Is a motor car just a horse-drawn carriage with a different type of horse? Or is it a fundamentally different species? Many years ago, this was a real debate – especially as, at that time, the motor cars you saw were basically horse-drawn carriages modified to carry mechanical engines.
At this stage of its evolution, the motor car was not an impressive beast. It was less reliable than a horse, more difficult to run, and far more expensive to boot. That’s why, when the president of the (horse-drawn) Carriage Builders Association observed in 1900 that the idea “that the automobile will one day replace the horse is a fallacy too absurd to be mentioned by intelligent men”, he didn’t sound like a complete idiot. In fact, he had evidence in his favour. In the five years preceding his statement, 300,000 horse-drawn carriages were sold in New York alone – compared with just 125 motor cars.
What the carriage builder missed, of course, was the PFI factor/ potential for improvement. Horse-drawn carriages were at their peak in terms of comfort, convenience, performance, efficiency and so on. The motor car was just starting out and geniuses like Henry Ford were working hard to prove that the motor car’s PFI factor was much, much higher than most people ever believed possible.
Now fast-forward a century to Direct Line’s pricecomparison bashing ad campaign. Are comparison services just good old-fashioned brokers delivering their service by a different type of medium? Or are they a fundamental innovation, heralding motor-car-like effects on their markets?
Looked at from today’s perspective, Direct Line has a point. Consider some of the drawbacks of the typical price comparison service.
For a start, few price comparison sites are truly comprehensive. They don’t survey the entire market, partly because organisations like Direct Line refuse to co-operate with them, but partly because some are only too happy to act like good old-fashioned brokers with a cosy, select “panel” of providers to choose among. If you can get a better deal by going elsewhere, what’s the point of going to a price comparison site?
What’s more, often the information they provide is biased by commercial considerations. Some sites prioritise the results of providers who pay them higher commission rates. Others refuse to mention providers who refuse to pay them commission. So the results you end up seeing are not a genuine price comparison at all. They are actually commissions incentives comparisons – just like many traditional brokers.
In addition, because they focus on just one attribute – price – price comparisons are often misleading for another reason: they don’t actually compare like with like. Take a car insurance policy with zero excess to pay, guaranteed alternative vehicle provided and all admin and repairs handled for you by the service, and compare it with one that charges you £1,000 excess, doesn’t provide you with alternative transport and leaves you to clear up the mess. Guess which one would win a price comparison? People who say too much focus on price in isolation leads to commoditisation have a point.
For many people, however, price isn’t the most important factor anyway. What they are really concerned about is whether the product has the features and attributes they want, whether it is of outstanding or mediocre quality, what the customer service is like and so on. They might also be concerned about completely different dimensions such as social and environmental policies. Where are the comparisons on these things?
Finally, lest we forget, most price comparison sites assume that you already know exactly what you want to buy, whereas for many people the most important potential added value is advice: which product is right for me with my particular circumstances and priorities?
This is why, like the motor car in 1900, demand for comparison shopping services is limited. After early year-on-year growth rates of 30% or more, usage of comparison services in the US is already going ex-growth. The UK looks like it could soon follow suit. In some categories, such as insurance, comparison shopping has successfully entered the mainstream. But if the industry doesn’t watch out, it risks boxing itself into a very small ghetto – addressing the needs of a relatively small proportion of confident but totally price-oriented shoppers across a relatively small range of easily compared products.
But what is the comparison shopping service’s PFI factor? Is comparison shopping at peak performance, like the horse-drawn carriage? Or is it closer to that of the 1900 motor car? The answer is: the 1900 motor car. The motor car had much it could do to improve cost, comfort, convenience, safety and reliability. Comparison shopping has much it can do to improve trust, usefulness, ease-of-use, advice, comprehensiveness and so on.
As the number of comparison services proliferates and the industry’s early growth rates slow, inter-service competition is intensifying. This is a competitive arms race with an important difference, however – it is not the usual competition to influence consumer decisions, it is competition over who is best at helping consumers make better decisions. And it has its own internal logic.
For example, comparison services are going to have to work at lot harder to explain exactly why their particular service helps consumers make better decisions as opposed to the help offered by other services. That’s why most services are already working hard to provide users with expert and peer reviews and other forms of buyer advice.
They will also have to defend themselves against detractors. Take commissions. What is wrong with commission? If a middleman gets a fee for connecting a buyer and a seller what is wrong with that? All retailers do it. There are two arguments here.
First, seller commission might bias the middleman’s recommendation. The only way comparison services can build trust here is by developing clear, explicit policies to guarantee such bias cannot happen – with transparency to prove it. We’ve got a long way to go on this.
Second, it’s sometimes argued that middlemen just add extra cost. In theory, a direct service such as Direct Line should be able to offer better value because it eliminates the middleman’s fees. But this only works in a Soviet-style monopoly situation. As soon as you have two “direct” services competing for customers, they are desperately trying to out-market each other to capture all available “direct” traffic. That is why Direct Line is such a profligate advertiser. The net result is that “direct” models’ go-to-market costs can be higher, not lower, than middleman-based models.
Either way, whichever go-to-market strategy the seller opts for, its customers still end up paying the costs of this strategy in the prices they pay. By highlighting the commissions issue, Direct Line is effectively initiating a debate about the consumer value (as distinct from corporate value) of companies’ go-to-market strategies and spends. How would you prefer your money to be spent: paying a comparison service to provide you with useful information, or being exposed to traditional advertising?
There is another, even more important way in which this competitive arms race is different. Traditional marketing is based on the assumption that the seller of a product is also the most important and most influential source of information about that product. With comparison services, however, the biggest influence on consumer purchasing decisions is the trusted provider of impartial third-party information: comparisons, reviews and so on, over which marketers have no direct control.
Rumours about Direct Line entering the price comparison market via a white-label deal with Tesco notwithstanding, for a company such as the Royal Bank of Scotland, whose entire business model relies on near 100% control of distribution channels and information content, this is a terrifying prospect. The fact that RBS subsidiary Direct Line feels the need to start “fighting back” shows its fear that this threat is actually beginning to materialise.
By “fighting back” however, all Direct Line is really doing is forcing the comparison services to improve their game. With an enemy like Direct Line, comparison shopping doesn’t need friends.
Alan Mitchell, www.alanmithcell.biz