Is Customized Pricing Brilliant Or An Imminent Disaster?

Attorney Mark D. Rasch is the former head of the U.S. Justice Department’s computer crime unit and today serves as Director of Cybersecurity and Privacy Consulting at CSC in Virginia.

In the war between retailers and customers, where retailers want to charge the highest prices they can and consumers want to pay the least they can, the weapon of choice for both combatants is knowledge. The more retailers know about their customers, the more likely they are to be able to target advertisements and pricing specific to them. Consumers, likewise, can comparison shop for products and thereby bargain efficiently. But in this war, consumers may ultimately lose, because it is the merchants that pay for the very tools consumers use to find the information they need. A recent patent by search giant Google (NASDAQ:GOOG) may fundamentally change the sales process from a 21st Century marketplace back to a 7th Century shouk, with prices based on sellers' perceptions of who their customers are and what they are willing to pay.

Last September, Google applied for a patent for a method of "dynamically pricing electronic content." The patent application explains that the technology will be used for "determining a likelihood that a group of users will repurchase an item of electronic content, determining that a particular user is more or less likely to repurchase the item of electronic content than the users of the group, in response to determining that the particular user is more or less likely to repurchase the item of electronic content than the users of the group, adjusting a base price associated with repurchasing the item of electronic content, and providing the particular user with an offer to repurchase the item of electronic content at the adjusted price."

Translation? Based on all the personal information Google has gathered about you, it will determine whether you are likely to pay more money than others for the same product and then charge you accordingly.

Now, we are all used to both targeted advertising and targeted marketing. If we only buy things with coupons, a retailer may be inclined to send us coupons. If we buy luxury items, we may get ads for those types of items. Prices may vary based on regional differences (higher in Alaska and Hawaii), retailer costs (Manhattan, N.Y., higher than Manhattan, Kan.) or seasonal fluctuations. In some industries, it is accepted that different people may pay widely different prices for essentially the same thing—think the airline industry, for example. We are used to loyalty programs that may offer participants a discount for goods or services in exchange for parting with personal information.

But the Google patent, if really applied, is something different. There is a huge difference between "dynamic advertising" and "dynamic pricing." In the case of the former, for example, say I get an ad for a Toyota while my more affluent friend gets an ad for a Lexus. Fine, I didn't want the Lexus anyway. In the case of the latter, we each get ads for the same Toyota Camry, but his price is different from mine. And that is based on what Google, and possibly the "Internet," knows about him.

That's the beauty and the misery of big data. The Web (particularly coupled with non-Web information) can create an intricately detailed and nuanced profile of individuals, predicting not only what they want (sometimes better than they know what they want) but also what they are willing to pay. It's more than knowing the difference between an "urban core" consumer and an "elite suburbs" consumer. Big data can know whether you are a tech gal, an Apple fanboy or an Android geek. It can know what factors affect your personal purchasing decision—speed, design, ease of use, etc. And it can know what things you are willing to pay for, in addition to how much (or how much more) you are willing to pay for it. Which brings us back to the 7th Century. (For friends of Rick's—500. Special friends of Rick's? 200!) Every sale is a negotiated price.

We expect different prices at Neiman Marcus than at Walmart (NYSE:WMT). We expect different prices for toothpaste from Tom's of Maine, a Colgate-Palmolive (NYSE: CL) company, than for generic Rite Aid (NYSE: RAD) toothpaste. What we don't expect is that the woman in front of us in line will pay less for the same item because the retailer suspects we have a higher threshold for paying. Or that we really like the product. Or that we really need it right now. That's what Google’s patent allows retailers to do.

So, is it legal?

Regular readers are used to the answer, "it depends." In this case, I will go further. The answer is, "probably yes."

Some U.S. laws prohibit discrimination based on factors such as race and religion, generally for extending credit. And there may be state and local consumer protection laws that relate to pricing in some way. Deceptive and unfair trade practice laws may be used if there is an express or implied promise that a search engine will deliver the "lowest prices" rather than "the lowest prices for you." But, otherwise, there is no law of which I am aware (and I am ready to stand corrected here) that requires a company to charge everyone the same price for the same item. Oh, and remember, this is not legal advice.

What's worse here is that consumers usually have recourse for "overcharging." They can go online and shop for a lower price, right? Well, not really. As consumers become more connected, logging into Web portals with Microsoft (NASDAQ:MSFT) or Google or Amazon (NASDAQ:AMZN) credentials, not only are their ads personalized, but their search results will be, too. If I suspect that I am being charged $40 bucks for a book that my buddy is being charged only $20 bucks for, I can go online and search for the "price" of that book, right? But when I conduct that search, lo and behold, I can't find it for less than $40. The results are "rigged," because I am not the customer. I am the product. The retailer is the customer. So if I am showrooming at a Best Buy, see a 60-inch LCD for $950 and scan the barcode for an Internet search for a lower price, Best Buy could pay Google (or others) not to deliver lower prices—either to the world or to certain profiled individuals. (OK, that might violate antitrust laws, but you get the idea.)

Another problem with personalized pricing is that consumers have no effective way of knowing it has occurred or of "gaming" the protocols to get lower prices. I don't know which of my activities lead the big data machine in the sky to think I am willing to pay more than my neighbor for driveway repaving or what I can do about it.

Ultimately, the democratizing force of the Internet may fight back, and the marketplace may adjust. Or legislatures may step in to end price discrimination. Electronic shelf tags in stores are required to show accurate prices. But prices for whom? It may end up that customized pricing is a brilliant, but bad idea. The market will tell.

If you disagree with me, I'll see you in court, buddy. If you agree with me, however, I would love to hear from you.