The price difference is an example of personalised pricing algorithms. It’s when a business charges people different prices for the same goods or services based on their personal data. The personal data accessed by the company allows it to determine the amount it thinks you’re willing to pay.
With more of us shopping online, along with advances in data collection and more sophisticated algorithms, there’s an increasing opportunity for businesses to use personalised pricing.
But is this a fair practice? We look at the pros and cons of personalised pricing.
How can shops or services personalise pricing?
To work out what you’re willing to pay, the company will access your personal data, such as age, gender, and location.
Data collection is part of everyday life – when you download an app, sign up to a loyalty scheme, or buy something online, you’re required to share personal information.
There’s the potential to target pricing depending on where you live, your gender, and what products you’ve searched for and the amount you’ve spent on them in the past. Businesses could also decipher spending habits, such as whether you’re an impulse shopper, or not.
If a company knows how much you earn, it could refuse you a service because it thinks you’re a bad credit risk, or it may charge you more.
What are the pros and cons?
While personalised pricing may not be inherently bad, it relies on businesses applying it fairly, responsibly and transparently.
Personalised pricing could be used to ensure those on a low income can buy cheaper goods and services. It could also mean you’re directed to the goods you want, quickly.
Yet, without any rules about its use, or transparency about how it’s applied, it has the potential to exploit consumers.
A 2018 Citizens Advice UK study found that a quarter of low-income consumers didn’t know product prices might fluctuate after repeated online searches.
It could also be discriminatory. If algorithms are based on post codes, it could drive discrimination based on ethnicity or class.
Competition could also be reduced if an online retailer, in conjunction with a web browser, restricts what other online stores you can access, according to the UK’s Competitions and Markets Authority.
Businesses with access to data could also undercut competitors who don’t have the same information.
Yet businesses that do invest in data may provide a more efficient service to their customers.
The future of personalised pricing
While personalised pricing might seem harmless when you’re buying a t-shirt online, what if it’s applied to your phone or power bill, or other essential services?
The Citizens Advice UK study didn’t find evidence of this because businesses didn’t have the data, or the investment in IT systems to collect it.
“But this doesn’t mean personalised pricing couldn’t emerge in the future,” the report’s authors noted.
If it does, it recommends regulators assess the costs of essential services to make sure groups of consumers aren’t paying more than they should.
Is it legal?
The Fair Trading Act states businesses can’t mislead shoppers about prices. Yet the law was written when it was common for businesses to disclose pricing up front – with personalised pricing that’s not the case.
What could be misleading is if the business wasn’t upfront about its use of personalised pricing.
The Privacy Act requires companies to disclose to consumers what data is being collected, and how it’s being used.
Yet, our privacy legislation doesn’t include algorithmic transparency. Meaning, companies don’t have to tell us the assumptions, or biases, they’re making on factors like ethnicity, gender, incorrect information, or your ability to pay.
Consumers should be able to opt-out of personalised pricing and ask for the standard price
There should also be greater transparency on data collection and sharing, as well as how prices are set.
Consumers should have greater control over the collection, storage and use of their data.