Wednesday, May 25, 2011

Consumer behaviour, economics and research methodology

I've had some fun with the iSelect media release that purported that the "iSelect Broadband Report" had been released but wasn't.

I now want to talk about its central thesis, the comment attributed to Charlie Brown that;

Australians need to do their homework on broadband before signing up to a new contract. It doesn't need to be time consuming or difficult - if you use an online comparison service, you can evaluate plans based on your actual needs to find the best one for you.

This, of course, means use a site like iSelect. The size of the prize seems to be quite impressive - the whole $141,313,506.15 that they absurdly tell us will be saved. As I've elsewhere noted we are given no information on how this amount is derived.

We aren't even told over what time period this saving is made, but it looks to be an annual amount. Still a big number, but we are also told there are 7.5 million households subscribing to the internet. That's a saving of under $20 per household.

Economists who talk about anything other than theoretical non-existent markets will tell you that "search costs" are a significant factor in consumer behaviour, and that consumers will use other things, like brand and referral as substitutes. The iSelect research tells us that, on average, we shouldn't exert more than $20 worth of extra search costs in choosing broadband provider.

Their pitch of course is that their site significantly improves your search capability. Having had a look at it it is a proposition that certainly wouldn't be true for me, though it may be for other consumers.

More significantly the release reveals that "Not surprisingly, most people (66 per cent) say that reliability and maintaining connection are the most important features of a home internet service." This is something that price comparison sites provide no assistance with.

The release also says "Less than a quarter (24 per cent) understand how the speed of their broadband connection is measured (megabits per second), yet 86 per cent say speed is very or extremely important to them." This means the consumers are actually savvy, because the access speed tells you nothing about the contention ratios in the ISPs network. Users judge speed by how fast things happen on their screen not how many bits can flow from their modem to a network access point per second.

There also seems to be an unexplained discrepancy. The release cites the ABS statistic of 7.5M households with a non-dial up connection. Technically speaking this is reported by the ABS as 7.595 and should be rounded up and represents the bulk of the 9.739 million non-dial-up connections.

But the ABS also reports download stats. They report 191,655 Terabytes of data downloaded for the entire three months prior to the report date (31 Dec 2010). That is a grand total of 19 GB of download for the entire quarter for every broadband connection, or just over 6 GB per month.

Yet the iSelect release asserts "Australians are on average downloading more than 48 gigabytes of data per household per month." This is a massive discrepancy between the result from the iSelect research (presumably based on user self-reporting) and the ABS statistic (which is based on data provided by ISPs). Two potential causes of that discrepancy could be errors in the self-reporting of download usage or a very statistically non-representative sample.

The position marginally improves though if the vast gap between fixed and wireless downloads is included (see graph) but 31 GNB in a quarter is still less than 25% of the rate claimed by iSelect.

I'm not sure I have the energy for another round of questions to iSelect.

Novae Meridianae Demetae Dexter delenda est

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