When price comparison websites exploded on to the insurance scene there was a genuine fear that they might seriously impact the sector, sweeping in like a tornado and taking brokers and insurers with them.
That, however, didn’t happen – insurers and brokers managed to adjust and keep business flowing. However, now a new report has suggested that insurance firms are no longer threatened by price comparison websites – they actually need them to stay alive.
The report by Decision Technology, entitled
Pulling Rank: How to win the pricing game, suggests that firms throughout the financial services sector that want to maintain or increase market share need pricing strategies that focus on staying within the top three positions of a price comparison website. Why? Because the report suggests that the top three positions on price comparison websites now account for 80% of total sales across financial services.
“The rise of price comparison websites is changing the competitive landscape in the retail financial services in a dramatic way,” said Henry Stott, director at Decision Technology. “Record numbers of people have been switching current accounts over the past few years, due in large part to the deals they can find online.
“This presents an opportunity as well as a challenge for retail finance companies. If you understand how people think and take decisions, you can make your products more attractive. But this means companies need to move beyond traditional pricing models based on outdated economic theory and inaccurate market research, and instead use behavioural science to understand how and why customers use price comparison websites the way they do.”
Decision Technology’s report outlines the unconscious biases that come into play when people are making purchasing decisions, and why these have increased the success of price comparison websites:
Reference dependence: People are generally better at making comparisons than absolute judgements. Price comparison websites make decisions easy by providing lots of reference points for comparison. It is not the cost of the product, per se, but where it ranks that is important.
Framing effects: Price comparison websites typically frame decisions in terms of price alone. Customers therefore focus on price to the detriment of other considerations, such as level of service or restrictions in small print.
Status quo bias: Since people feel losses more acutely than equally sized gains, they prefer things to remain the same and need a large incentive to move away from the status quo. Clearly customers can be tempted away but there is an advantage to being a customer’s current provider.
As such, the company suggests five recommendations for financial firms to adopt in response to the continuing rise of comparison websites:
1. Ensure products make it into the top three spots on price comparison websites – this is crucial for brands to capture market share.
2. Create a low-cost, online-only brand to compete on price comparison websites efficiently.
3. Use low cost products to draw customers in via price comparison websites and then cross-sell more profitable services.
4. Conduct regular randomised controlled experiments to stay on top of the latest trends in customer behaviour.
5. Embed behavioural science throughout so all teams understand the customer decision making process.
What is your verdict on price comparison websites? Do you still see them as a threat? Leave a comment below with your thoughts.
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