Next Gen Price Comparison Sites

An alert reader sent in this WSJ article on The Next Generation of Price-Comparison Sites. Price comparison websites are almost as old as the internet as a commerce medium. The idea is that the internet would facilitate an Adam-Smith-like perfect market of perfect information. Bill Gates described a “friction-free economy”, which others pointed out meant a “profit-free economy.” Naturally, everyone but the lowest-priced site has some reason to be unhappy with price comparison sites. And since the lowest price sites may not even be legitimate, almost everyone is concerned with the transparency of a perfect information and a perfect market.

A common tactic to fool price-scraping “spiders” as web-crawling programs are known, is to bury shipping charges somewhere inaccessible. You can then advertise a low price to lure shoppers, but tack on fees later. Contrary to the promise of the perfect market and the annihilation of brands however, online shoppers are at least as brand-conscious as offline shoppers. Various studies have shown that low price does not rule on the internet. Amazon is a prime example. Its prices are “competitive” but almost never the bottom of the barrel. Why? In the anonymous, online world, trust is even more important. And buyers will usually pay some premium for that trust.

So why have companies like EBay spent hundreds of millions of dollars on price comparison sites? For one thing, the technology has advanced considerably. The price comparison can be a subtle as a toolbar that displays an alert when you’re browsing an item in an online catalogue, indicating a lower price elsewhere. And, these sites do save consumers money. This drives people to the sites, which can then charge companies for inclusion.

Does this make price comparison worth hundreds of millions of dollars? Personally, I don’t think so (perhaps I’m just envious because I didn’t go into that business?). The technology isn’t that hard, and I predict there will be a number of free and/or open source options, targeted to particular products in the next few years. Depth will be worth a lot for people who want a digital camera, a trekking backpack, or a case of wine (especially now that states are removing restrictions on wine purchases over the internet).

What does this mean for people pricing in environments that are subject to price comparison spiders? (Note that this applies in both business and consumer markets.) First, don’t panic. Your IT group has (or should have) the ability to measure traffic from comparison sites– both the robots and human shoppers. If robot traffic is on the rise and human traffic is declining, you may be losing business to other sites. But it’s important to establish how much. Even a 10% loss in business is unlikely to justify a 10% price decrease. Next, measure the effectiveness of your “loyalty” programs, from rebates and promotional discounts to frequent purchase programs, coupons, and so on. Implement or adjust as needed. This may include reaching beyond pricing to clear up issues with service, reliability, or return policies.

This will focus on your existing customers. What about new prospects? You can encourage existing customers to spread the word through pricing incentives, for one thing. You can also offer guarantees about service levels. And you might have to get creative.

Just be sure you can measure what you’re doing. The temptation to match prices rather than differentiate value sounds simple, but it can destroy a healthy business. The cure can be worse than the disease.

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