Saturday, January 22, 2011

Are price comparison sites a rip-off?

One of the big benefits of the internet is price transparency - quickly being able to see comparative prices and grab the best deal. The price comparison site has sprung up to make this easier and they are now a routine part of life for most of us. But are they to be trusted?

One reason for doubt has to do with a certain cuddly meerkat and an annoying opera singer. PC sites spend a fortune on advertising suggesting they are chasing a very profitable slice of business. If companies can afford saturation TV advertising it usually means they have very high profit margins and you should be wary. Examples are online Bingo, 118 services and certain car insurance companies - it is their customers' cash they are splashing with these campaigns.

So without having any direct information about the profitability of PC sites I can be pretty confident they make a lot of money and this is reflected in the prices. Perhaps it is no coincidence that motor insurance premiums are reported to be rocketing (33% rise in premiums). Direct line, which doesn't use PC sites, uses that fact in its advertising saying that you can save money by cutting out the middle men and their fees.

Another point of concern is how broad the coverage of a site is. You assume that quotes are gathered widely from all market participants but sometimes only 10 or 15 are actually featured out of hundreds of possibles. Some companies besides Direct Line generally don't deal with PC sites - RBS, Green Flag, Tesco, Churchill.

When you consider the ownership of some sites then things can become even murkier. For example Admiral, a FTSE 100 insurance giant, owns and some customers have complained "Admiral always come out top of their comparisons". The meerkat company is owned by insurance group BGI.

The papers have been full of reports recently about which claims to find the best price on heating oil. It is PC site owned by an Irish company that also delivers heating oil and has ten different brands which are all featured on the site. Some newspapers have conducted tests and found that the site has directed customers to their own brands even when much more expensive than rivals. It is an apparent conflict of interest which the government is looking at - Energy Minister demands heating oil enquiry.

Another danger was highlighted by the Telegraph last week:

Biba, the British Insurance Brokers' Association, claimed this week that some sites were giving people insurance quotes that did not reflect their individual requirements owing to the focus on the lowest headline price. This has led to customers buying products with higher than expected excesses, or which are unsuitable.

"They [comparison sites] have become the tail that wags the insurance industry dog," warned Biba's head of corporate affairs, Graeme Trudgill. "They have made it all about the price and not the cover."

A final conclusion: it's pretty simple really - don't forgo price comparison sites if you find them useful, just don't assume that they are the last word on price and do at least some shopping around, including offline in some cases.

Latest article at Advoco (my Spanish tax site) What should you do with your savings in 2011?

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