Personalised Pricing – Part 2

As we noted in our previous post about personalised pricing, at the moment it’s thought that businesses are only just beginning to experiment with individualised pricing based on analysis of their customers personal data. But at the moment no-one knows a great deal about what exactly is happening. In November 2012 the UK’s Office of Fair Trading issued a “call for information” asking businesses to tell them what they were doing about personalised pricing. They published their report earlier this year (May 2013), http://www.oft.gov.uk/shared_oft/markets-work/personalised-pricing/oft1489.pdf) and it makes interesting reading.

The first observation they make is that personalised pricing exists when “different people are charged different prices for exactly the same goods or services, for reasons that are not associated with costs”, and that an alternative (and more) accurate term to describe this kind of pricing is “discriminatory pricing”. That is, the price people are being charged depends not on the product or service they are buying, but on who they are. This, or something rather similar, is actually a familiar pricing strategy which we generally accept, even when it doesn’t necessarily operate in our favour. For instance, we accept that senior citizens may be offered cheaper or even free bus travel, or that students can get a 10% discount on rail fares. But our acceptance of these pricing strategies depends on the belief that these groups are being offered a discount, rather than being charged a premium; that they are less able to pay the non-discounted price than other groups are and that there is some generalised public good from this discounting.  It’s also because the discount is related to an acceptable underlying profit-loss model, so that bus travel is free and train fares are discounted only at non-peak times, or that no purchase could be made at the non-discounted price.

The OFT report notes that whilst the growth of online purchasing and merchants’ use of customer’s personal data offers the potential to make this kind of pricing much more individualised, nothing guarantees that it will be to the benefit of the individual. They warn that “consumers should not assume that they are being offered the best deal”. They note that prices online can vary quickly, and widely, and that customers have a tendency to assume that this is to do with the business and the market. For instance, when buying airline tickets we expect prices to be cheaper the earlier we book, because the number of available seats is decreasing as the departure date approaches (until very close to departure, when supply now exceeds demand, and prices drop dramatically). But what if price differences were driven by other factors, such as the information the airline or travel site had gathered about you. This might be simply knowing the route by which you got to their site, offering you a lower price if you had clicked on an advert in the Daily Mirror than if the advert was in the FT. But what if they had already purchased your personal data from a third party and knew that you lived 20 miles of the departure airport, that they were the only carrier from that airport to your destination, and that the nearest alternative airport/carrier was 60 miles away? And what if instead of your address they were using data about your credit score or even your bank balance?

The OFT report notes that personalised pricing does have the potential to benefit customers, but only if the process is transparent. They noted that businesses “could do a lot more to make their practices more transparent about what information they are collecting, how it is being used, and give consumers real choice about this.”   The OFT point out that personalised pricing is problematic if:

• consumers cannot easily avoid personalisation (i.e. the business collects their personal data and uses it to drive the offers made and the prices charged)
• consumers do not know that personalisation is occurring
• consumers cannot easily see what other customers are being offered

Given that at the moment transparency as they define it is virtually zero, and the problematic conditions they have identified are pervasively present, the rather bland OFT report and lack of further action seem curiously weak. They note that at the moment “misuse of personalised pricing is not widespread” but they base that conclusion on a voluntary call for information, to which they admit they received only a “limited response” (for which read “not many replied, they didn’t tell us much, and what they did tell us was that they were good people doing good things”. Well, as Mandy Rice Davies famously noted, “they would say that wouldn’t they”!)

Even given the limited and biased evidence examined by the OFT it seems that there are good reasons for consumers to be very wary of businesses who want to obtain, use and sell our personal data, even if they reassure us that this is a fair exchange because they can then make us personalised offers at personalised prices. We need real control of our personal data, that when we make it available we need complete clarity about how it is going to be used, and we need to ensure that this is an equitable exchange. We need the trade in personal information to be as fair as that of bananas, coffee and chocolate.