As part of a wide-ranging investigation into price indications online, the Office of Fair Trading looked a while ago at differential pricing, where for example buyers in affluent areas are quoted higher prices than those in less salubrious parts. Its findings did not suggest a major issue, but now Nick Johnson reports a reappearance of concerns over the practice.
Browse travel site Orbitz with a Mac, and you'll see a different – and more expensive – set of offers than those displayed to Windows users, according to reports in June 2012. Given that Apple owners are statistically more inclined to buy top-end goods and services, the business logic of this differential treatment is hard to dispute.
In fact, Orbitz doesn't offer different prices to different user groups – it just steers them towards the inventory they're more likely to want. But with increasingly rich customer data becoming available, are we now moving to a world where offers and pricing could be varied based on data-driven segmentation?
Key legal issues
Many businesses – and particularly those operating online – now have access to large volumes of data based on location, age, gender, credit history, browsing patterns and multiple other factors. This can unlock the possibility of tailoring deals and pricing based on an individual's profile – and that profile's correlation with qualities such as long-term loyalty or price insensitivity.
Regulators like the UK's Office of Fair Trading (OFT) and the Article 29 Working Party have begun to grapple with the legal and social issues raised by these possibilities. But there's precious little precedent by way of guidance. Working from first principles, key danger areas are likely to include:
• Discrimination law
European law (the Services Directive) prohibits retailers from discriminating against consumers (including in theirf pricing) based on nationality or place of residence, unless this can be directly justified by objective criteria.
In the UK, the Equality Act additionally bars discriminatory pricing based on particular protected characteristics: disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex, sexual orientation and (from 1 October 2012) age.
Businesses who enjoy a dominant market position also need to worry about challenges under competition law: price differentiation could amount to an abuse of their dominance.
• Data protection
Some personal data will generally need to be processed in the context of allocating the user into a pricing or offer category. Depending on the disclosures given to data subjects, and any consents obtained from them, processing of their data for this purpose could be argued to be in breach of the Data Protection Act 1998. The OFT have set out their stall and appear to see this as a significant and very live risk – see sections 8.10-8.15 of their May 2010 report on online targeting of advertising and prices.
• Consumer protection law
Differential pricing activity could also be vulnerable to challenge under consumer protection law, if consumers aren't adequately informed of the existence and basis of segmentation activity. Again, the UK's OFT has publicly warned it sees lack of transparency in this area as potentially actionable as a misleading omission. That’s arguably stretching the limits of UK consumer protection law, though much may turn on the kind of data/behaviours being used as the basis for segmentation.
Staying out of trouble
Businesses looking to tailor their offering based on customer profiling should tread carefully:
- Delivering a different user experience and showcasing different inventory is one thing – charging a different price for the same product is another, and will be much more risky.
- Segmenting offers based on age is about to get much more problematic in the UK – as from October 2012.
- If you can navigate the risks under discrimination law and the EU Services Directive, transparency and disclosure to customers will be key in ensuring compliance with data privacy and consumer protection laws.
- Leaving aside legal and regulatory concerns, don't underestimate the resourcefulness of the internet community. If there's a way to spoof your profiling system, someone somewhere will work it out and spread the good news…
Media interest in this area has been relatively muted to date, but there are some big stories here waiting to happen. Differential pricing takes all the social mobility and two-tier internet concerns raised in the net neutrality debate and ups the ante with a good dash of "Big Brother" data exploitation narrative – and the potential for outrage over racial, sexual and other forms of discrimination. Go there at your peril!