Enhanced privacy measures might produce bigger profits

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How do consumers value privacy in online activities? This is a hard and much-debated question. On the one hand, consumers express concerns about privacy and have for many years. On the other hand, they readily give up personal information for a chance to win a few dollars or a T-shirt.

The question today is whether online merchants should bother with offering customers reasonable privacy protections. And the answer may surprise you. What's more, better privacy policies may allow merchants to charge higher prices.

There is some new research on this subject presented in "The Effect of Online Privacy Information on Purchasing Behavior: An Experimental Study," conducted by Janice Tsai, Serge Egelman, Lorrie Cranor and Alessandro Acquisti of Carnegie Mellon University.

The study sought to determine whether the prominent display of privacy information in search-engine results causes privacy-concerned users to consider privacy when making online purchasing decisions. Another goal was to determine whether privacy-concerned users are willing to pay a premium to buy from privacy-friendly merchants.

The survey attempted to weed out those who perceived little or no privacy risk when shopping online. One might think that screening out those who are indifferent to privacy would make a big difference, but only 12.5 percent of total respondents were eliminated by this standard.

Another finding of the work was identification of those privacy-affecting activities that most bother consumers. This study found people were most unhappy about Web sites that share health information, use financial information to determine content or ads, share personally identifying information, do not allow consumers to find out what information the company stores and do not allow consumers to remove themselves from mailing lists. People were much less concerned about activities that involved use of information that is not personally identifiable.

The study asked participants to buy two items online with a budgetary constraint. One item was not privacy sensitive (batteries) and one was (a sex toy).

Participants who received privacy information were more likely to buy from sites offering medium or high levels of privacy. Those who did not see privacy information generally made purchases from the lowest-priced vendor. The suggestion is that people will pay a premium for privacy when privacy information is more accessible. Perhaps surprisingly, the effect was pretty much the same for the non-privacy sensitive purchase as for the privacy sensitive purchase.

Overall, the study design was clever and appeared to reasonably test the hypotheses of the authors. The study seemed to test activities in a real online-shopping environment, with participants having adequate incentives to save money. The study's sample was small, however, so some may question whether the results will scale.

What does the study suggest for a merchant offering products online? As with any limited study, the results should be interpreted with some caution. In the experiment, when consumers received privacy information in an effective way they were influenced enough to be willing to pay more for an item.

In the real world, merchants with good and prominently displayed privacy policies compete against others who either do not have good privacy policies or do not promote their policies. Ordinarily, consumers have little control over the privacy practices of those collecting information, but consumers do control who they do business with. The study does not offer direct conclusions about how consumers react in an environment that includes good, bad and no privacy information.

As much as I would like to say that it is good for business to have and display a pro-consumer privacy policy, I don't think that conclusion necessarily follows directly from the study, although the study supports the notion. Still, the prospect of higher prices for products sold in a pro-privacy online environment should be intriguing enough to attract the attention of any company selling on the Internet. Better consumer privacy protection and higher prices could be a stunning combination. Maybe it's time to stop fighting privacy and raise your prices.

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