Price customization: bold… or deceptive?

Is it farfetched to believe that an online shopper’s browsing history could affect a travel site’s search results? It most certainly is not. Although the internet gives consumers a powerful tool for easy price comparisons, the downside is that it also enables retailers to collect detailed information about online shoppers’ spending habits. Thanks to the internet, businesses can now use a myriad of new approaches to efficiently adjust their pricing to increase profit margins.

Warning, you’re being tracked!

Thanks to browser technology, businesses now have the ability to store profiles of their customers’ buying habits, preferences, financial resources, and so on. Some companies judiciously use this type of strategic information to adjust their pricing according to a user’s profile.

According to Charles Leocha, a journalist for MSNBC.com, online travel agencies like Expedia use sophisticated software and browser cookies to analyze customers’ previous transactions. This means a consumer’s search results can vary according to the profile recorded. For example, if a particular consumer is shown more higher-priced fares – or fewer discounted fares – it could be because the system has identified him or her as a « good customer » who is more likely to purchase higher-priced items. In fact, this is a subtle way of preventing certain types of consumers from purchasing lower-priced items. It’s a little like banning well-heeled shoppers from dollar stores!

A concrete example

Although this type of marketing practice may seem like a paranoid example of Big Brother at work, it is nonetheless closer to the truth than to fiction. Online travel agencies may insist that such biases don’t exist, but our experience shows otherwise.

To test the truth of this hypothesis, we conducted a test with members of the Tourism Intelligence Network team. We ran a simple search on the Canadian Expedia site for a plane ticket from Montreal’s Dorval Airport to Paris’ Charles de Gaulle Airport, departing January 8, 2006, and returning a week later on the 15. However, our three searches, conducted simultaneously on three different workstations, produced three different results (see illustrations).

Profile 1

In the case of Profile 1, the lowest price offered was $800 for a connecting flight or one with 2 stops or more, with no direct flight option. As for Profile 2, the lowest price displayed was once again $800, but this time, we were offered a non-stop flight for $978. Finally, Profile 3 was offered a flight for the somewhat surprising price of $699, in other words, $101 less than the other two! And yet, it was the very same US Airways itinerary, with exactly the same departure times.

Profile 2

Profile 3

Read the fine print

Expedia’s policy with regard to using information collected from customers is as follows:

«Expedia.com collects certain technical information from your computer each time you request a page during a visit to Expedia.com. This information is collected from your computer’s Web browser to enhance your experience on our site…»

Few consumers are aware that retailers are able to manipulate online shoppers’ personal information to conduct what some experts call « psychological marketing. » The Annenberg Center at the University of Pennsylvania examined this phenomenon in a study entitled Open for Exploitation, released in June 2005.

The study’s results demonstrated the naiveté of US online consumers, 68% of whom believe price comparison sites like Expedia and Orbitz are required by law to display the lowest available price. Furthermore, 87% of the people surveyed said they strongly object to online retailers offering different prices for the same product, depending on the information gathered on customers’ shopping habits.

Somewhat questionable, but still legal. Use with care.

Price customization is therefore a very real practice and, contrary to popular opinion, it is entirely legal. As long as discrimination is not based on factors like race, religion, nationality or gender, there is no problem. Such approaches have been around for a long time, like discounts for students and seniors, for example.

This type of strategy is a legitimate business tool because it follows the trend of yield management and companies must satisfy the needs of shareholders. Although businesses that offer a flat price at all times may satisfy their clientele, they will definitely deprive themselves of a higher profit potential.

There’s nothing new about dynamic pricing. The major difference stems from the fact that the internet offers businesses a number of new ways to efficiently adjust their pricing. Since consumers are still not very aware of the incidence of price customization, businesses employing this strategy must be very careful not to cause dissatisfaction and erode customer loyalty.

The internet unquestionably offers businesses an opportunity to acquire highly relevant and strategic information about their customers and thereby target different market segments with different prices for the same product. Technical tools enable retailers to study not only the purchasing behaviour of online shoppers, but also their non-purchasing behaviour, in other words, their information searches.

In today’s context where the internet plays an increasingly important distribution role in relation to global distribution systems (GDS), more and more travel agencies are going online to find prices. This raises another question: what happens when travel agents consult the internet on behalf of their clientele? Could such agents be penalized due to their frequent use of sites that employ dynamic pricing?

Tourism-based businesses with the technological ability to do so must ask themselves a key question: is it profitable to take advantage of our clientele’s electronic profiles to implement dynamic pricing?

A double-edged sword

Retailers trying to determine their web strategies in relation to dynamic pricing must define these strategies with great care. For example, is it better to offer lower prices to customers who visit the site frequently, but rarely buy, or to those who are loyal and rarely shop elsewhere? It is a difficult question because, in fact, a business could decide to offer higher prices to loyal return customers, gambling that their loyalty will blind them somewhat and make them unlikely to shop elsewhere. Or the same business could just as easily adopt the opposite strategy, in other words, reward loyal customers by offering them the lowest prices possible.

The stakes are high because bad decisions could cause a business to lose many customers. On the other hand, automatically rejecting any type of dynamic pricing is also a way to miss out on some lucrative profits that would be difficult to make in other ways. To make an informed choice, retailers must look at all the parameters that could help guide them. In particular, they should not only consider the frequency of a customer’s site visits, but also the time of year, the type of products purchased, the profit margin on previous transactions, etc.

Possible backlash

Since the practice of dynamic pricing is in its infancy, businesses can still take advantage of the fact most consumers know nothing about it. However, in the longer term, organizations that rely too heavily on this approach could well pay the price.

One possible risk is an increase in the number of intermediaries created to fight back against businesses « guilty »of too much greed. Although the goal of such initiatives would be to denounce abusive practices, they could also, for example, rank travel websites according to their level of « honesty » and try to protect customers – or even steer them away – from businesses seen as too manipulative.

Although it is difficult to accurately assess the extent to which dynamic pricing is used in Quebec, we can safely assume that few organizations have adopted it as yet. Although companies are technically capable of amassing a ton of information about their online customers, very few do so in order to analyze it, while others simply do not have the resources needed to efficiently collect this type of information.

Managers will definitely have to weigh the pros and cons before blindly adopting dynamic pricing. However, there is an amazing wealth of strategic information that can be gleaned by analyzing online clicking behaviour. Without going so far as to customize pricing, businesses could benefit – at the very least – from learning more about their site visitors, whether they buy anything or not.

Sources:
– Elliott, Christopher. « A Low-Fare Browser? », National Geographic Traveler, July-August 2005.
– Feldman, Lauren, Joseph Turow and Kimberly Meltzer. « Open to Exploitation: American Shoppers Online and Offline », Annenberg Public Policy Center of the University of Pennsylvania, June 2005.
– Knowledge@Wharton. « What Consumers – and Retailers Should Know about Dynamic Pricing », Hotel News Resource [www.hotelnewsresource.com], December 2, 2005.
– Kontzer, Tony. « Online Shoppers Growing Wary Of Sharing Data », InformationWeek, August 15, 2005.
– Ramasastry, Anita. « Web Sites Change Prices Based on Customers’ Habits », CNN [www.cnn.com], June 24, 2005.
– Ramasastry, Anita. « Websites That Charge Different Customers Different Prices: Is Their ‘Price Customization’ Illegal? Should It Be? », FinLaw, June 20, 2005.