The practice of using a consumer's personal information to set prices for them individually is attracting government attention.
Consider this scenario: A retailer you and your neighbor both shop with online gathers personal data on you both, then uses that data to deliver each of you a different price on the same product. You're served a higher price for the same TV because you're already in the parking lot and therefore more likely to pay the higher price.
That's personalized pricing, also known as surveillance or algorithmic pricing. Companies including Orbitz, Target and others have faced scrutiny and investigations in recent years over claims that they deliver different prices to different consumers based on personal data, like what type of computer they're using or how close they are to the store, even their browser history showing past or similar purchases.
The Federal Trade Commission has proposed a disclosure rule for businesses that use personalized pricing. The rule would require businesses that use personal data collected about individual consumers to set prices, which may appear different from other consumers, to disclose the practice to the consumer before purchase.
It’s important to clarify upfront that personalized pricing is different from dynamic pricing, said Danielle Kays, partner at law firm Fisher Phillips.
Dynamic pricing is a common business practice whereby a hotel's rate changes based on metrics like demand and availability of rooms. It's familiar and expected and doesn't draw from personal information.
Personalized pricing takes into account what’s unique to an individual, Kays said. That could include browser history, location, shopping habits or other data. Businesses use that personal information to set a price specific to that individual that’s not necessarily related to supply and demand.
“So, while two people are buying things at the same moment, there can be a different price for each of them based on the company’s algorithm and information that they have about how much that person might be willing to pay,” she said.
The proposed disclosure rule is just that: disclosure, she said. The FTC is not trying to prohibit personalized pricing.
“If you accurately and completely tell someone that a price is based on their purchase history, that would be enough to pass the disclosure,” she said. “Where someone else is being charged a different price than you at that same moment in time, based on your own data, that's where there needs to be that disclosure.”
At this point in the process, the FTC has opened a public comment period until Sept. 18.
The FTC’s involvement in personalized pricing is an interesting development following an emerging trend of consumers suing over the practice, Kays said. The FTC has issued a civil investigation demand in the last year, and Congress has been looking at legislation on surveillance-based wage setting.
“We’re seeing that this is on the minds of people at the state level, too,” she said.
At the moment, hoteliers should identify whether any of their pricing is based on consumers’ personal data or individual information, she said. They should also review whatever disclosures their companies have released about how and where such data is being used in setting prices. That also includes whether any information needs to be updated between what’s actually happening and what’s in the existing disclosure.
Hoteliers also need to review contracts with third parties to identify if they are using personalized pricing and see if they need to put any guardrails in place regarding the data being used, she said.
Because the proposed rule is in the public comment stage, it will take time before any action occurs, Kays said. As such, hoteliers should continue to monitor the progress of the proposal for any changes.