September 28, 2006, 12:00 AM

Consumers` Fears

Attorney Ken Grady tells retailers how to earn customers` trust with clear, conspicuous and consistent privacy policies.

It is a fact that privacy is one of Americans’ top concerns. In the early Internet years, privacy advocates pointed to polls and survey data to argue that privacy concerns would slow the growth of e-commerce. Despite these gloomy predictions, e-commerce has thrived.

However, the issue of collecting and using personally identifiable information remains at the forefront of many legislative discussions about online and multi-channel selling. The results of a recent study suggest that multi-channel retailers should act now to build customer trust when collecting and using personally identifiable information, or they may struggle as their ability to niche market and price discriminate is restricted through new privacy legislation.

Lack of understanding
The Annenberg Public Policy Center and the University of Pennsylvania sponsored the study “Open to Exploitation: American Shoppers Online and Offline,” conducted by three researchers affiliated with the Annenberg School for Communication. The study focused on assessing American adults’ knowledge of the law about companies’ collecting personally identifiable information and then using that information, including using it to adjust prices.

In addition, the study assessed American adults’ attitudes about such practices. Although the authors exhibit a bias against collecting and using personally identifiable information, the study provides interesting insights on what customers know and don’t know.

On average, participants incorrectly answered 7 out of 17 true-false questions about the legality of collecting and using personally identifiable information. The study used online travel services as an example and found that 68% of American adults who had used the Internet in the prior month believed price comparison sites such as Expedia and Orbitz were required to include the lowest airline prices in the search results. 64% did not know that an online store could legally charge different customers different prices for the same product at the same time of day.

The authors also reported:

  • 76% agreed that “it would bother me to learn that other people pay less than I do for the same products,”
  • 87% disagreed that “it’s OK if an online store I use charges people different prices for the same products during the same hour,” and
  • 72% disagreed that “if a store I shop at frequently charges me lower prices than it charges other people because it wants to keep me as a customer more than it wants to keep them, that’s OK.”

Reflecting on the study’s results, the authors concluded: “Americans who suspect themselves disadvantaged as a result of these often-hidden activities (but don’t know what to do about them) may well turn against the corporate and government institutions who they believe are encouraging the practices. That could ignite new marketplace tensions-and possibly even broader frictions-within U.S. society.”

Three initiatives
To avoid this outcome, the authors propose three policy initiatives. First, they suggest that the Federal Trade Commission require web sites to change the label of their policy regarding privacy and the use of personally identifiable information from “Privacy Policy” to “Using Your Information.” They argue that this change will clarify to site users that a privacy policy doesn’t require the recipient to protect users’ information. Second, they suggest that schools from elementary through high school teach students about Internet information issues to educate the next consumer class. Third, they suggest that retailers disclose what information they collect and how and when they will use that information.

Although all three suggestions are generally benign, the third is the one that should be closest to a retailer’s heart. The strongest conclusion from the study is that American adults (your customers) don’t trust companies (or governments) to do the right thing with their personally identifiable information.

As e-commerce grows and companies have less direct personal interaction with their customers, developing customer trust will solidify its position as the most important factor in building a profitable retail business. For multi-channel retailers who shift their emphasis during the next five years toward doing more business with existing customers, building customer trust when collecting and using personally identifiable information will give them the tools to maximize sales and profitability. Behavioral targeting helps retailers identify and focus on customers who are most profitable and then refine marketing campaigns to increase business from those customers. Once those customers are identified, the retailer can employ many strategies, including price discrimination, to improve the profitability of those customers.

The three Ps
Currently, both behavioral targeting and price discrimination, with some exceptions, are legal. Those exceptions fall into categories such as data collecting expressly prohibited under the Children’s Online Privacy Protection Act or discrimination based on race, gender, or other prohibited factors. But there are some dark clouds on the horizon. Driven by misplaced confidence in polls and surveys suggesting customers are very concerned about privacy, and emboldened by survey results showing that customers think it is unethical to use practices such as price discrimination, legislators are being encouraged to act.

Retailers can best defend against these regulatory efforts by showing they can build trust while collecting and using personally identifiable information. Any effort to build customer trust should focus on the three Ps: policies, procedures and people.

Retailers need to develop clear and consistent information use policies, and post them conspicuously on web sites. In fact, in a recent lawsuit the court held that so-called “browse wrap” agreements accessed from a small link at the bottom of the home page were not sufficiently obvious to alert the customer to a site’s terms and conditions and, therefore, were not binding.

Privacy policies, or as the Open to Exploitation authors suggest, “Using Your Information” pages, should be posted clearly and conspicuously on web sites and written in plain English. They should state what information is gathered, how the information will be used, and whether and what information may be shared with unaffiliated parties. Vague statements and “hide the ball” language simply build distrust. If a retailer believes that customers will leave if the retailer tells the truth, that retailer needs to do a better job of explaining how the information will help customers or ask itself whether it really needs the personally identifiable information.

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