by
Gro nroos (1988) as well as Parasuraman et al.
(1985, 1988).
For the purposes of the analysis presented
in this paper the ``content'' of financial
services offerings will be interpreted as the
features and quality of the core service
provided. In essence, this incorporates
service features, as well as technical or
outcome service quality. Image is
incorporated into the model quite simply as
an image and reputation element. Mathur
(1988) argues that the support element of the
value adding mix encompasses expertise and
personalisation of the offering. For service
offerings, and in particular financial
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services, it is evident that this concept should
be expanded to include other elements of
functional or process service quality, as there
now exists a significant literature on the
importance of service quality in achieving
competitive advantage in services markets
(Lewis, 1989; Parasuraman et al., 1991;
Gro nroos, 1988). Finally, the opportunity for
using low price as a strategy to add value is
incorporated into the model. Thus the model,
which it could be argued represents a ``value
adding mix'' for services, either through
differentiation or low price, comprises four
main options: differentiation based upon
features and quality of core services;
differentiation based on functional or process
service quality; differentiation based on
image and reputation factors; and competing
using low price. It should be noted that these
are not mutually exclusive options and
combination strategies can be used. Details
are shown in Appendix 1. In addition,
although not a primary focus of this
research, it is also acknowledged that there
may be a transactional and relational
element to the process of adding value. It may
be expected that those factors that are more
likely to be judged on a transactional basis,
such as price and service features, are more
likely to be important in adding value in the
case of more simple service offerings where
customer cognition is enhanced. Conversely,
elements that may well be judged to an extent
on a relational basis, such as functional
service quality, including elements such as
trust, are more likely to be of importance in
adding value in the case of more complex
services, to allow for lack of consumer
cognition. Such themes are returned to later
when propositions regarding the relative
importance of factors in strategies for adding
value are developed for investigation.
Earlier qualitative research in financial
services (Devlin and Ennew, 1997) showed
that the particular factors emphasised in the
value adding mix in attempts to add value
and achieve competitive advantage may be
contingent on the complexity of the service
offering in question. For certain more
complex financial services offerings in
particular, lack of consumer understanding
may result in increased reliance on
experience and credence qualities of the
service offerings which may enhance the
importance of organisation-wide factors such
as image, reputation and functional quality.
However, this may be less of a problem in the
case of more simple services with features
and benefits which consumers find relatively
easy to understand and evaluate
notwithstanding the fact that services cannot
be patented, leading to difficulties preventing
copying of differentiation of service features.
This means that price may also be more
important to more simple services, as
comparison of price with benefits is more
easily carried out by customers in the case of
more simple services.
Such a line of thinking is not dissimilar
from that of Zeithaml (1988) and her
distinction between intrinsic and extrinsic
cues and the introduction of a higher level
abstraction concept, when analysing
consumer perceptions of quality and value.
Intrinsic cues are usually product specific
attributes, often tangible in nature. Extrinsic
cues are external to the product, with the
examples of brand name and advertising
being used by the author. An important
extrinsic cue is functional service quality as
defined by abstract dimensions which can be
generalised across offerings which Zeithaml
(1988) calls higher level abstraction. When
customers are purchasing offerings where
search qualities are important in the
customers' perception of value and, hence,
intrinsic attributes have a high predictive
value, then customers will tend to rely upon
those intrinsic attributes. However, Zeithaml
(1998) argues that, when intrinsic cues are
scarce (as is arguably the case for more
complex financial services), when it is costly
in terms of time and effort to evaluate
intrinsic cues, and when the offering is high
in experience and credence qualities, then
extrinsic attributes will be far more
important in the customers' assessment of
value. She continues by stating that extrinsic
attributes can serve as value signals and can
substitute for active weighing of benefits and
cost. This is likely to be the case particularly
when the incidence of experience and
credence qualities is high. Relating such
propositions to strategies for adding value to
complex financial services, it can be argued,
therefore, that the support and image/
reputation elements mentioned above may
well be particularly important to the mix of
factors which adds value to a complex
financial services offering.
This point is also similar to those made by
Bharadwaj et al. (1993) who argue that, when
buyers cannot easily evaluate the qualities
and value of the service or capabilities of the
service provider, then brand reputation may
serve as an important proxy for more detailed
evaluations. In the case of financial services,
branding is often at the organisational level
(Devlin et al., 1995), thus lending further
support to the notion that organisation-wide
factors will be important in adding value.
Bharadwaj et al. (1993) continue by stating
that those services which are highly
intangible and are, therefore, high in
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International Journal of Bank
Marketing
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experience and credence qualities will find
brand reputation important as a potential
competitive advantage. Nayyar (1990)
continues the theme by suggesting that
buyers face a potentially costly task in
ascertaining the attributes of services prior to
purchase due to information symmetries. He
suggests that this information asymmetry can
be exploited by managers in service firms who
can take advantage of the fact that buyers tend
to attempt to lower such acquisition costs.
Nayyar (1990) stresses the importance of
exploiting existing relationships when such
information symmetries are present and
makes the point that reputation is a
potentially strong remedy to the information
asymmetry which may exist in the buyer-
seller relationship. According to Nayyar
(1990), reputation is transferable, i.e. an
organisation-wide rather than service-specific
concern. He concludes by stating that, if
reputation can be legitimately transferred,
then service firms can gain competitive
advantage in this way for services high on
experience and credence qualities but, as
acquisition costs are less for services high on
search qualities, reputation is likely to prove
less important in such instances.
Thus, it would appear that the particular
elements of the service offering which may
be important in strategies for adding value
may be contingent upon consumer
understanding of the service, which will in
turn influence consumer reliance on
experience and credence qualities over
search qualities. Clearly the issue is an
important one and requires further
investigation and the following propositions
are formulated with this in mind.
P1: For more complex service offerings,
managers will attempt to formulate
strategies which emphasise such factors
as image and reputation elements, as
well as the support element of
functional service, in the process of
adding value, to accommodate
customers' dependence on credence
qualities in evaluating services.
P2: For more simple service offerings,
managers will attempt to formulate
strategies which emphasise such
factors as low price, as well as the
features and quality of the core service,
in the process of adding value, to take
advantage of increased consumer
cognition of features and benefits.
Method
The propositions developed above were
tested using a detailed questionnaire,
distributed widely among marketing,
strategy and related senior personnel in
retail financial services. Once designed, the
questionnaire was piloted on a convenience
sample of fellow academics and industry
participants and amended in the light of
comments made. Questionnaire surveys are
widely used in both small and large scale
investigations of management practices and
consumer preferences (Easterby-Smith et al.,
1993). As explained above, for the survey
carried out to facilitate this study, the
population sampled was senior marketing
and strategy personnel in retail financial
services organisations, in order to gain an
insight into which factors managers judged
important in adding value to types of
financial services offerings. Individuals were
invited to supply data for those services
where they felt that their cumulative
experience allowed them to provide an
informed opinion as to the relative
importance of value adding items. Thus,
potentially valuable data were extracted even
where an individual may have had limited
responsibility currently, but broader
experience allowed him or her to complete
the questionnaire. In addition, in some
instances more than one individual was
targeted in a particular company as the
questionnaire was concerned primarily with
individual perceptions rather than
attempting to arrive at a company consensus.
Indeed, it has been argued (Mathur, 1988,
1992) that the company-wide level is not the
appropriate focus for the study of the
competitive strategy and that different
``firmlets'' exist within an organisation
which my well have distinctive views
regarding competitive marketing strategy.
The section of the questionnaire designed
to provide data for investigation of the
propositions developed above comprised the
following: first, identical scales were
provided for both simple and complex
services. Respondents were referred back to a
previous section of the questionnaire which
clarified the distinction between simple and
complex financial services offerings in terms
of consumer understanding, the nature of
pre-purchase evaluation and the risk
associated with a particular offering. It is
accepted that the dichotomy of services
offerings into simple and complex is a
simplification; however, it was judged that
such a classification would provide a useful
insight into relative importance of elements
in adding value. The distinction between
similar and complex services is similar to
that employed by Weinburg (1997) who
incorporated a distinction between simple
and complex services into his discussion
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regarding telemarketing of financial
services. He argued that simple services are
those where consumers are more likely to
establish that they have a requirement
independent of any advice. Consumers are
also more willing to become involved in a
search process for such services and such
services tend to be straightforward and
accessible. In the case of more complex
services there may be a lack of a voluntary
need recognition by consumers, which may
mean that, as per the old adage, such services
need to be sold rather than bought. Such
services tend to be less straightforward and
accessible for consumers and advice may
well be required before features and benefits
are understood, if indeed they are understood
at all. In some senses the dichotomy between
simple and complex services can be seen as
similar to elements of more general service
classification schemes (Lovelock, 1994) where
services are classified according to the
degree to which they can be customised and
the extent to which customer contact
personnel can exercise judgement in meeting
customer needs. In many cases, more
complex services will exhibit such traits to a
greater degree. Details of the dichotomy
employed in this study are given in Appendix
2. For both simple and complex services,
respondents were asked to distribute 100
points between four value adding elements in
order that the number of points allocated
should reflect the importance of the element
in adding value to the offering in question, as
shown in Appendix 1.
The four value adding elements were
formulated with the discussion presented
earlier very much in mind. Then, the
possible importance of such elements as the
quality of how services are delivered was
highlighted, as well as such factors as image
and reputation, especially in the case of more
complex services. For more simple services,
price and features and quality of the core
service provided were introduced as
potentially very important and the scale to be
incorporated into the questionnaire was
designed primarily to investigate such
matters.
A list of managers to be targeted during the
distribution of the questionnaire was drawn
up using such sources as the University of
Nottingham Insurance Centre database, the
Bankers Yearbook, the Building Societies
Yearbook etc. All companies to be included in
the investigation were telephoned and asked
whether they would be willing to participate.
A brief explanation of the investigation was
given where requested. Specific names and
addresses were established for the vast
majority of the companies concerned. In
some instances more than one individual was
targeted in a particular company as the
questionnaire is concerned primarily with
individual perceptions rather than
attempting to arrive at a company consensus.
A final list of 460 names was drawn up and at
least three questionnaires were sent out to
each name, with a request to pass extra
questionnaires on to interested colleagues if
appropriate. A prepaid envelope was
included with each questionnaire to
encourage reply, as well as the opportunity to
request a summary of results, when
available. The questionnaires were
distributed in mid-September 1995 and a
follow-up letter was sent in October 1995.
A total of 193 usable responses were
generated, including 43 from the follow-up
letter. An accurate percentage response rate
was difficult to ascertain, as in a proportion
of cases the surplus questionnaires will not
have been passed on to colleagues. A cursory
analysis of the pattern of returns suggests
that most companies only returned one
questionnaire. It is probably reasonable to
assume that no more than 30 per cent of the
questionnaires were passed on. This
represents a response rate of 26 per cent. The
initial explanatory telephone call, named
correspondence and the offer of a summary of
results undoubtedly helped to inflate this
figure. In some instances more than one
individual was targeted in a particular
organisation, as the questionnaire was
concerned primarily with individual
perceptions rather than attempting to arrive
at a company consensus.
A simple Chi-square test to ascertain the
representativeness of this sample proved
impractical as the researcher could find no
readily available, easily identifiable source of
data with which to compare the sample
obtained. A broad range of sources was
consulted and a thorough investigation of the
population carried out before the
distribution of the questionnaire survey, to
ensure that all possible efforts were made to
produce a representative survey. As can be
seen from Appendix 3, the proportion of
insurance companies as a percentage of the
total sample is relatively high at just over 50
per cent, although it should also be
remembered that there are a large number of
insurance companies, of various kinds,
operating in UK retail financial services
markets. It is also encouraging to note that a
brief analysis of the response to the ``name of
employer'' question in the survey indicated
that respondents included representatives of
the vast majority of the ``main'' players in
retail financial services markets including
the four traditional clearing banks, major
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insurance companies and building societies,
as well as more recent entrants to the market
such as Virgin Direct.
In order to investigate the propositions
developed above paired samples t-tests were
used to compare the mean scores for the
value adding elements for simple and
complex service offerings. In addition the
data were explored by comparing the
perceptions of respondents according to their
employer type. Finally, given the relatively
high proportion of respondents from
insurance companies, data were provided
regarding the perceptions of those
responsible for general and life insurance
offerings to draw out differences between the
two groups.
Results
The information contained within the
questionnaire was input into SPSS for
windows version 6.0 to enable detailed
quantitative analysis to be performed. The
first issue to be investigated was that of
whether the four categories of value adding
factors introduced above were rated
differently by respondents for the case of
more simple and more complex retail
financial services offerings, as defined above.
Results are shown in Table I. In all cases,
figures represent the average percentage
importance attached to a particular element.
Perhaps surprisingly, in view of the
discussion above, it was found that
respondents judged particular service
features and the core technical quality of
what was delivered to be more important in
the process of adding value to more complex
services than to simple ones. This difference
was significant at the 5 per cent level and was
the opposite of that initially hypothesised.
One possible explanation for this unexpected
outcome is that respondents do not feel there
is sufficient scope to differentiate basic
features for more simple services; however,
opportunity exists to do so with more
complex offerings. Also, ease of copying more
simple service features may further help to
explain the results obtained. These factors
may outweigh the fact that consumer
understanding of more simple services is
enhanced, and indeed consumer
understanding may be less than envisaged in
the case of more simple services.
Given these findings it is perhaps not
surprising that the functional quality
element of the value adding mix, that
concerned with the quality of how the service
is delivered, was perceived by respondents to
be equally important in the case of simple
and complex service offerings. However, the
element concerned with image and
reputation was perceived by respondents to
be significantly more important in adding
value to more complex services. Thus it
would appear that, as expected, such
organisation-wide factors may be employed
to help overcome customer reliance on
experience and credence qualities in the
process of purchasing more complex
services. Finally, the price element of the
value adding mix was found to be
significantly more important in the process
of adding value to more simple financial
services offerings. Again, this was as
expected and may well be due to the fact that
greater consumer understanding of benefits,
etc., may result in a more informed
judgement of value for money when the price
of the service is taken into account. In
addition, pricing for more simple services
may well be more transparent and easily
understood.
Tables II and III allow for further
investigation and interpretation of the data
by providing a comparison of views as to the
importance of factors in adding value,
classified according to respondents'
institution type. Details are provided for both
simple and complex services and separate
categories are presented for banks/building
societies, insurance companies and other
financial institutions, including unit trust
companies and those providing sharedealing
services and investment management. For
simple services some important differences
emerge. Respondents from insurance
companies are less convinced than others as
to the usefulness of the features and quality
of core service in adding value, particularly
when compared to the ``other'' financial
institutions category. As insurance
companies may well be dealing with a less
homogeneous and sophisticated customer
base they may be less inclined to use little
understood product features to add value,
even in the case of more simple services.
Respondents from insurance companies are
significantly less convinced than banks and
building societies as to the usefulness of
functional service quality in adding value.
Table I
Adding value to retail financial services: general perceptions
Value adding element
Simple
services
Complex
services Significance
Features and quality of core service provided 26.28 29.57 0.00*
Quality of how the service is provided 21.58 21.43 0.84
Image and reputation of service provider 19.76 24.66 0.00*
Price of the service offering 32.33 24.35 0.00*
Note: * = significant difference at the 5 per cent level
[ 228]
James F. Devlin
Adding value to retail financial
services
International Journal of Bank
Marketing
18/5 [2000] 222232
Given banks' current preoccupation with
service quality matters this is perhaps not
surprising. For simple services no significant
difference emerged in the ratings for image
and reputation factors; however, insurance
companies were particularly convinced as to
the usefulness of price in the competitive
equation. Given that the insurance company
category included a number of general
insurance specialists, this may help explain
an apparent emphasis on low price as a
method of adding value. This issue is
investigated further later.
As Table III shows, differences for more
complex services were far less marked, with
the only significant difference being between
insurance companies and other financial
institutions as to the importance of price.
Thus, further evidence was provided as to the
perceived importance of price by
respondents from insurance companies.
Finally, given the relatively high
proportion of respondents from insurance
companies in the sample, it was felt
appropriate to compare the views of those
respondents primarily responsible for general
insurance services with those responsible for
life insurance, to establish particular
differences between the two groups. Details
are provided in Tables IV and V.
Strong evidence emerged that those
responsible for general insurance perceived
that low price formed the primary element in
the mix of factors used to add value,
particularly for more simple services, but
also for more complex services. Equally, they
were unconvinced as to the merit of
emphasising such factors as core features,
service quality or image and reputation,
especially in the case of more simple
services. Given the price sensitive nature of
the markets such respondents compete in,
this is perhaps not surprising, although it
may also be indicative of a reluctance to
consider competing in ways other than using
low price.
Conclusions and managerial
implications
This study was concerned with an
investigation into managerial judgements as
to which elements of the service offer to
emphasise in the process of adding value to
retail financial services offerings and hence
achieving competitive advantage in a
particular market. The issue is an important
one as an informed and accurate
understanding of the process of adding value
on the part of managers may help their
offerings compete more effectively. As a
result, an investigation as to whether the
factors thought to be important by
respondents were contingent upon the
precise characteristics of the service offering
under consideration was incorporated into
the analysis. Thus, it was hoped that an
insight would be gained into how retail
financial services managers overcome
potential problems with consumer cognition
when attempting to add value to service
offerings. It was expected a priori that more
simple and easily understood services may
provide a greater opportunity for managers
to plan to use the features and quality of the
core service along with low price to add
value, as they are more easily understood by
consumers. Conversely, it was proposed that
for more complex service offerings, where
customers may well rely on experience and
credence qualities, then managers may plan
to use factors such as functional service
quality and image and reputation to add
value. The findings from this investigation
show that, in general terms, differences in
managers' judgements as to which factors are
particularly important in the ``value adding
mix'' of factors for more complex and more
simple services are apparent, but are not
always as expected.
Participants perceived that the features
and quality of the core service provided
element of the value adding mix was
significantly more important in the case of
Table II
Adding value to simple services and respondent rype
Value adding element simple services
Banks/building
societies
Insurance
companies Others
Features and quality of core service provided 27.44 23.60* 29.65*
Quality of how the service is provided 23.97** 20.43** 21.42
Image and reputation of service provider 19.23 18.43 21.53
Price of the service offering 29.35*** 37.42*** 27.39***
Notes: * = significant difference at 5 per cent level between insurance companies and
other financial institutions, using one-way ANOVA; ** = significant difference at 5 per
cent level between insurance companies and banks/building societies, using one-way
ANOVA; *** = significant difference at 5 per cent level between insurance companies
and both banks/building societies and ``other'' financial institutions, using one-way
ANOVA; n = 178
Table III
Adding value to complex services and respondent type
Value adding element complex services
Banks/building
societies
Insurance
companies Others
Features and quality of core service provided 28.21 29.38 32.36
Quality of how the service is provided 21.92 20.57 21.70
Image and reputation of service provider 24.10 24.07 25.18
Price of the service offering 25.80 25.98* 20.75*
Notes: * = significant difference at 5 per cent level between insurance companies and
other financial institutions, using one-way ANOVA; n = 188
[ 229]
James F. Devlin
Adding value to retail financial
services
International Journal of Bank
Marketing
18/5 [2000] 222232
complex services. This was unexpected and
provides evidence that, perhaps, ease of
copying and a lack of options for
differentiation in the case of more simple
services may outweigh the fact that
customers exhibit a greater understanding of
more simple services. Alternatively,
managers in retail financial services markets
may be overlooking the possibility of basing
differentiation of more simple services to a
greater degree on such factors in order to
exploit increased consumer cognition.
Finally, consumers of more complex service
offerings may be perceived as more
knowledgeable than originally thought.
Further research is required to clarify
whether managers are taking full account of
the degree of consumer cognition when
deciding how to add value to offerings. Price
was, as expected, cited as far more important
in adding value to more simple services. This
may well reflect the fact that consumers are
able to judge price against benefits received
more effectively in the case of more simple
services. Greater transparency in the pricing
of more simple services may also help
explain this result.
As expected, image and reputation factors
were seen by managers as more important in
adding value to more complex services
offerings. In the case of more simple services
many were particularly sceptical as to the
merit of using image and reputation factors
to add value. Image and reputation are
potentially important in overcoming
customer reliance on experience and
credence qualities and organisation level
brands should be nurtured, protected and
developed to assist effective competition. It
would appear from the results that functional
or process service quality is not perceived as
significantly more important in adding value
to more complex services. Indeed, in general
terms it appeared to be the least important of
the value adding elements. This may reflect
customer preferences, although it could be
the case that such an option for
differentiation is being overlooked by
managers, especially in the case of more
complex services. Such a view has been
espoused previously in the literature
(Gro nroos, 1988) and it may well be that
managers have yet to take heed of the
suggestion to consider the option of adding
value by improving functional service
quality.
Finally, it should be noted that for more
simple services respondents from insurance
companies were particularly sceptical as to
the value of core service features and
functional service quality. Such respondents
were, however, particularly convinced as to
the merits of low price. Upon closer
inspection respondents from general
insurance companies cited low price as
important in adding value to both simple and
complex services. However, those
responsible primarily for life insurance were
less convinced as to the importance of price.
For complex services in particular core
features and image and reputation were
perceived as significantly more important in
adding value. It is apparent that those
responsible for life assurance should guard
against being too complacent regarding the
prospects for commoditisation of some of
their main markets, whilst those responsible
for general insurance need to be careful not
to suffer ``price myopia''.
In terms of future research, it is evident
that the question of which elements are
important in adding value could be extended
to other goods and services and similarities
and differences analysed further. There is
also an urgent need for the views of
consumers to be sought, as it is the consumer
who is the final arbiter of success, when
expressing preferences through the
marketplace. Any differences with
perceptions of managers could then be
isolated and the implications for the
formulation of competitive strategy
considered.
Table IV
General vs. life insurance: simple services
Value adding element simple services
Responsible
for general
insurance
Responsible
for life
insurance Significance
Features and quality of core service provided 19.79 26.36 0.00*
Quality of how the service is provided 19.54 21.73 0.28
Image and reputation of service provider 14.90 21.55 0.00*
Price of the service offering 45.45 30.36 0.00*
Notes: * = significant difference at the 5 per cent level; ** = significant difference at
the 10 per cent level; n = 88
Table V
General vs. life assurance: complex services
Value adding element complex services
Responsible
for general
insurance
Responsible
for life
insurance Significance
Features and quality of core service provided 26.61 31.05 0.07**
Quality of how the service is provided 17.32 21.69 0.02*
Image and reputation of service provider 21.06 25.24 0.06**
Price of the service offering 35.00 22.02 0.00*
Notes: * = significant difference at the 5 per cent level; ** = significant difference at
the 10 per cent level; n = 93
[ 230]
James F. Devlin
Adding value to retail financial
services
International Journal of Bank
Marketing
18/5 [2000] 222232
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Appendix 1. Value adding
elements: questionnaire extract
Listed below (in Table AI) are four factors
used to enhance the value of a service in the
eyes of the customer. For both simple and
complex services, such as those you
identified in section two, please allocate a
total of 100 points between the four factors
listed in the left-hand column, in accordance
with how you feel that they contribute to the
process of adding value and achieving
competitive advantage. For instance, if you
feel that for simple services the quality of the
core service is the most important and the
other three factors equally less important,
you may choose to allocate 40 points to the
first factor and 20 to the other three.
[ 231]
James F. Devlin
Adding value to retail financial
services
International Journal of Bank
Marketing
18/5 [2000] 222232
Appendix 2. Simple and complex services:
questionnaire extract
The distinction between simple and complex
services is a major theme running through
this questionnaire. As a starting point we need
to know your opinion as to how simple or
complex, on average, you perceive customers
will find the groups of services listed below.
Simple services are those where, on
average, customers will exhibit a reasonable
understanding of product features and
associated benefits and will be able to
perform a satisfactory pre-purchase
evaluation of the service. Such services are
likely to be of a low risk nature.
Complex services are those which, on
average, customers will find confusing and
complicated with a resultant lack of
understanding of features and benefits being
apparent. Pre-purchase evaluation will also
prove difficult. Such services are likely to be
of a medium to high risk nature.
Appendix 3. Number of returns by
institution type
Table AI
Simple services Complex services
The quality of the core service we provide, i.e. basic features and
what it does for the customer
The quality of how the service is provided, e.g. friendliness of staff
The image and reputation of the organisation offering the service
The price of the service offering and its role in the customer
perception of value for money
Total 100 100
Table AII
Number of returns by institution type
Institution type
Number of
returns %
Banks 18 9.4
Building societies 21 10.9
Insurance companies 100 52.1
Insurance brokers 3 1.6
Unit trust companies 25 13
Investment trust companies 3 1.6
Other 23 11.5
Total 193 100
Note: there was one non-response to this question
[ 232]
James F. Devlin
Adding value to retail financial
services
International Journal of Bank
Marketing
18/5 [2000] 222232