Today retailers are able to gather voluminous amounts of data on consumers. Merchants of all types use Big Data to help find new customers and advertise products. Using customer information to boost sales is an old and time tested strategy. However, the breadth and depth of Big Data could lead to negative outcomes for consumers. A recent report from The Office of Economic Advisers investigates these concerns and highlights some potential solutions.
Potential issues with Big Data pricing
Companies could use Big Data to set different prices for customers. Economists call this price discrimination, which can benefit both retailers and consumers. For example offering a discount to seniors or students can generate more revenue for the seller and offers lower costs for the purchaser. Companies know that consumers in these groups are more likely to be price sensitive and offer them a cheaper product or service. Big Data enables companies to pursue this strategy with greater precision. One area of concern is that companies could target inexperienced customers with low sticker costs and then up charge them for extras. Big Data might make it easier for companies to use this “bait and switch” tactic.
A more worrisome issue is risk-based pricing. This approach popular with many insurers also has big benefits for consumers. For example auto-insurers charge more to people who are at fault for accidents. This can create disincentives for risky behavior. The potential problem is when customers are priced out of the market because of a factor they can’t control. If health insurance is prohibitively expensive for a person with a genetic disability then such a pricing scheme is unfair and possibly illegal. Big Data could also allow companies to uncover medical conditions that a consumer might not even know about themselves. Higher prices in this case could constitute a strange new type of privacy violation.
Inadvertent abuse of protected classes
The worst case scenario with Big Data pricing involves the treatment of protected classes. Federal law does not allow companies to treat people differently based on race, religion, and several other characteristics. Big Data pricing could inadvertently lead to higher prices for certain groups in a way that would violate American values and laws. For example an analytics platform could identify a large group of consumers who regularly buy evergreen trees in mid-December. A statistical model may not know these people were Christians celebrating a holiday, but it could still result in higher prices.
It’s critical to note that the evidence that Big Data pricing occurs today is very weak. Companies are likely aware of the backlash that could ensue if there was a perception that it was treating customers unfairly. The report makes clear that it’s imperative to clarify current laws and regulations to protect consumers.