How technology opens the door for personalised pricing

Imagine going into your local pub - the Dog and Duck - and being greeted by the landlord who already knows your favourite tipple and starts to pour it before you even reach the bar.

Now imagine the same landlord throws in a bowl of chips for free - because you are a regular at the pub three nights a week.

Then the pub closes for a couple of weeks for refurbishment. So, you go to another pub - The Red Lion - a few hundred yards further down the road.

A little surprisingly, the landlord at that pub knows your favourite pint too, even though you have never been in before.

You find out that the Dog and Duck landlord has sold on information about your tastes to the landlord at The Red Lion.

How do you feel? A bit concerned, perhaps.

But worse is to come. You subsequently find out that - knowing what you are going to order - the landlord at The Red Lion has charged you 10p more than he has charged another customer.

You don't even get a free bowl of chips!

This might seem like a very far-fetched example. However, shift this whole buying process online - and it sums up a big issue for internet shoppers.

The Office of Fair Trading (OFT) wants to know more about personalised pricing. This occurs if a retailer offers different prices depending on information they have collected about that customer.

This is done primarily in two ways. Firstly, retailers can collect details of a customer's previous purchases made on the website. Secondly, they can buy information about the customer's purchases or internet searches from a third party.

The OFT wants to know if consumers are aware that all this data is being collected about their shopping and searching preferences, as well as if this puts consumers off buying on the internet.

The regulator says that there is no evidence, but a lot of concern, that this information allows retailers to charge a higher price to certain customers - just like the hypothetical landlord at The Red Lion.

"It is important we understand what control shoppers have over their profile and whether firms are using shoppers' profiles to charge different prices for goods or services," says Clive Maxwell, chief executive of the OFT.

Concerns have been raised about flights or hotel rates. It is alleged that in some cases, when a potential customer has looked once, then taken a few minutes to compare the cost elsewhere, they return to find the price may have risen. However, there has been no firm proof of this.

Other suggestions have included different prices for people using different brands of computers, or living in different areas, as they give an indication of their wealth.

Of course, such a scenario could work in a consumer's favour. A regular customer, or one the retailer would like to keep, may be offered a discount, just like the free bowl of chips in our earlier example.

"This is the transfer online of something that has been happening offline for a very long time," says Vanessa Barnett, partner and online marketing expert at law firm Charles Russell.

The essential difference, she says, is that receiving a discount in person is much more obvious than when it is done online.

She adds that consumers always have the power to withdraw their custom from the scurrilous retailer, online or offline.

Technology commentator Tom Cheesewright agrees. Consumers do not like being unfairly treated because of what online retailers know about them, but they do like the discounts and better treatment that might come from the same information.

So, where does this information come from anyway?

Clearly, retailers can track the purchases a customer makes at their online store.

In addition, websites can record information in text files called cookies.

Cookies are widely used to record what repeat visitors view on a site and by advertisers to track users online. They are also used to recognise customers, make suggestions, or store their details to make the process quicker.

There has been particular concern about tracking cookies, used by advertisers, which keep tabs on the various websites that you browse, so they can target you with "relevant" advertisements.

Official statistics show that online sales were 11% higher in October than the same month a year earlier. So, this information can be very valuable indeed.

Concerns about cookies have already prompted action under European law which came into force on 26 May.

It requires websites to explain what cookies are and to get users' permission before using them. So, a permission request will be popping up relatively regularly at the moment for internet users.

In the UK, the Information Commissioner's Office (ICO) recently said that it would launch a crackdown on those not complying, although there are suggestions that many websites are failing to do so.

They could face fines of up to £500,000 each.

In the US, regulators are urging internet companies to have a "do not track" system in place that gives consumers more control over their personal data online.

In a separate development in the UK, the Department for Business has a "midata" programme, which encourages various banks and energy companies to release data about a customer's consumption if it is requested.

Unlike online tracking, this simply keeps a note of their consumption habits of, for example, their gas and electricity.

In these fields, it may allow people access to details that would help them get the most appropriate tariff.

It remains to be seen whether the government will eventually legislate to encourage supermarkets to release similar data. This data is gathered on loyalty cards, which hold information about families' eating habits, when they shop, and how much they spend.

At this point, the gap between data gathered by an online shopper and somebody who visits a store narrows significantly.

As a result, such trends have attracted the attention of the government and the regulator.

The OFT, which is working with international counterparts during its enquiries, will report in spring 2013 on whether an investigation is needed into personalised pricing.

In the meantime, customers will have to rely on internet retailers acting like the landlord at the Dog and Duck.