Evan Schuman's StorefrontBacktalk

Some four months after Best Buy dropped $121 million in mid-September 2008 to take over downloadable music pioneer Napster, both companies quietly said that Napster’s privacy policy was changing to let Best Buy do a wide range of unannounced things with the newly obtained data riches. Napster’s CEO, Chris Gorog, went so far as to write a blog that spoke of “personalized music pre-loaded on new MP3 players or mobile phones because of our collaboration.”

Regardless of what Best Buy ends up doing, in today’s rock-bottom economy, with its mergers and bankruptcies, the retail concept of data ownership is getting quite a workout. For example, CompUSA closed its doors but has now reemerged in a very different form in Florida. And there’s no telling where the petabytes (exabytes?) of customer information now controlled by Circuit City will wind up.

From a privacy perspective, there are even scarier possibilities than someone’s music or computer purchases falling into the wrong hands. In a February 6 story, U.S. News & World Report listed 15 major companies that could kick the financial bucket this year and included the $25 billion pharmacy giant Rite Aid on its list. Let’s say, for argument’s sake, that something does happen to Rite Aid. If it gets merged with Walgreens or another pharmacy chain, there’s probably not a huge data impact.

But what if it gets purchased by the nation’s largest seller of pharmaceuticals, a tiny merchant called Wal-Mart? Could Wal-Mart start leveraging that data the way Best Buy is considering Napster’s data?

Let’s take this to the next stage. What if a major drug-maker itself wanted to purchase the chain and use its data to target doctors and consumers prescribing rival drugs? For that matter, what if one of the larger and financially stronger medical insurance companies bought the chain? Or, in the case of a bankruptcy, just the chain’s CRM database?

Retailers have always reserved the right to change or amend their data privacy policies at whim, with little or no notice. These declarations are hardly legally binding contracts with customers. Of course, it wouldn’t matter if they were legally binding, because acquisitions and certainly bankruptcies have almost always voided all contracts.

Therefore, this isn’t primarily a legal concern. Yes, there could be a legal argument that the U.S. Constitution includes an inherent right to privacy. But we don’t even need to go there to find a reason to be nervous about these database transfers. Enlightened self-interest may do the job all on its own. If Best Buy proceeds with an aggressive use of Napster data and, in so doing, alienates lots of Napster customers along with other downloadable music fans, that could devastate the value of its acquisition.

How Next-Gen Consumers See It

This possibility brings up the real issue: Would Napster customers in fact be alienated by even the most brazen abuse of customer purchase data? Are American consumers—especially younger consumers—so cynical today about privacy that it’s almost impossible to alienate them with CRM projects? I’ve noticed a staggering disconnect between senior retail executive perceptions—who project their own discomfort and assume major consumer backlash if the full details of what they do came out–and those of younger consumers who already assume retailers are doing far worse and seem to not care.

I do visiting lecture work at a New York University graduate program dealing with business strategy issues and saw an eye-opening discussion in class last week (February 2). This particular class consisted of students who were mostly in their early 20s, and we were arguing about retail data usage strategies. In a role-playing exercise, the students said they believed American consumers would rebel and abandon retailers if they found out their plans.

We talked about how many retail execs—in the hours after the TJX and Hannaford breaches became known—initially feared financial disaster for both chains based on their belief that customers would quickly abandon them. In the cases of TJX and Hannaford, revenues actually increased slightly for both chains. There was no consumer backlash whatsoever.

Getting back to the class, after a couple of hours of discussion, a scenario was painted where a consumer was sold an especially desired product based on the retailer using highly confidential data. The class was asked, by a show of hands, which students—upon subsequently learning how the sale was made—would have returned the item? Zero hands went up. How many would refuse to shop at that chain any more? Again, a unanimous decision: They’d still shop there.

Weren’t these the exact same students who had just said consumers would rebel? And yet, they themselves wouldn’t. One student speculated that it might have been because the outcome was positive for the consumer. OK. The scenario was changed to have a negative outcome. Specifically, it turned into a car company that jacked up the price of a vehicle upon learning that the consumer just received a huge raise. Another show of hands (would you refuse to accept the car?) and another unanimous verdict in favor of consumers near the end of the ’00 decade opting for a refresh of an age-old slogan: “Tread On Me.”

Maybe that’s a bit harsh. But no matter the interpretation, it’s clear that many consumers are much more interested in the deals being offered by retailers and less with how they came to be offered. Although sad, accepting that fact is liberating for American retailers.

Note: I have said “American retailers,” because the aforementioned NYU grad class also had several students from other countries (including Turkey, Cuba and Hong Kong), and the non-U.S. students were unanimous in saying that their fellow countrymen wouldn’t be nearly as tolerant as their American friends. But they voted as American consumers, which explains the unanimous votes.

Key Takeaways

So what conclusions should retail IT execs draw from this exercise? Two key ones. First, as we’ve noted before, there are two very different—polar opposite, actually—groups within U.S. consumers. Older consumers who can easily be alienated with aggressive use of data, and younger ones who, as a group, are quite apathetic about how a sales pitch came to happen. If your prospects are a mix of these groups, proceed with extreme caution and insist on opt-in as much as possible. That way, your audience members who want to be excluded can be.

The second takeaway is strictly for younger consumers, and it is that you need to get back to the basics. If the ultimate offer is a good one, proceed. But it needs to make sense for the consumer and to truly be something better than what your competition offers.

These distinctions are liberating, because they will allow retailers to truly experiment with customization, to try and replicate the mythic neighborhood shopkeeper of yesteryear who knew his customers so well that he could anticipate their wants and needs.

This tactic also means delivering true value. Gimmicky promotions using newly acquired CRM data will alienate customers, but not because you used that data. Rather, it is because you used it poorly and because you delivered something that was not worthwhile to the consumer.

Here’s another test case: If a co-worker rifles through the personal things on my desk but uses that knowledge to get me the most brilliantly perfect gift in the world, I’ll likely be fine with it, even if I later learn how that person figured out that I needed this thing. But if that co-worker used that knowledge and then delivered something cheesy, well, forgiveness will be much less apparent.

With that in mind, let’s look at what Napster’s Gorog wrote in his blog: “As we explore options on this front, we expect this combination will provide future enhancements to personalize the Napster experience for our users. For example, we hope to be able to present specialized digital music offers and personalized recommendations based on your Best Buy CD purchases. Determining the number of Napster customers who are also Best Buy Reward Zone members may enable us to create a Reward Zone benefit for Napster Subscribers. Looking even further out, it is possible to envision personalized music pre-loaded on new MP3 players or mobile phones because of our collaboration.”

Music pre-loaded on an MP3 player? What if that purchase history consisted mostly of gifts for others? For that matter, maybe the CRM database is filled with songs this customer bought and decided they hated? Or songs they liked once but now can’t stand? Maybe they’ll want it just to listen to podcasts at the gym?

Wouldn’t it be a better offering to let the consumer log onto the Best Buy site and piece together their customized MP3 files from lists they can choose from? Of course, that wouldn’t involve using any CRM data, and it would also be much more useful to the customer. A classic example of how retailers should not be using such data.