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Behavioral Targeting

There is still more interesting grist from the national telephone survey by the Annenberg Public Policy Center at the University of Pennsylvania.  The report has an extensive discussion of price discrimination – offering different prices for the same product or service to different customers based on behavioral profiling.

This practice is already happening.  Supermarket discount cards are an example of price discrimination.  The report notes: “[B]eing a loyal customer doesn’t automatically mean getting the lowest prices.  Computer analyses of shopping histories might determine that a person’s allegiance to some products means he or she would buy them even without the discounts, or with smaller discounts than others might get for the same items at the same time.”

But the future potential for discriminatory pricing is vast.  Ponder this:

Merchants consider the online environment a particularly ripe are for such “dynamic pricing” – that is, for . . . price discrimination driven by behavioral targeting.  Writing in Harvard Business Review, associates from McKinsey & Company chided online companies that they are missing out on a “big opportunity” if they are not tracking customers’ behavior and adjusting prices accordingly.  Consultants urge retailers to tread carefully, though, so as not to alienate customers.  The most public revelation of price discrimination online centered on customer anger at in September 2000 when it offered the same DVDs to different customers at discounts of 30%, 35% or 40% off the manufacturer’s suggested retail price.  Amazon insisted that its discounts were part of a random “price test” and not based on customer profiling.  After weeks of customer criticism, the firm offered to refund the difference to buyers who had paid the higher prices.

Angel Customers Demon Customers One marketing book suggests that companies begin to treat consumers differently.  The book notes that certain customers (“angel” customers) are very profitable, but that there are other rather unprofitable customers (“demon” customers).  For example, demon customers return items frequently or call customer service a lot.  They can actually cost a company money.  Thus, the book recommends that companies find ways to slough off the demons and retain the angels.

What if, based on profiles, companies started charging higher prices based on people who appeared to be wealthier?  Or people who were determined to have a particular need for a product or service?  Or based on how often people called to complain about products or how often people returned items?  Are such practices uncouth?  Illegal?

Well . . . not illegal.  But that’s not what most people think:

  • 68% of American adults who have used the internet in the past month believe incorrectly that “a site such as Expedia or Orbitz that compares prices on different airlines must include the lowest airline prices.”
  • 64% of American adults who have used the internet recently do not know it is legal for “an online store to charge different people different prices at the same time of day.” 71% don’t know it is legal for an offline store to do that.

As for whether such practices are unseemly, that’s for you to decide.  Some might say that price discrimination is fine so long as it makes economic sense.  If you’re willing to pay more than me, why not charge you more?  On the other hand, decisions about who pays what are based on personal information plugged into a profile.  The argument for consumer profiling is that it enables marketers to better target advertisements to interested consumers, thus bringing consumers more information about things that they will find of interest.  This seems quite innocuous.  But what if every little thing we buy, return, or complain about is tracked and then used as a way to treat customers differently, to charge them different rates for products and services?  Things begin to look a bit more problematic.


Originally posted at PrawfsBlawg


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This post was authored by Professor Daniel J. Solove, who through TeachPrivacy develops computer-based privacy training, data security training, HIPAA training, and many other forms of awareness training on privacy and security topics. Professor Solove also posts at his blog at LinkedIn. His blog has more than 1 million followers.

Professor Solove is the organizer, along with Paul Schwartz, of the Privacy + Security Forum and International Privacy + Security Forum, annual events designed for seasoned professionals.

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