As consumers, we often take for granted the “buying power” that the Internet has given us. This is especially true when we’re purchasing something that has a daily fluctuating price, like hotels and airline tickets. Once upon a time businesses could charge whatever they like these things, because they knew that it was difficult to find a cheaper alternative.
If you wanted to find the cheapest airline ticket to New York, for example, you had to call each individual airline. Then came along the likes of Priceline, Kayak, and Hotwire. Unhappy with the price of your hotel? You can find a cheaper alternative within seconds.
Over the last two decades, the Internet has acted as “the great equalizer.” It’s done this by greatly reducing (if not eliminating) something that economists call search cost--the cost that consumers face when they want to switch to a better alternative. Long ago, if you were unhappy with the price that
We probably don’t even think about the fact that there was once a “search cost” when buying something, let alone the economics, but let’s think about this. Long ago, if we were unhappy with the price of a TV at our local electronics store, we had three options:
- Spend time checking other stores to see if they had a cheaper price for the same TV. This was costly from a time perspective.
- Use a trusted intermediary, such as a salesperson, to tell us if any other brands or models were just as good at a cheaper price. This was costly from a “risk” perspective--the salesman has other motivations than you and you’re taking a leap of faith that they’re knowledgeable about TVs.
- Just buy the damn TV that you’re looking at.
Anytime search cost is reduced or eliminated, consumers like you and me win. When it comes to reducing search cost, some industries are easier than others, and all of the “low hanging fruit” has been picked.
So what industry may soon experience this reckoning and means lower cost to you and me? I wondered this question myself. The next domain has to have the following characteristics:
- Little transparency on pricing.
- A large “cushion” between what consumers are currently charged and how low suppliers are willing to go.
- A large number of competitors in the space.
After doing some digging, I believe that the next space is be auto insurance.
According to the Lifehacker article “You’re Probably Overpaying For Auto Insurance,” most people are overpaying for auto insurance because of...you guessed it...high search costs. One company, gabi.com, has made it their mission to solve that problem by allowing customers to enter their current insurance policy, then view policies that are cheaper.
According to Dr. Hanno Fichtner, the founder of Gabi, “The industry has little transparency and is keenly aware that switching providers is a huge hassle that most consumers simply don’t want to deal with.”
Gabi conducted research in which they analyzed over 220,000 insurance policies. They found that most people could save money by switching policies, and that the average savings would be over $700 per year.
So why is the Internet only now getting around to eliminate search cost in the auto insurance industry?
Well, there have been previous attempts before. Some sites like insurance.com allow you to compare car insurance from multiple websites. But they don’t take into account your current insurance plan, among other things, and fall a bit flat. In essence, they’ve only slightly reduced the search cost of car insurance, rather than completely eliminated it.
Unlike booking flights and hotels, car insurance can be bit guarded and complicated. Upon a simple Google search, users are bombarded with overtly promotional articles and websites offering different rates covering different aspects. Gabi had to assemble a team of former car insurance agents in order to tackle the problem around price transparency.
Of course, the movement to eliminate the search cost of auto insurance is still in its infancy. Priceline.com started a similar endeavor in the travel industry decades ago (remember the William Shatner commercials that started as early as the late 90’s?). It’s also possible that another space, like health insurance, will actually be the next heat up. But for now, keep an eye out on the auto insurance industry and where it goes. If my prediction is correct, consumers and their wallets will have plenty to rejoice about.