A spate of media articles has raised the alarm of companies leveraging real-time data to manipulate consumer behavior. Recently, for example, the New York Times breathlessly profiled Uber's attempts to use data to motivate both drivers and riders to pick up more fares. And now comes The Atlantic's profile of ecommerce firms manipulating prices in real time to drive maximum profits. For loyalty marketers, these articles often fall into the "Master of the Obvious" category - after all, leveraging data to motivate profitable customer behavior is the essence of what we do. Still, the relatively skeptical tone of the media coverage ought to give us pause to ask the obvious question: do our data efforts enable us work on behalf of our customers - or are we merely exploiting them?
By Rick Ferguson
The Atlantic article by Jerry Useem details the efforts of both e-commerce giants and startups to manipulate prices in real time to conduct live experiments in leveraging elastic pricing to drive maximum profits. In the brick-and-mortar retail world, items cost what they cost; they may be discounted, but the customer shopping the racks next to you sees the same prices you do. In the online world, the very idea of a "standard price" for anything is going away. When shopping online, you will often see a different price than your neighbor for the same item; you may even see a different price for it depending on your previous purchases, your browsing history, or even the time of day you shop.
To Useem, the practice smacks of Big Brother. While the advent of online comparison shopping and retail showrooming seemed to have put the power of data squarely in the hands of consumers, now the Empire has struck back by purposely obfuscating, if not outright killing, the very idea that it's possible to determine the lowest price for anything. Money quote:
"This is what online comparison shopping hath wrought. Simply put: Our ability to know the price of anything, anytime, anywhere, has given us, the consumers, so much power that retailers - in a desperate effort to regain the upper hand, or at least avoid extinction - are now staring back through the screen. They are comparison shopping us."
Interestingly, the Atlantic piece points out that the "retail price" of goods is a relatively modern invention. The concept never really existed prior to the Civil War; until the beginning of the Industrial Revolution and the advent of the urban department store, the price of everything was negotiable. Retail pioneer John Wanamaker invented the "price tag" to push goods in his Philadelphia department store - and the rest is history.
Useem refers to the retail price as a "truce" between merchants and their customers, and points out that the internet allowed customers to essentially break the truce by providing price transparency. The pricing wars back on, retailers are now merely exploiting the new tools of data analysis and digital advertising to win the war by once again obscuring the true price of anything. Economists conducting pricing experiments in real-time took over e-commerce, and suddenly consumers once again find themselves on the defensive. Money quote #2:
"Then economists realized that they could go a step further and design experiments that produced data. Carefully controlled experiments not only attempted to divine the shape of a demand curve—which shows just how much of a product people will buy as you keep raising the price, allowing retailers to find the optimal, profit-maximizing figure. They tried to map how the curve changed hour to hour. (Online purchases peak during weekday office hours, so retailers are commonly advised to raise prices in the morning and lower them in the early evening.)"By the mid-2000s, some economists began wondering whether Big Data could discern every individual's own personal demand curve—thereby turning the classroom hypothetical of "perfect price discrimination" (a price that's calibrated precisely to the maximum that you will pay) into an actual possibility."
On the one hand, marketers might ask, "So what?" No one forces a customer to buy anything. Attempting to understand the maximum price that an invididual customer will pay for an individual item is merely allowing the retailer to turn maximum profit based on pre-existing shopper behavior. The practice may not be transparent, but it isn't necessarily unethical.
Their are ethical problems, however, that are at least worthy of debate. The first problem is highlighted in the Atlantic piece: the potential for fraud and outright discrimination. The article mentions a successful class-action lawsuit levied against e-retailer Overstock.com for blatant price fraud on outdoor furniture, as well as raises serious allegations of discrimination by retailers offering, for example, lower prices to greater Bostonians, and higher prices to rural Masshachusetts residents with fewer shopping options.
The second problem is less concrete, if no less worthy of consideration: the problem of using data to do things to customers rather than for them. By using shoppers' own personal data, such as their browsing history, to extract maximum revenue from them, aren't we in effect "robbing" them of the value of their data? In theory, we can envision a world in which legislatures have given consumers complete control over their personal data - perhaps through blockchain-enabled "data lockers" that require retailers to seek permission to access your browsing history for marketing purposes. It's a world in which consumer data has actual cash value not only to companies, but also to the consumers themselves.
In that scenario, consumers would once again have all the power. Retailers would be forced to essentially auction off their goods and services - or provide substantial reward and recognition - to customers who grant access to their data.
Such a world may come sooner than you think - particularly in Europe, where the looming General Data Protection Regulation (GDPR) will grant consumers unprecedented protection against unethical use of their data, backed by draconian fines for companies found in violation of the new regulations. Even absent regulation, the backlash has already begun. Some online entities have embraced radical transparency; Useem highlights online apparel retailer Everlane, which prices goods based on a transparent reveal of their cost to manufacture and source, and then allows customers a choice of what price to pay for them; he also highlights start-ups that monitor online prices for you and then alert you when an item reaches your personal pricing threshold.
Perhaps it will soon be time for a new truce - one in which, rather than opaquely manipulating prices to "fool" consumers by leveraging their personal data without their explicit permission, retailers instead leverage the tools of reward and recognition to provide more pricing transparency in exchange for opting-in to data tracking. Retailers might even themselves host "data lockers" that allow customers to access their own transaction history and choose for which categories of items they're willing to pay a premium in exchange for lower prices on other goods. Or perhaps loyalty program members can choose to pay a premium on a product category in exchange for points earned toward some future reward redemption.
In this scenario, the truce holds. Instead of building an environment of suspicion and mistrust, retailers instead build real relationships with their customers based on mutual exchange of value. Such a future may seem unlikely - but a guy can dream, can't he?
Rick Ferguson is CEO and Editor in Chief of the Wise Marketer.