insurance companies using price optimization for the first time. This is when an insurance company strategically raises prices on only some of its existing customers, hoping that the price hike is not so large that the consumer picks up and leaves. The rub is that the price increase in, say, auto coverage, is not actually based on how risky that particular driver is. The higher price is based on the kind of consumer the company thinks he is: whether he's likely to shop coverage and switch if hit with an increase.
How could a company make such a prediction about a single customer? Data mining and predictive analytics, of course. One boon of the information age is that corporations now have a surprising amount of data on their individual customers: where you shop, the things you buy, and even how sensitive you are to price fluctuations.
It is a brave new world, and we are living in Ron Swanson's nightmare.
My initial reaction was that this practice is completely unfair. For one, it's kind of a ridiculous policy to punish your loyal customers who have been with you for years. Since we know it takes more time, money, and effort to acquire a new customer than to retain an existing one, enacting a policy to test the loyalty of your long-time customers seems particularly stupid.
And on some level, we believe that insurance customers who have the same risk profile should be offered the same price. We posit that if a group of drivers is likely to cost the company the same amount, on average and over time, they all ought to have the same monthly bill. It's intuitively fair.
But my behavior shows that I don't truly believe in paying the same price as everyone else: just the opposite. I actively negotiate, and at every opportunity, too. I try to lower the price on everything from my auto and home purchases down to my internet bill.
When I negotiate for a lower price, I am actively trying to create a situation in which I pay less than other customers for the same good or service. I'm creating price inequity: one guy will pay X, and I'll try to pay some fraction of that figure. We may both be equally good customers, paying on time for the same number of years, for the same services. And here I am trying to get this guy to end up paying more than me.
But I don't apologize for this. The myth of a marketplace in which all customers pay the same prices is not something I believe in or would want to operate in. I like getting a deal. I want to pay less than the next guy. I like wearing down a supplier. I sometimes will even brag about how little we paid to friends or family.
So it's hypocritical for me to think that I should be able to actively reduce my prices as much as I can (note that I am not campaigning for all customers' prices to be lowered), while suppliers shouldn't be able to raise them strategically.
If I am comfortable with the notion of customers paying different rates due to some negotiation on my part, it must be fine for suppliers to give it a go, too. I target certain companies thinking I can get a lower price. Why shouldn't companies target certain customers in the same way?
And what is price optimization, if not a supplier trying to negotiate rates higher? It's just an offer. Customers have a chance to dispute the price increase, or to walk away. The fact that a lazy customer may not notice or even pick up the phone to defend his previous price is not the fault of the company. It's like Mike McDermott reminds us in Rounders: caveat emptor, pal.
When we frugal consumers try to minimize costs at every turn, can we fault a company for trying to maximizing profits?
We should remember that the price someone ultimately pays typically is not a static figure set ahead of time. When we say "the market" sets the price, it is not a passive thing happening in the ether. It happens via the interaction of customers and suppliers. I exert downward pressure on prices by comparing prices, negotiating, and, when it's appropriate, leaving for another company.
Shouldn't a supplier be able to exert the same pressures? Shouldn't a small business or a corporation be able to put its knowledge of its customer base to its full use, and create the highest total profit that it can?
When I say I believe in a free market, doesn't that apply to the actions of a company as well?
I'll go ahead and step off the soap box, readers. It seems I've awoken my inner conservative this morning, with all this talk of free markets and arguments for the rights of corporations. I did switch from coffee to tea recently, so maybe that's to blame.
But I'd like to hear what you think on the matter. Is price optimization a fair market practice, or a discriminatory pricing scheme? Let's hear it in the comments.
*Photo is from meddygarnet at Flickr Creative Commons.