Microsoft yesterday acquired Jellyfish, a shopping comparison site which offers cashback on purchases for users, and ranks retailers according to the amount they agree to lower their prices.

The terms of the acquisition were not disclosed, though Jellyfish raised $5m in funding last year from Kegonsa Capital Partners and Clyde Street Investments.

Jellyfish was launched in June 2006, and it has an interesting approach to the shopping comparison model.

The site shares around half of the affiliate ad revenue it makes from every sale with its customers, effectively offering customers cashback on most purchases. Jellyfish incentivises retailers to provide greater discounts, as they are made according to how much cashback a buyer will receive.

It claims that, from a retailer’s point of view, it offers greater value as it only charges them when a customer makes a purchase. It calls this ‘value per action’, and it sounds like the PPA system that Google has been testing this year. .

According to Microsoft’s Live Search blog:

“Jellyfish has done some really innovative work in comparative shopping engines. We think the technology has some interesting potential applications as we continue to invest heavily in shopping and commerce as a key component of Live Search.”

The move comes at a time when more established shopping comparison companies are feeling the effects of market changes, with reports that Yahoo! is thinking about a move to offload Kelkoo.

Certainly the sector has become a lot more competitive in the past couple of years. Going forward, the sites we expect to do well are those with a combination of a niche propostion / focus and a best in breed user experience.

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Related research:

Shopping Comparison Engines Buyer’s Guide 2006