Managing my money for young adults
Managing my money for young adults

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Managing my money for young adults

5  Comparison websites – not the full story

Comparison websites are a common part of making spending decisions, for example when you’re looking for the best deal on a phone or a new pair of trainers or car insurance. They’re also widely used to research utility services and e-services – to help choose between gas and electricity suppliers, and internet providers.

Comparison sites started to emerge in the 1990s, coinciding with the start of the internet.

They’re a way for customers to compare the costs and benefits of one company’s products against another’s. They provide a quick way to gain quotations from different organisations.

Most of them offer a choice between buying online and, less commonly, by phone. In effect, comparison sites are a form of intermediary: companies that supply the goods and services pay the owners of the comparison site each time one of their products is sold.

The strongest brands currently are: 

The consumer advice organisation Which? also provides product comparisons:

To offer something different, there are firms that are making a virtue of not being on comparison sites by claiming that their products are cheaper as a result, such as Direct Line.

Taking an impartial overview, the financial services regulators have raised concerns about customers not getting the level of clarity they need to make decisions about which products to buy.

However, despite these issues, comparison sites continue to proliferate and grow in use.

Activity 3 Estimate their impact on markets

Allow about 10 minutes

Think about the ways internet comparison sites affect customer behaviour, and the knock-on effect on the suppliers of the goods or services.

Now apply these ideas to the insurance market: what do you think might be the impact of comparison sites on the market for insurance products such as phone insurance?

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These websites make it easier for customers to shop around and therefore switch insurer on a more regular basis. This makes the market more competitive.

It also means that insurers are likely to have a higher turnover of customers, leading to higher costs – since it’s usually less expensive to keep a customer than to gain a new one. This in turn has led insurers to look at ways of driving down their operating costs – or, in some cases, at withdrawing from these comparison sites altogether.

Another impact is that some insurers have altered the structure and terms of their products to make them appear cheaper on the comparison sites – for example by heavy discounting, but for only the first year of insurance cover. In these cases the insurers hope that inertia will lead to a good proportion of customers not moving to new insurers after the end of the ‘cheap’ first year.

So while the sites are convenient to use it’s important that consumers remember to identify all the features and terms of competing products.

Comparison sites are a key driver for switching from one supplier to another. In this video Martin Lewis talks about the sense in being a ‘switcher’ instead of being a ‘loyal customer’.

Download this video clip.Video player: mmmft_1_video_week3_lewis_switchers.mp4
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Car insurance. Who will get the better deal? The customer who has been with the company for five years loyally or the new customer? If everything else is equal, in Latin, ceteris paribus, if everything else was equal, who would get the best deal? That one who's been there loyally for five years or the new customer?
Eyes closed. Come on, eyes closed. Hands up if you think it's the loyal customer who's been there for five years. Hands up. Hands up if you think it's the new customer. Hands up if you didn't put your hand up. Wimp.
So, you can open your eyes now. You were roughly 50-50 split. Those of you who said the existing customer who's been loyal and been there for five years had absolutely spot on logic. Of course, you've been there five years, they know you better, they have more data for you. It should be cheaper. And you were completely wrong.
Companies are all about maintaining existing customers and acquiring new customers. The ultimate goal of any profit maximising company is price differentiation. If I have, and I'm out of date, I know, but it's a physical object, so it's sort of better. If I have a Kylie Minogue CD, I should be so lucky, if I have a Kylie Minogue CD here, and this gentleman here is not much of a fan of Kylie Minogue, so he is only willing to pay me three pounds for it, and it cost me two pounds, I should sell it to him for three pounds.
But this man here, he loves Kylie. He wants to be Kylie when he's older. Sorry. He's willing to give me 50 quid for this CD. Well, I sell it to him for 50 quid. So I sell it to him for 50 quid, and him for three quid. I only make a profit there. I make a lot more profit there. Price differentiation. Sell to everybody at the maximum price you can possibly get. That is the holy grail of business. As long as it makes you money. You don't want to fix price, you want to move it.
Car insurance. People who sit there and accept their renewal each year, they take the price each year, can be taken for granted. They're going to renew anyway. Why bother giving them a discount? But when you're trying to win customers, price competition is fervent. It's fast, it's hard. We've got to beat everybody else out there. Now we're not just saying he's going to accept the renewal, and he's going to sit there languishing paying the same each other. Now we, as a company, are having to fight against 100 other insurers. How are we going to win? We're going to cut the price. We're going to use our marketing budget. We're going to smash it down.
The new customer gets the reward. So much so that many people find that when they get their renewal quote, 500 pounds, if they go onto a comparison site and do a comparison, their own existing company, who now thinks they're a new customer, is offering it to them for less.
One of the great lessons in your finances, though not in your relationships, is loyalty doesn't pay.
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