Eduardo Diaz, a loyal MR reader, asks:
A question for you…have you ever compared in the context of "trade repairs" (i.e. garage door repair, plumbing, etc.) the pros and cons of companies that offer free estimates or evaluations vs. companies that charge an inspection charge?
My intuition would make me hypothesize that: Free estimate company would have a stronger incentive to be nice to get the business. They might "sugar coat", if they are unethical and think they can get away with holding you up later. In this model, the customer might feel "obligated" to reciprocate for the courtesy of the free estimate by giving this provider the business. Company that charges for the inspection would have an incentive to be a little more straight with you, this tendency increasing as the inspection charge comes close to cover the cost to the company of the inspection. Incentive to be nice is less in this case. Perhaps, the repair techs with "less people/sales skills" might gravitate to this business model. or perhaps this model attracts more techs that live far away or don't have a "critical mass" of business in a particular area. These trade repair industries are very competitive due to low barriers to entry and difficulty to collude, so I think competition probably drives the cost structure for those companies to a pretty similar point. Thus, I'd expect my total cost with a free inspection company vs. an inspection-charge company should be the same, assuming I'm properly informed by reading up on-line reviews, getting several quotes, etc. in other words, the no charge companies will need to recoup the cost of all the inspections that don't result in profitable repair work.
If you think you are likely to proceed with the repair work (rather than junk the thing, try to fix it yourself, decide you're in fact a garage door hypochondriac, etc.), you might be more likely to pay the upfront fee for the estimate. Of course the company knows you will behave this way. If they have any ability to price discriminate, for the service itself they will charge you a higher price ex post. You in turn will shy away from this equilibrium. In essence paying the upfront service charge reveals something about your type, namely that you are eager for repairs. We're then more likely to see free estimates as the dominant strategy. Some subset of firms will charge for estimates if they can appeal to customers who in essence want to face price discrimination to ensure higher service quality from the wealthier firms with more valuable long-term reputational franchises.
Alternatively, assume that if you have to pay to learn the price, the said price information is valuable. Price information is valuable when the market in question isn't so competitive and when search costs are high. Producers are signaling that their markets are not so competitive when they charge for service estimates and many producers will shy away from letting on about that to their customers.
Sometimes you can flip this kind of argument. You, as a customer, might assume that a firm which charged for estimates had especially informed customers. You might hope to masquerade as another such informed customer and thus patronize such a firm, hoping that it will treat you well because it is used to dealing with informed buyers. It is an open question whether this equilibrium holds up.
You can spin many other scenarios, those are just some ideas that came to mind.
Alternative: you talk with your neighbors and friends, or use a service like Yelp or Angie’s list, to try and find someone with a good reputation.
When I find someone with a good reputation, I try and get them to give me an estimate. At that point I usually know if they charge for an estimate and will proceed, but at least I have the comfort of having some kind of evidence (even if weak) that they know what they are doing and do it well.
Here is a better example of some of Dan Ariely’s commentary on “free” as a motivator:
http://www.predictablyirrational.com/?page_id=178
Personally, I almost exclusively use contractors whom I have used before or who I get a recommendation for from a trusted source, and whenever possible, I prefer owner operators who do the work themselves. Then I call them and say that they come recommended from good friend x. If it is a job like a garage door, I would just say come fix it, thereby signaling trust. If they overcharge me, then I won’t call them again nor will I recommend them to others. If it is a larger job, I may ask for an estimate, but again I signal that they are called in based on a business contact. Once someone has done work for me, I don’t even ask for estimates, and I find that this continues to build the trust relationship, and it certainly saves time. That way I can just call them, book a time, and say something like, “ok, I will leave the back door unlocked for you today so that you can fix my washing machine,” and I can save the trouble of being there to let them in.
The whole system works for me, and I have a network of repair men and contractors who keep my old house and cars in good order. But I live in a city of maybe 60,000 people, so it may not work in a large metro area.
My hypothesis: the estimate is a loss leader, because the customer is more likely to get the repair from the company they already dealt with to get the estimate (in order to avoid the time and inconvenience of surveying the market again). Once one company stops charging for estimates, the others are compelled to follow suit because of the psychology of the consumer: they get the estimate from someone who provides it free to save money, then are more likely to follow up with the repair from the same company.
Highly informed and sophisticated consumers are too rare for a business to stay in business by catering to them. Effective businesspeople have a practical understanding of the psychology of their customer base, and how to exploit it to rope in more customers than the competition.
Therefore, I would predict that free estimates would be rarer when the customer is a professional, i.e. in business-to-business transactions, relative to consumer transactions.
Joshua is probably also right about times when the estimate is particularly costly or expensive to do; in those cases it doesn’t make sense to use it as a loss leader because the loss is too high relative to the return.
Are there disloyal MR readers? Is there an MR Secret Police monitoring us for disloyalty? Is a member of the MR Stasi even now watching me type this through a millimeter-size hole in the wall? Are there MR informants, and how do they compare to the East German rate of 6.5 citizens per informant?
I agree with the poster who obsverved that if the estimate involved a lot of work, it would likely be charged for. I would also add that if the cause of the problem requires me to disassemble, say, a washing machine–then the offer of free comes at a cost to the repairperson, if the consumer is free to select another repairperson who then just comes in and simply fixes the machine with advance knowledge of what the problem is. In that case, discounting the bill for the completed project, but charging for inspection if you do not do the project, makes the most sense. Free riding is always an issue. And, if you can do it yourself, its even sweeter.
When I hire an attornoey for personal and business repair or prevention reasons, I always get preliminary refrrals from people I know and trust, as well as doing my own research. Whether they charge for an initial consultation is not relevant to me.
But my limited experience has been that I have been much happier with the attorneys who charged an initial consultation fee than those who didn’t.
I think the entire argument hinges heavily on the type of service or work being estimated and the local or regional competition for said work / service. I think it also depends on the type of estimate itself. Take for instance an estimate for putting guttering on your house (it’s a family business so it’s what I know). It’s more than likely that if there are multiple gutter-hanging companies in the area they will have competitive estimate fees, if any fee at all. Gutter-hanging is also a type of work that a consumer would shop around for estimates on, giving each company a reason to match their lower-estimate-cost competition, so as to not price themselves out of an estimate (who’d pay $75 to Joe when Bob and Tom will estimate it for free?) and thusly the entire job. On top of that, an estimate for hanging gutter is relatively quick and easy for an experienced contractor.
I guess to answer the main question, in my opinion an estimate fee would signal that there is a lot of work or time involved in creating the estimate, or that there is little competition for the service or work being estimated.
A person who gives free estimates can only survive if those estimates turn into paid work. This person therefore has an incentive to find ‘defects’ that do not exist, and/or to pad the amount of work required in order to earn back the cost of inspection. There are no free lunches.
A person who charges for estimates and also does the work may feel that you have been captured by the high price of the estimate and therefore will be more receptive to price gouging. Especially beware the person who is willing to discount the cost of the estimate against the work – the estimate then becomes a way to lock the homeowner in with the estimator. This would result in an overall higher total price of estimate + work.
It seems to me the most reasonable course is to find an independent estimator who does not also do the repair work. This person would charge for the estimate, but have no incentive to bias the answer in any way. In addition, this person’s business model and reputation depends on the quality of the estimate itself, and in addition the person may have his work questioned by the contractor who comes in to do the job after the fact.
Get an independent estimate. Then when you hire someone to do the work, make them agree to the estimate or let them do their own, knowing that you already have an independent one. The exception would be smaller jobs where you expect to do the work anyway and just want an estimate up front to prevent the contractor from jacking the price up once it’s started.
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