How price comparison websites can remain a 'force for good'

posted on 29/10/2014 09:49:45 by Jonathan Elliott

Price comparison websites (PCWs) have come under attack recently - but the newspaper reports only tell one side of the story.

Price comparison websites are designed to help, not hinder the energy market.

Price comparison websites (PCWs) have come under attack recently for ‘deliberately hiding’ energy deals that don’t pay them any commission. It’s certainly not the first time PCWs have been criticised for a perceived lack of transparency and, as long as they play such an influential role in helping people find better deals, it probably won’t be the last.

According to Ofgem, more people (31%) now rely on PCWs for switching their gas and electricity than go direct to suppliers (27%) - so it’s important that those people are able to trust them. Fortunately, we work directly with three of the top five PCWs - as well as running one of the 11 that have signed up to Ofgem’s Confidence Code - we are in the unique position of seeing all sides of the arguments and feel duty bound to offer a balanced view (and potential solution).

Yes it's true that PCWs will initially show visitors only the deals they're able to sell, rather than the whole range of tariffs that are available on the wider market. Does this mean that they are only ‘in it for themselves’ as has been the accusation from PCW detractors? Well, before jumping to that conclusion yourself, first consider these three reasons for the way they’re set up:

Tariffs are exactly the same price whether shopping direct with suppliers or using a price comparison website.

Historic Manipulation

If all PCWs defaulted to unfiltered ‘whole of market’ results, the suppliers would exploit this marketing platform by offering cheap tariffs that could only be bought from them ‘direct’. In other words, suppliers would promote their products for free and then clean up when customers applied direct – all without having to pay any marketing costs. This is not PCW paranoia but precisely what happened a few years ago with products like ‘Go Direct’ topping the best buy tables. For suppliers this ‘channel’ was in complete contrast to their own direct marketing efforts such as door-to-door and in-store which had a much higher ‘cost per acquisition’ and, consequently, led to higher bills.

What followed was the then industry watchdog - Energywatch - stepped in by introducing the ‘only those available’ filter that is now being criticised. A condition of having that filter is that PCWs (certainly those now accredited by Ofgem) have to offer ‘whole of market’ as an alternative option. This not only protects PCWs by stopping underhand tactics from suppliers, but also continues to give the customer a choice.

The way in which this filter is worded could - and should - be improved by some PCWs. For example, “Do you want to see whole of market?” Yes or no? This is something Ofgem should address in its review of the existing Confidence Code if it wants to remain the defender of public trust in PCWs that do the right thing.

Volume of New Business

It’s actually down to the supplier as much as it is the PCWs as to whether they are allowed to sell their products. If they are not, the most likely reason is that the supplier is not ready or willing to do so. Take for example the new, smaller, suppliers on the market right now. Could they handle the amount of customers the combined might of PCWs would send their way if, as is often the case, they also happen to be the cheapest? It would open a floodgate of customers which they and their systems may simply be unable to handle.

Even if the PCWs showed their products without an apply button, customers would easily find them direct (as in the previous scenario). Imagine if everyone in your local branch of ASDA suddenly walked out and descended on the corner shop for its groceries. Again, this is about being able to offer more – not restrict – choice, so the PCWs with the widest panels will always offer the greatest transparency. 

Funding a Service

Frankly, all PCWs - even a not-for-profit that the government has promised - need to earn money to survive: website development, database maintenance, compliance, legal costs and staff overheads. For example, we offer a free helpline staffed with home energy experts operating at a low margin, simply to provide a better customer experience for those without internet access or requiring more support than a website can provide.

Commission is our only source of revenue, paid by the supplier only on successful applications made through us - and this has no impact on the price the consumer is charged. That means tariffs are exactly the same price whether shopping direct with suppliers or using a PCW. If PCWs are forced to show the whole of the market, they will lose money and some will undoubtedly go out of business. The only winners then will be the suppliers.

Hidden deals are not the real issue here but the fact that commissions are not disclosed. Seventy percent of the 1,000 households we surveyed said they were already aware that PCWs earn commission.

However, it’s this final point that is frequently seized upon by those seeking - for whatever their agenda happens to be - to undermine PCWs and used to rally popular opinion against them.

Given that customers who switch can save an average of £249 on a £1,200 energy bill - and that the difference in price between the best five deals sitting atop the Best Buy Table is only £33 - hidden deals are not the real issue here, but the fact that commissions are not disclosed is. Seventy percent of the 1,000 households we surveyed  (14th – 21st October 2014) said they were already aware that PCWs earn commission and gave pretty accurate estimates averaging at £37.50 per customer. The majority (73%) said they would expect to be able to see this figure when switching.

Unfortunately, PCWs are currently prevented from displaying this figure because it is contractually confidential and, again, it must be pointed out that such arrangements are generally at the request of the supplier, not the PCW. Indeed, it is the supplier’s contract which bonds the partnership and allows the PCW to fulfil the application process on their behalf.

As we have previously suggested, it is clearly in the interests of transparency that all PCWs are permitted - and encouraged by Ofgem - to list this information. Better still, that an industry standard amount is reached in order to create an even playing field and provide the level of transparency that satisfies the market.

This would mean PCWs would then be unimpeded to fulfil their important role of driving competition in the energy market, improving the experience of switching immeasurably and forcing suppliers to work harder to acquire and retain their customers. After all, what would the world (and prices) be like if it weren’t for this force for good and the impact it has had on reducing the dominance of the Big 6 by giving smaller suppliers a platform upon which to promote themselves? It would certainly be to the detriment of millions of UK homes.

Jonathan Elliott

Jonathan Elliott is Make It Cheaper's CEO and founder. He recognises that small businesses are the lifeblood of the British economy, and is passionate about making it easy for them to save time and money, boost their profits and improve prospects for growth. As a vocal campaigner for fair treatment of SMEs by utility companies, Jonathan collected ‘SME Consumer Champion’ & ‘Most Trusted’ at the 2013 Energy Live Consultancy Awards.

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