The Price Comparison tax

When you use a price comparison site to find a new insurance, energy or mobile phone provider, you are adding cost to the provision of the service.

uSwitch, MoneySuperMarket, ComparetheMarket and the other big ‘aggregators’ in the UK are buyers and sellers of your personal data. They buy it with advertising (mainly) and sell it to the companies who provide products and services.

In the UK, of the c. £500 p.a. average cost of a motor policy, £60 is the cost of customer acquisition — and the vast majority of this is paid to the big aggregators. So more than 10% of your premium is going to price comparison services. That’s more than the margin of the insurance companies.

So why does this market inefficiency flourish more-or-less unchallenged?

The first part of the answer is simple. There has been a failure in direct distribution. Consumers’ experience is that, going direct, the price is no better, but the process is much more lengthy, complex and frustrating. And the worry that you might be overpaying is not addressed.

But there is another more subtle and pernicious reason. The dominance of price comparison pressures product providers into short-term behaviours that damage their brand and consumer trust.

Ferocious price competition forces providers to raise prices in the years that follow a customer’s sign-up, in order to achieve profitability. Result —loyalty is penalised, disloyalty rewarded.

This then compels consumers, once they realise what’s happening, to shift provider (churn).

The more people ‘churn’ the better for the aggregators. The aggregator brands get stronger, while the providers (who should be the stars of the show) are damaged by their pricing behaviour. It’s a self perpetuating cycle.

How can a service provider escape this cycle?

1. Efficiency: you must have a service that, once someone is a customer, doesn’t give you reasons (price or others) to leave. So the business needs to be super efficient and able to compete on price without resorting to front-end discounting to buy market share. A structural advantage (digital only, no legacy IT systems, etc.) must be found that can create and sustain this operational efficiency.
2. Effective acquisition: you will need recruitment channels outside price comparison, perhaps socially, by referral, or through affinity groups. Even traditional bought-media advertising can work, if you’re efficient enough to make the acquisition cost affordable.
3. Sustainability: A lack of greed and a corporate structure that allows you to operate in a long-term sustainable way. This might mean a more cooperative ownership model than a traditional corporation, but this is not a necessity.

Here’s an examples of a provider who is managing to innovate and win in price comparison-beset markets.

Zopa operates as a peer-to-peer provider of loans and savings. Where a high street bank might have a 10–12% spread between loan and savings rates, Zopa has c. 1%. This Efficiency is delivered through a digital platform approach. Sustainability was also baked-in to Zopa’s business thinking from the start, with patient investors allowing them to ride out a slow start, as it took several years post launch before their efficiencies were able to truly complete in price comparison and achieve Effective acquisition. Now Zopa is winning with the Aggregators (it is MoneySuperMarket’s Best Personal Loans Provider 2016) and has lent more than £1bn.