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Why Companies Should Compete on Privacy (and What Customers Can Do to Help)

CMO Survey Results

The CMO Survey reports that 40 percent of companies use customer information collected online for targeting purposes and 88.5 percent of chief marketing officers expect this practice to increase over time. At the same time, CMOs have very low levels of concern about how the use of online customer data infringes upon privacy. Specifically, when asked, “How worried are you that this use of online customer data could raise questions about privacy?” on a scale where 1=not at all worried and 7 is very worried, the average response was 3.5. Figure 1 shows the full distribution.

Figure 1. CMO concerns about use of online customer data and privacy questions

At the same time, a recent by the Pew Internet & American Life Project found that 86 percent of Internet users have taken steps to remove or mask their digital footprints — ranging from clearing cookies to encrypting their email. Fifty-five percent have gone even further to avoid being observed by specific people, organizations or the government.

Clearly, customers and marketers are not on the same page. It is time for companies and industries to proactively create strategies, systems and standards for interacting with customers online.

Why? Well, if they do not, the government might step in and establish stronger rules to protect consumer online privacy. This is unlikely to be comforting or viewed as efficacious given that consumers likely are even more nervous about government surveillance.

In 2010, the Federal Trade Commission, with input from businesses, issued a very thoughtful report, “Protecting Consumer Privacy in an Era of Rapid Change,” which outlines a number of recommendations and raises many important questions facing businesses and customers. At the core of their recommendations (which are, by the way, only advisory) is the view that it is better to generate competition on privacy than to regulate privacy.

The idea has merit, but three things must happen for this to unfold:

— First, customers must know what companies are and are not doing with their information.

— Second, customers must use this knowledge to drive their purchasing choices on the Internet.

— Third, companies must respond to these choices by improving privacy protection.

These improvements, in turn, generate competition on privacy features which benefits all consumers, even those that do not originally search and select. In such a dynamic, companies that offer commerce options tailored to the privacy concerns of its customers will have the edge in attracting and retaining customers.

This model depends on consumers giving their business to companies that protect their privacy. Clearing cookies and encrypting email are signs that consumers are willing to do some of the work policing the marketplace. The question is whether they will search for and select relationships with companies that choose to invest in privacy protections.

The FTC report is not encouraging in this regard, acknowledging “…to the extent that choice mechanisms exist, consumers often are unaware of them, and click-through rates remain low” and “…when a consumer downloads an application to his smartphone, he may not vocalbook know whether his wireless carrier shares his personal information with the application. He also may not know if the application shares his information with advertisers or other third parties.”

Younger consumers do not seem to care about how un-private their Internet-related tools and interactions are. Older consumers are painfully ignorant of how much of what they do is visible. So it remains to be seen who will be the vanguard in this market to lead, teach and complain about companies that operate outside of what will surely be an evolving norm for privacy.

From the company side, competition on privacy is also uneven, which the FTC also acknowledges in its report. For example, “All companies involved in information collection and sharing on mobile devices – carriers, operating system vendors, applications, and advertisers – should provide meaningful choice mechanisms for consumers. Regardless of the specific context, where the consumer elects not to have her information collected, used, or shared, that decision should be durable and not subject to repeated additional requests from the particular merchant.” The headline today that “Google explores dropping cookies” in favor of a unique identifier is an indication that a certain type of competition on privacy may be in the making. Stay tuned.

It is clear that companies do not want the government creating rules in this area. Consumers probably do not want it or trust it either. It is my view that companies and industries that get out in front of privacy will win the love and respect of their customers, distinguish themselves from their competitors and earn long-term loyalty and sustained revenues.

At the same time, companies should let customers decide how much they want to share in return for more customization and targeting. In a strong relationship, customers will likely disclose a great deal because they trust companies and understand the value of sharing information about their preferences and behavior. Think reciprocity. When this happens, it’s a win for customers and a win for companies. It is also a win for society because commercial relationships are based on respect and reciprocity, not ignorance and secrecy.