Tuesday, January 24, 2012

Forget about SOPA/PIPA...2012 is the year the Internet is going to steal your Consumer Surplus!! See here how your online surfing and shopping habits are conspiring against you...

Price Discrimination results from a businesses ability to segment their customers on their willingness to pay for a good or service. An airline ticket is one that many/most teachers use as a prominent example.  It is easy to segment customers, mostly based on time in advance for purchasing a ticket, and extract the highest price possible.  If a business cannot segment their customers by preferences then they have to use a "one-price" model of pricing.

Even if a customer was "willing and able" to pay a higher price than the "one-price" they don't have to. This particular customer is reaping some "consumer surplus" in the market.

Example: I went to the mall preparing to pay $30 for a shirt but when I got there the price was only $20.  I retained for myself $10 in consumer surplus. Consumers love this surplus and merchants/suppliers see it as missed profit opportunity.  BUT that is changing!

Below is a short commentary on how the convergence of advancements in technology, the emergence of on-line shopping  AND our own personal internet surfing habits are forming a perfect storm to conspire to transfer our Consumer Surplus to merchants and/or producers (aka "Producer Surplus").  I encourage you to read it and to recognize the trend.

It is also a reminder that "TINSTAAFL"...

What if when you bought a new Macbook, the price was higher because your tweets constantly referenced your love and devotion for Apple? What if Orbitz used the fact that your Facebook Likes include “Party Rocking in Miami” to charge you more for a flight to Miami?

This is called online behavioral pricing. It’s a consumer’s worst nightmare as it uses the traces of your online identity to maximize prices on the products and services you want most. It’s also an ecommerce merchant’s dream.

Behavioral pricing is a form of price discrimination. The goal of price discrimination is to maximize profits by adjusting the price that different customers pay based on data about the consumer. Price discrimination is common offline, such as the Museum of Modern Art charging adults $25 but students only $14.

We’ve already seen online merchants make preliminary attempts at this. When the New York Times unveiled its digital subscriptions, it decided to charge $15 per month to subscribe on your clunky old Blackberry, but $20 per month to subscribe on your iPad. Yet, it doesn’t cost the New York Times more to deliver content to the iPad. Instead the assumption was that you, the owner of a $500 tablet, would be more willing to pay than your average smartphone user. But this rudimentary price discrimination is a mere hint of what’s coming with behavioral pricing

Why 2012 is the Year of Behavioral Pricing

Charging customers the perfect price is the pinnacle of commerce and something online merchants are now in a unique situation to make a reality because of the troves of online consumer data. This year, we’ll see behavioral pricing emerge from two converging trends.

First, ecommerce merchants’ interest in pricing technology has surged in the last two years. Startups like BlackLocus, which has raised $2.5 million, have gained traction by helping merchants price their goods using competitor data. While this is just scratching the surface, the traction demonstrates the intense interest that merchants have in pricing technology.

At the same time, online marketers have dramatically increased the amount of behavioral data they have on consumers. This data comes from a complex network of web histories, demographic records, loyalty programs, and increasingly, social media profiles. In the last few years, behavioral data has matured and gained widespread acceptance and usage in online advertising. Startups like Demdex (acquired by Adobe) allow advertisers to access “databanks” of behavioral information on users, and target advertising to them. For example, if you are selling healthy food for kids, you could target your online advertising to “moms who purchase healthy living goods.”

As merchants seek to expand their technology around pricing, behavioral information will quickly be adapted to build behavioral pricing. As these two trends converge, expect to see existing data companies quickly expand to do this and new companies emerge with this goal.

The Result

By piecing together your web history, social media presence, and demographics, marketers have a near complete picture of you. Do you own a house, visit home improvement websites, and tweet about DIY? Watch as online stores use behavioral pricing to extract the highest price possible from you.

As a consumer, behavioral pricing may mean occasionally lower prices, but the purpose is clear: merchants want you to buy more and pay more for it. For merchants, this is their moment. Suddenly, they will be able to offer just the right discount on a laptop to ensure you buy, but at a price that gives them the healthiest profit.

In a world with online behavioral pricing, you will question every price you see. The tables will have turned, and your data will be actively working against you. On the other hand, if you’re a merchant, prepare for behavioral pricing to reshape the world of ecommerce. Perfect price optimization will now be at hand. And if you’re an entrepreneur, there is now an opportunity to disrupt the $152 billion ecommerce market– by being the fabric that ties behavior data to price.

2012 will mark the end of static pricing. The use of your tweets, credit score, and web history in ecommerce pricing is frightening—but ultimately unavoidable.

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