What is Search Cost?
Search cost is the time, energy and money expended by a consumer who is researching a product or service for purchase. Search costs include the opportunity cost of the time and energy spent on searching and perhaps the money spent to travel between stores examining different options, purchasing research data or consult an expert for purchasing advice. This is time and energy that could have been devoted to other activities. Retailers depend on high search costs to prevent too much price based shopping from eroding margins.
Understanding Search Cost
The search time and related search costs tend to be higher on big-ticket items like vehicles. This is because it makes more sense to spend time, energy, and possibly money researching how to get the most reliable and affordable car than it does researching how to get the tastiest and most affordable sandwich. The consequences of making a bad purchase decision on an expensive item are much greater than those for an inexpensive item.
Thanks to the internet, buyers generally face lower search costs for almost anything they want to buy today compared to the past. This is simply because users can now get fast, accurate information on products and services without even having to leave home. However, there is still a trend for consumers to comparison shop online and then make the purchase offline when the price is significant. To ensure that business still comes in, retailers also tend to offer customizations on large purchases that are only available through retail locations.
Prices for the same or similar items differ across stores and locations for a variety of reasons. The fact that the same product can be bought for the same or lower price usually provides enough incentive to conduct a search. However, if a product is purchased infrequently, the effort to check the price on every shopping trip might outweigh the benefit of saving a few dollars. Sometimes, promotions and advertising for a particular product increases the consumer’s incentive to search. This change in incentives leads to an increase in traffic, which, from a store owner's perspective, is a desirable.
Factors in Search Costs
Search costs are divided into external and internal costs. External costs include the monetary costs of acquiring the information and the opportunity cost of the time taken up in searching. External costs are not under the consumer's control. However, the decision to incur the costs are at the discretion of the consumer. Internal costs include the mental effort given over to undertaking the search, sorting the incoming information and applying it in context with existing knowledge. Internal costs are determined by the consumer's ability to undertake the search. This, in turn, depends on intelligence, prior knowledge, education and training. In economics, search costs are often studied in conjunction with switching costs to identify barriers that consumers face in changing suppliers.