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Is Customized Pricing Brilliant Or An Imminent Disaster?

March 1st, 2013

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.


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