Around 10 million people use price comparison websites each year in the UK. They're quick, convenient and save us a lot of time shopping around. But not many of us realise that we're paying around £650 million a year in commission for the privilege.
A recent YouGov survey found that consumers thought they paid between 5% and 10% in commission when they bought something through a comparison website - in reality, the average commission is 24%. But is there any way of avoiding these hidden charges? Moneywise investigates.
Comparison websites make their money in a number of ways. The simplest and most obvious is from advertising on the website. A second income stream comes from sponsored listings, whereby companies pay to have their products appear at the top of search results.
As long as price comparison websites make it clear that these listings are paid for and not necessarily 'best buys', this is perfectly legal. The third revenue stream comes from click-throughs where the comparison site earns referral commission when a customer clicks through to a company's website and buys a product.
The more people a comparison site can convert from lookers into buyers, the more income it will earn.
The sites also make a lot of money in commission from the companies that list products on their websites. Commission works as a kickback for the comparison websites - the price they quote you on their website includes a payment that will go to them rather than the initial price provided by the company offering the financial product.
Make no mistake, this is big business.
The big four comparison sites - moneysupermarket.com, gocompare.com, comparethemarket.com and confused.com - have been locked in a multimillion pound TV advertising battle in recent years. Moneysupermarket.com is worth nearly £560 million on the London Stock Exchange and is forecast to make around £40 million in pre-tax profits in 2011.
Cheaper to go direct?
So is there anything we can do to avoid paying high levels of commission to comparison sites? The obvious answer would be to buy direct from the product provider. But in the weird world of financial products you can actually end up paying more going down this route.
Take life insurance, for example. There are around 10 big life insurers in the UK. They quote monthly premiums for different types of risk, and build in a commission of around 30% to pay for distribution through independent financial advisers, brokers and price comparison sites. This is similar to the recommended retail price of electrical goods on the high street.
How the cost of Admiral car insurance goes up between comparison websites
This is for a quote on a 2009 Citroen Xsara Picasso and a 40-year-old, male driver.
If you go direct to the insurer you will be charged this full price, whereas a broker or a price comparison site might decide to forego some of the commission in order to offer a better price than their competitors. The comparison sites will charge anything from 20% to 100% of the commission on offer from the insurance company, although exact figures are hard to find as the sites claim commercial confidentiality.
Ian Williams, managing director of execution-only broker Cavendish Online, explains: "There's a factory gate price for a product such as life insurance, then there's the price at which it's sold via intermediaries. Customers can end up paying hundreds of pounds in commission over a life policy's term."
The good guys
But it's not all bad for consumers. Cavendish and SaveItBuddy are lining themselves as the good guys in the comparison website world. Cavendish charges a fixed fee rather than taking commission, while SaveItBuddy returns part of the commission it receives to customers in the form of cashback. The cost of using the wrong comparison site or going direct to a company can really add up.
According to Cavendish, a 35-year-old man buying £100,000 of level term assurance with critical illness cover over 25 years direct from Legal & General could expect to pay a monthly premium of £36.51, or £10,953 over the life of the policy.
Buying the same policy from the same provider through Cavendish would cost £26.43 a month, or £7,929 in total – a saving of £3,024 (minus Cavendish's £35 arrangement fee).
Moneysupermarket.com's quote for the same level of cover was £32.48 per month, or £9,744 in total; £1,209 cheaper than L&G but still £1,815 more than Cavendish.
If this was made clear right from the start it's very unlikely anyone would buy life insurance direct from the provider. As it stands, commission levels are often buried deep in the smallprint.
Price comparison sites also like to give the impression that they scour the whole market to find you the cheapest 'best buy' products. But that often isn't the case.