Price Comparison Websites: Go Compare
The Squeezed Middle Between Google and Product Providers
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Price Comparison Websites: Go Compare
Turn on any TV or radio in the UK and after a while you will be confronted with an advert for a price comparison website. There are four of them: Moneysupermarket, GoCompare, Confused.com and Comparethemarket. Between them, they spend over £150 million a year on traditional media advertising and a lot more on other marketing. A few years ago, Go Compare’s TV advert – featuring Welsh opera singer Gio Compario – was voted the most annoying in the UK; Comparethemarket’s ad was not far behind.
In some ways these companies are a precursor to the super app that is gaining increasing traction in financial services. This week, PayPal launched a one-stop shop allowing customers to access credit, savings accounts and other financial services from a single app. Like super apps, price comparison sites provide an interface between the customer and the market – a first port of call for customers to access financial services. But the mechanism is quite different, as are the economics.
Price comparison websites account for a big chunk of sales of financial services in the UK. In the past, they have driven 25% of credit card sales, 40% of home insurance sales and 55% of motor insurance sales; those rates are likely now higher. Yet their ability to capture value is muted. Two of the four were sold last year for between £500 and £600 million apiece. And stock in the one that’s public – Moneysupermarket – this week hit a six year low.
A look at them reveals the challenges operating at one end of a value chain and how becoming an aggregator in financial services is not that easy.
You’re So Moneysupermarket
Moneysupermarket was founded as an offline business in the mid 1990s to provide mortgage information to independent financial advisors. Its founder, Simon Nixon, had dropped out of college and picked up a job in the mortgage industry, where he witnessed brokers spending most of their days calling up lenders to check the best rates. His idea was to launch a magazine, released every two weeks, that highlighted the best mortgage deals. Realising there was demand for even timelier data, he later used computers to provide real-time information under the futuristic sounding brand, Mortgage 2000.
As 2000 got close, he launched a website, Moneysupermarket.com, to take his database of mortgage deals direct to consumers. Soon, the product range was widened to include credit cards and personal loans and, in 2003, insurance was added. At the time, the company would simply scrape providers’ websites to pull product data. The company subsequently used the same technology to add travel comparisons and home utility price comparisons to its range of services. It focused on categories that satisfy three criteria: strong consumer interest, a large number of providers competing for attention, and a small number of variables that influence consumers’ purchasing decisions.
The company struck deals with a range of providers across its different categories to post their products on its site in exchange for a commission. At the time of its IPO, in 2007, it had 70 providers in banking and 126 providers in insurance. Providers would pay commissions on a cost per click (CPC) or cost per action (CPA) basis. Under the CPC model, the company would get paid if a customer clicks through to the provider’s site; under the CPA model, the company would get paid after a customer completed an application with the provider. In its most recent financial year, Moneysupermarket earned £16.20 per active user on its site. Its model is an affiliate marketing model; the company serves as a disinterested marketing channel for underlying providers.
To attract customers to its site in the first place, Moneysupermarket spends heavily on advertising. In the full year prior to IPO it spent £7.4 million on marketing and promotion; by 2020 that spend had increased to £34.3 million. For many years, the company and its peers were testament to the impact an irritating ad campaign can have. Just before its IPO, approximately half of its revenues were derived from direct-to-site traffic – traffic that doesn’t go via a search engine. By 2015, that proportion had increased to 84%. Consequently, the amount of money that Moneysupermarket paid to Google diminished. In the year before its IPO, it paid 39p in every £1 of revenue it booked to acquire visitor traffic from the likes of Google; by 2015 that number was down to 20p.
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The requirement to invest so heavily in marketing explains why the model didn’t take off in the US. Moneysupermarket itself never tried to set up in America, but Confused.com did, under the brand name Compare.com. It was launched in 2013 and its ultimate parent, Admiral Insurance, invested very heavily in it. But motor insurance at least is dominated by four major players in the US and they each spend a lot on advertising. Geico alone spends around $1.9 billion a year on advertising and Progressive spends $1.7 billion, making it difficult for any intermediary to compete on marketing. In addition, insurance regulation in the US is very fragmented, with different rules applying across states. Consequently, Compare.com found it difficult to wrest control from the established providers. In 2018, Admiral revealed that while it sourced 73% of its new business via price comparison sites in the UK, the proportion in the US was only 12%. In August 2019, Admiral revised down its projections for Compare.com and wrote down the value of its investment by £27.5 million.
That’s not to say the US does not support similar models. The one that works best in the US is lead generation. Rather than act as an affiliate for providers, companies gather customer data and sell it to providers, who then target you with phone calls and emails. It’s the Glengarry Glen Ross school of customer acquisition:
“Do I want charity? Do I want pity? I want sits. I want leads that don't come right out of a phone book. Give me a lead hotter than that, I'll go in and close it.” — Shelley Levene
In Admiral’s case, over three times more volume came via lead generation in the US in 2018 than via price comparison websites.
A number of companies have emerged in the US that specialise in lead generation for financial services. Everquote is one that IPO’d in 2019. Unlike the price comparison sites which source most traffic directly or via organic (unpaid) search, Everquote sources traffic via referrals and display ads (including chum). Using data gleaned from its traffic, it generates leads which it auctions off to insurance providers. Its biggest customer is Progressive, which accounts for a fifth of its revenue. The price per lead it gets is a function of how well past leads convert relative to other channels. In the first half of this year, Everquote earned revenue of $14.40 per quote request at a cost of $12.75 per quote, which is more than the market for the Glengarry leads (“a buck a shot”) but the margins are still tight.
Another is AlphaMedia, which came to the market last year. It provides a platform for insurance companies to buy and sell leads between each other. If a customer goes through an insurance application process but logs off without converting, the insurer can sell that pile of data as a lead to others. MediaAlpha works with thirty insurance companies on the supply side (alongside other parties such as price comparison websites) and multiple insurance companies on the demand side. Each lead is worth around $9 and MediaAlpha takes a cut of around 12%.
The Squeezed Middle
A problem with the price comparison websites and also Everquote, which regards itself as a “leading online marketplace for insurance”, is that although they act as a gateway for customers, they don’t actually own customer relationships. This is reflected in the amounts they spend on customer acquisition. Since troughing in 2015, the amount Moneysupermarket has allocated to Google has consistently been going up, from 20p per £1 of revenue in 2015, to 33p in 2020. The price comparison websites don’t have organic user relationships, they have to pay for them, and consequently they lack the winner-takes-all power of true aggregators.
In addition, they thrive on churn, earning money when a customer changes provider, or looks like they’re going to. This can be against the best interests of providers, so the price comparison sites are being squeezed by Google on the one side and by the providers on the other side.
This has been rammed home twice in the past year. In May, the Financial Conduct Authority (FCA) announced a ban on the practice of “price walking” in the insurance industry, which is where consumers are given a cheap price to get them through the door, before the price ratchets up on renewal. New rules dictate that a renewal price should be no higher than the equivalent new business price for a given customer. This reduces the incentive to shop around each year to keep prices low.
Then, this month, an energy crisis erupted in the UK. Wholesale gas prices have doubled since May for a variety of reasons. In particular, they have risen beyond the cap imposed on retail prices, making the energy business structurally unprofitable for many providers. The result is that many energy companies won’t make it – and there are a lot of energy companies, as a result of the UK government’s attempt to promote competition. At the end of 2006, there were 10 providers of electricity and gas in the UK; by March 2021, the number was 49. Already in September six have failed, accounting for 1.5 million customers, and several more are on the brink, including the sixth largest with 1.7 million customers. 1
In the short-term, all switching is off – providers don’t want new, loss-making customers. In the longer-term, less competition in the category means less scope for switching. Moneysupermarket derives around a fifth of its revenue from its ‘Home Services’ category, of which around 60% is energy.
Super apps have none of these drawbacks. As well as aggregating customers, they participate in product design and pricing, giving them greater purview over the value chain. As a result, they are able to capture more of the value. Ant Group in China is still the most developed here, even if it is being broken up. In insurance, it partners with 90 providers and rather than being paid a referral fee, it takes a share of the premium. In the first half of 2020, that share was around 20% of premiums.
Price comparison websites had a good ride and Simon Nixon for one took out a lot of money from the innovation. But in the struggle between true aggregators on the one side and product providers on the other, they may have peaked.
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Up until 2019, the UK energy regulator (Ofgem) encouraged new entrants to the market, even publishing a 5 page pamphlet ‘Entering the retail energy market: A guide’. The number of providers in the market peaked at 70 in mid 2018 but a spate of failures led the regulator to tighten up its application process. The same year, it introduced a price cap which changes twice a year based on recent wholesale prices. The next change, in October, will reflect wholesale prices up to August and the one after that, in April, will reflect prices between September and February, incorporating the recent hike. It’s this lag between input prices and output prices that hurts the retail energy providers.
The current crisis reflects a clash of two disparate policy choices: promotion of competition and a price cap. Both ultimately serve the purpose of ensuring a fair pricing regime for consumers but they tackle the problem in different ways. Banking regulators have historically avoided promoting competition, as we discussed in The Policy Triangle, because it is not consistent with stability, as energy regulators are now observing. In the trade-off between stability and competition, stability wins out.