Who’s Afraid of the Big Bad Meerkat?

Henry Stott


Decision Technology

Price comparison websites are an opportunity not a threat.
Price comparison websites (PCWs) are disrupting the financial sector. Customers are increasingly moving online to look for the best deal, so firms whose products are not at the top of the rankings are losing out on market share. But, by using a behavioural approach, firms can make the most of the opportunities PCWs provide and increase market share.
70% of UK internet users have visited a PCW, and the websites account for a significant proportion of retail product sales. From home insurance to credit cards to mortgages, PCWs are shaking up way people buy from financial services firms.
This presents firms with a number of challenges. PCWs reduce revenues, increase competition and reduce control over the sales journey. The emphasis they place on price alone makes it more difficult to compete on other attributes such as service or quality, key issues given the reputational work the financial sector needs to do in the wake of recent mis-selling scandals.
However, PCWs also represent a huge opportunity for firms. Our research shows that the top three products on a PCW account for around 80% of sales, and that moving from second to first place in the rankings can result in a 37% increase in market share. There are significant rewards for firms who get their pricing strategy right.
But to do this, firms need to move beyond traditional pricing models based on outdated economic theory and inaccurate market research, which often fail to accurately understand and predict customer behaviour. Instead, commercial directors must use behavioural science to understand why customers use PCWs the way they do. Only then will they be able to take back control and regain market share.
Decades of academic insight and robust experiments show that people’s preferences are reference-dependent. Put simply, we are better at making comparisons than decisions without context. This is why PCWs are so successful – they appeal to our inbuilt need to compare. They make mental processes simple and 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.
The fact that purchase decisions are so heavily context dependent means slight changes in competitor price will shift demand significantly. So firms need to have up-to-date information and, crucially, the right pricing model; traditional ‘optimal price’ analyses will be obsolete within hours.
Firms can not only survive but thrive in the world that PCWs have created. There are five steps we recommend:
1. Ensure products are always ranked in the top three on PCWs.
2. Consider creating low-cost, online-only brands to win customers using a smaller cost base.
3. Adapt operations to cross-sell more profitable services to customers arriving from PCWs.
4. Conduct regular research using randomised controlled experiments to inform product design.
5. Upskill staff to ensure they understand the ongoing implications of behavioural science.
PCWs will continue to grow in popularity and complexity, bringing challenge but also opportunity for financial firms. Those that take these recommendations on board can better protect their market share and prosper. Those that continue with business as usual will soon find themselves struggling.
To download the Decision Technology report “Pulling Rank: How to win the pricing game” please use the download button.

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