Capitalizing on Privacy Practices

Friday, July 22, 2011

David Navetta

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Article by Nicole Friess

Capitalizing on Privacy Practices - Study Indicates Consumers Will Pay for Privacy

Consumers are more likely to purchase products from online retailers who are protective of consumer privacy, according to researchers at Carnegie Mellon University.

The study, entitled “The Effect of Online Privacy Information on Purchasing Behavior: An Experimental Study” found that the availability and accessibility of information regarding online retailers’ privacy practices can affect consumers’ decisions to purchase products online.

Interestingly, in contrast to the commonly held view that consumers are unlikely to pay for privacy, the study indicates that “when privacy information is made more salient and accessible, some consumers are willing to pay a premium to purchase from privacy protective websites.” The study is consistent our discussion in a previous post of the “privacy by design” framework.

As we discussed, businesses that address privacy into the design of their products and services are less likely to face consumer and regulatory backlash or incur the costs of remediation. Yet businesses may benefit in another way from protective and consumer-friendly privacy practices - the results of this recent study indicate that such practices may be leveraged as a selling point.

The Experiment

Many websites use machine-readable codes that tell a browser their privacy policies - such as whether a website sends cookies and with whom the website shares personal information gained from those cookies.

Websites commonly use Platform for Privacy Preferences (P3P) compact policy “tokens” such as “NID” (no identified user information collected), which represent a standardized privacy expression defined in P3P specifications. The authors of the study used a modified version of Privacy Finder, a search engine that annotates a user’s Google or Yahoo! search results with “privacy meter” icons.

Privacy Finder generates these icons through an automated analysis of the P3P policies of the websites a user visits. These icons graphically represent how well a website’s privacy policy matches preferences specified by the user.

The authors configured their search engine to calculate privacy warnings based on a website’s sharing of personal financial information, purchase information, or personally identifying information; a website’s refusal to allow a user to remove the user’s personal information from marketing lists; and a user’s inability to view her personal information on a website.

Three groups of participants (two control groups and one test group) using the modified search engine were told to search for products online and purchase those products using their own credit cards. All participants were instructed to purchase both an eight-pack of Duracell AA batteries and the “Pocket Rocket Jr.,” a vibrating sex toy.

Both products average about $15 including the cost of shipping and are widely available online. One control group did not see any privacy meter icons when they searched for the products to purchase. The other control group saw the icons, but was told that the icons merely indicated websites’ “handicap accessibility” - a characteristic chosen as a control condition because it’s considered to be generally irrelevant to most online consumers.

The test group saw the icons and was told that the icons indicated the degree of websites’ privacy protections. All participants in the study could access merchants’ privacy policies by clicking on privacy policy links displayed on the websites they visited.

The results of the study offer new insight into consumers’ valuations of personal data and online behavior. Control group participants generally purchased their products from the websites offering the lowest prices.

In contrast, test group participants - who saw the privacy meter icons and knew that the icons represented the level of privacy protections utilized by the websites - were more likely to make purchases from websites offering medium or high levels of privacy, even if those sites charged higher prices for identical products.

Additionally, participants demonstrated that they would spend an average of 59 to 62 cents more to buy the same product from websites offering stronger privacy protections.

The Take Away

How can businesses capitalize on these findings? The study suggests that businesses that incorporate "privacy by design"  into their online business models help promote greater consumer awareness of and control over personal information, attracting privacy-conscious consumers.

Developing and implementing a website privacy policy is one aspect of the “privacy by design” framework – how a business collects and handles data online is more transparent with a privacy policy in place. While displaying a privacy policy is a good first step toward transparency, 70% of people surveyed by the Annenberg Public Policy Center of the University of Pennsylvania disagreed with the statement that “privacy policies are easy to understand.”

Accordingly, if a merchant seeks to promote its online privacy practices in order to boost sales, consumers must be able to identify and understand the merchant’s privacy practices for those practices to affect consumer behavior. Typically, however, online merchants display only small links to their privacy policies at the bottom of their websites. As such, privacy policies are often overlooked by consumers.

Recently, the Federal Trade Commission and consumer advocacy groups have been advocating just-in-time notice as a means of making information about privacy practices more transparent and accessible to consumers. The results of the Carnegie Mellon study seem to confirm the benefits of this approach. The study indicates that purchasing decisions may be affected when privacy practices are presented to consumers in a user-friendly fashion when they are browsing online.

The study also suggests that businesses “may use technological means to showcase their privacy-friendly privacy policies and thereby gain a competitive advantage” and “maximize profits.” Specifically, “if the adoption of P3P increases, businesses protective of customer privacy may be able to attract consumers by posting their P3P policies and signaling good privacy practices.”

Cross-posted from InfoLaw Group

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