Have They Got a Deal For You

By Joseph Turow
Sunday, June 19, 2005

A couple of years ago, in an undergraduate seminar I taught called "Spam and Society," discussion veered a bit off topic. One of the students asserted confidently that airline Web sites give first-time users lower prices than returning customers. Most of the others immediately agreed. They said the motive was to suck in potential buyers; then, when they returned, the airline could quietly raise prices.

I hear this kind of claim fairly often among heavy computer users. It seems to have become an article of faith that the unseen moguls behind all sorts of Web sites are cherry-picking consumers, customizing ads, manipulating prices and changing product offers based on what they've learned about individual users without the users' knowledge.

In my research on Internet marketing, I talk to lots of Web workers and consultants, and read the trade press, and it's pretty clear that this is going on. But it's extraordinarily hard to verify when it occurs, why any particular offer is made, or how a vendor is evaluating any given customer. Online merchants don't have to tell anyone how they operate, so generally they don't. University of Utah professor Rob Mayer, an adviser to Consumers Union's WebWatch project, told me he once asked an online travel industry executive whether travel sites offer certain customers different prices depending on their online history. The reply was cryptic yet telling: "I won't say it doesn't happen."

Lighten up, you might say. Nobody's forcing anyone to buy airline tickets or anything else. But I'm disturbed by what this reflects about our general retail environment -- the evolution of what I would call a culture of suspicion. From airlines to supermarkets, from banks to Web sites, American consumers increasingly believe they are being spied on and manipulated. But they continue to trade in the marketplace because they feel powerless to do anything about it.

This is a profound change. Broadly speaking, the past 150 years saw what you might call the democratization of shopping in the United States. Beginning around the mid-1800s, department stores such as Stewart's in New York City and Wanamaker's in Philadelphia moved away from the haggling mode of selling and began to display goods and uniform prices for all to see. Part of the motive was self-interest: Given the wide variety of merchandise and the large number of employees, the store owners didn't trust their clerks to bargain well with customers. But the result was a more or less egalitarian, transparent marketplace -- one that Americans have come to take for granted. When they have to negotiate -- most notably in car dealerships -- they see it as an unusual, nerve-wracking experience.

This reliance on evenhanded, fair dealing lies at the heart of American capitalism, or at least the way we'd like to think of it. It's not always practiced, by any means, as antitrust suits and many consumer complaints attest. But it's a worthy goal, and such institutions as the Securities and Exchange Commission and the Federal Trade Commission were established, in part, to aim for it.

The scaffolding of this system is shaken if a retailer changes its offerings to individual consumers based on information about the consumers that the consumers don't know, or that they suspect but can't verify. Take airline tickets. The Consumer Union's WebWatch investigators visited airline sites many hundreds of times, finding a bewildering array of prices that seemed weirdly random and virtually unpredictable (some prices changed between logon and checkout). The airlinessay it's the result of a necessarily complex pricing structure, but how can we tell that's all that's going on?

In September 2000, Amazon.com got headlines when customers found that the same DVDs were being offered to different buyers at discounts of 30, 35 or 40 percent. Amazon insisted the discounts were part of a random "price test," but critics suggested they were based on customer profiling. After weeks of bad press, the firm offered to refund the difference to buyers who had paid the higher prices. The company vowed it wouldn't happen again.

Frequent computer users I've talked to -- like my fairly hip students -- don't really believe such assurances. Frankly, it's hard for any dispassionate observer to believe there's no "price customization" when associates from the influential McKinsey consulting firm write in a 2004 Harvard Business Review article that online companies are missing out on a "big opportunity" if they are not tracking customers and adjusting prices accordingly -- either to attract new buyers or get more of their money.

Meanwhile, this sort of thing goes on quite openly in brick-and-mortar retail stores. In a hyper-competitive environment, where trying to beat Wal-Mart and Costco on price is all but impossible, department stores and supermarkets compete with them by trying to hook the right customers. Operating on the financial industry's premise that about 20 percent of the customers bring in 80 percent of profits, they try to identify who belongs in that 20 percent -- who will spend money and come back to spend more. And they're happy to get rid of those who hold out for bargains or return too many purchases.

Note that this is subtly different from the 20th-century model, in which storekeepers stocked certain brands of soap or pasta or disposable diapers because they sold well, thus pleasing customers and making money at the same time. While that certainly continues, the new goal is to make money by identifying individuals who fit "best customer" profiles and then reinforce their purchases for reasons and in ways that are hidden from them.

It happens everywhere. Many banks give customers scores based on their deposits and financial backgrounds; their phone representatives use friendlier scripts for high scorers. Supermarket cash registers spit out customized coupons at checkouts, tailored to the previous purchases recorded on "preferred customer" cards. If you buy Coke, you might get a coupon for Pepsi -- or perhaps one for Coke, to make sure you return; if you buy coffee, they'll offer you a discount latte. Some grocery chains are already testing "shopping buddies," small computers that you actually carry around the store, getting personally tailored recommendations and discounts from the moment you enter.

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