The right to be left alone.
Film actress Greta Garbo craved it. Justice Louis
Brandeis defended it. And the Fourth and Fifth
Amendments to the U.S. Constitution uphold it.
In the landmark case Olmstead v. United States in
1928, Brandeis wrote: "The right to be left alone is
the most comprehensive of rights, and the right most
valued by a free people."
But protecting that right is becoming more difficult.
Each day, marketers expose Americans to some
12 billion display ads, 3 million radio ads, and more
than 300,000 television commercials. The unsolicited
electronic junk mail known as "spam" now constitutes
some 10 percent of all worldwide e-mail. The average
U.S. consumer receives roughly 1 million marketing
messages a year across all media, or about 3,000 messages per
day. Worse yet, companies are using private information ferreted
out of daily commercial transactions, financial arrangements,
and survey responses to inundate consumers with still
more commercial messages (and sometimes to deny them credit
The very words marketers use to describe their methods of
finding and connecting with customers--military metaphors
such as target, campaign, deploy, blitz, and capture--betray
an increasingly "us versus them" mentality about how companies
treat consumers. Telemarketers call consumers at home at all
hours of the day and evening. Direct marketers stuff their mailboxes
with unsolicited catalogs and junk mail. Relationship
marketers demand more and more of their personal information.
Who can blame consumers for feeling besieged?
The rise of the Internet, with its ability to help companies
more easily obtain information about customers, brings privacy
issues center stage. Consumers and the groups that protect
them, such as the Electronic Frontier Foundation, worry about
privacy. They worry that businesses will use the Internet to capture
customer information (without consumers' knowing it)
when consumers visit corporate
Web sites and, by merging this
information with a wide range of
other publicly available data
(such as credit histories, phone
bills, and medical records), will be in a better position to leverage
vast databases of customer information.
Lawmakers and advocacy groups in many different countries
are marshaling their forces against the perceived threat. In
the United States, for example, legislators have sponsored a
comprehensive consumer health care bill of rights at both
national and state levels. Consumers are acting on their own
behalf as well. Some have requested that marketers remove
their names from telemarketing and direct mail lists. Others
take part in "Buy Nothing Day"--a 24-hour moratorium on
consumer spending sponsored during the Christmas shopping
season by Adbusters, a group that vows to hold the marketing
strategies of consumer products companies "up to public
scrutiny and to set new agendas in their industries." Others
provide false information in on-line registrations, surveys, and
forms. Still others participate in "TV Turnoff Week." And some
go so far as to respond to ads calling for focus group participants
in the classified section of local newspapers and then
deliberately give false information to questioners.
These actions may well represent a broader consumer
* A 1996 DIRECT survey found that 83 percent of those
surveyed said there should be a law requiring an opt-in
procedure for names to be included on direct mail lists.
* A 1998 survey of more than 10,000 World Wide Web
users by Graphic, Visualization & Usability (GVU)
found that 72 percent of Internet users believed there
should be new laws to protect privacy on the Internet and
that 82 percent of users objected to the sale of personal
* A 1998 Business Week poll found that 53 percent of respondents
said government should pass laws now for how personal
information can be captured and used on-line, a figure
three times higher than the number of consumers who
support the idea that the government should let trade
groups develop voluntary privacy standards.
These survey findings are borne out by recent warnings
from trade groups and organizations that oversee corporations.
In 1997 the U.S. Federal Trade Commission warned businesses
to adopt strong privacy guidelines to avoid government
legislation. In 1998 the U.S. comptroller of the currency (who
oversees nationally chartered banks) cautioned banks to take
steps to protect consumers' privacy or risk new government regulations.
That same year, the National Retail Federation suggested
voluntary guidelines for U.S. retailers that would let customers
know beforehand what types of personal information
were being collected at the cash register--and how retailers
planned to use that information.
Few marketers seem to have recognized the importance of
the issue to consumers.
* In late 1998, Geocities, a popular Internet site that allows
consumers to put up free Web sites, agreed to settle FTC
charges that it had misled its 2 million members by
secretly selling their personal information to marketers.
The charges resulted in a 15 percent drop in Geocities'
stock on the Nasdaq.
* Pacific Bell requested in 1998 that regulators allow it to
call unlisted numbers with unsolicited sales pitches. Regulators
turned the company down after consumer groups
and California legislators blasted the proposal.
* America Online decided to sell its members' phone numbers
to a telemarketing company in 1997, reversing itself
later after members protested.
* American Express announced plans in 1998 to sell extensive
information on its cardholders to merchants, despite
considerable criticism from privacy groups.
* Blizzard Entertainment (maker of the popular Starcraft
on-line game) admitted in 1998 that it copied personal
information without consent from consumers' computers
via the Internet.
* Giant Foods and CVS (a supermarket and a drugstore
chain, respectively) decided in 1998 to stop sharing medical
information with a marketer paid to send customers
prescription reminders and promotional literature for new
drugs--but only after critics called the practice unethical
and a violation of privacy.
* In 1998 GTE Corporation inadvertently published the
unlisted phone numbers and addresses of up to 50,000
California customers, some of whom, such as police officers
and crime victims, could have had their personal
safety compromised. The blunder led to 25,000 calls to the
company, 400 e-mails, and 1,500 requests for new phone
Beneath the current antagonism, marketers and consumers
share a set of very real common needs--consumers need the
goods and services vendors sell, and vendors need consumers to
buy these goods and services. But
the fact that it is economical for
companies to send out junk mail and
catalogs with the expectation of a
2 percent response rate means that
98 percent of what consumers receive is irrelevant to their needs
and interests. Inundated with so many irrelevant messages, consumers
feel beseiged by marketers. Marketers are beginning to
wear out their welcome with the people they need the most.
The high cost of shopping
Ironically enough, consumers have never been more alone--despite
the 3,000 marketing messages they receive each day.
With ever more products launched, and the complexity of many
products on the rise, the time and money that consumers spend
searching out the best possible product at the best possible price
may be higher than at any time in the past, particularly for
those high-ticket, complex items they purchase infrequently.
More troubling still, consumers continue to be vulnerable to the
risks of moral hazard and asymmetric information--the perennial
standbys of consumer rip-off.
Consider the home computer. Computers are impressively
complicated machines to purchase, install, and operate. Anyone
who has tried to buy one (and some 60 million American
households have at least one) knows the frustration of talking to
salesclerks who don't have a clue about which features are really
important. Worse yet are salesclerks who overwhelm the customer
with technobabble in a sincere effort to be helpful. Do
you want your computer with a 1GB Jaz drive with 12ms access
time and 5.5Mbps data transfer? How about an STB nVidia 4
MB 3D AGP video card? or a 1000LS monitor?
And the fun doesn't stop when you've made the purchase.
Most consumers find setting up their new computer a challenge,
to say the least. The New York Times reports that home
computer vendors receive some 28 million technical support
calls every year. Microsoft alone receives approximately 15,000
cries for help a day. After setup comes learning how to get on
the Internet--another formidable task.
Consumers may expect such challenges when it comes to
buying computers. But what about cars, televisions, washing
machines, even the lowly coffeemaker? For many of the products
consumers buy, particularly those they don't buy very often,
the time and money they spend searching out the best product
at the best possible price are going up.
Some readers may question this assertion. After all, the telephone
(and the yellow pages) let your fingers do the walking,
and the advent of the Internet has made searching out products
even easier. Research shows that, for some products, the telephone
and the Internet have greatly reduced the search time
needed to find them.
But consumers experience this ease of search primarily for
products they purchase relatively frequently and for which they
don't have to conduct much research. It's a snap to dial up
Amazon.com and order a best-seller, or to go to Travelocity and
find the best airfare between Dallas and Rome. But what about
more complex purchases, like an air conditioner or a health club
If you want to do it right, buying an air conditioner for a
particular room requires a complex calculation. The variables
* The length of the walls in the room you want to cool and
whether they're facing north or are shaded.
* The materials the walls are made of (masonry up to 8
inches thick? uninsulated?).
* The ceiling area of the room, in square feet, and the insulation
above the ceiling.
* The floor space.
* The number of doors and arches.
* The type and orientation of the windows (and whether or
not they have shades).
* The number of people who normally use the room (more
body heat means you need more air-conditioning power).
* The total wattage of appliances being used, and how many
hours you'd typically use the air conditioner in the given
Rather than figure all this out, of course, most consumers simply
head for the appliance store and throw themselves on the
mercy of the salesclerk.
Or consider a health club. As Consumer Reports points out,
"Joining a health club can be as tricky as buying a used car. You
have to find a club that matches your needs, navigate the
nuances of a contract that may lock you in for a year or more,
pay a substantial fee--for a fancy club, perhaps $500 for initiation
and $75 a month--then exercise enough will power to
exercise your body more than once in a blue moon."
The problem with either of these purchases is the risk
involved. Will the salesclerk really know which air conditioner
will best match the customer's needs, or is he more likely to
steer they buyer toward the product at hand or the highest-margin
item? Will the salesperson at the health club fill customers
in about their cancellation rights? Will the club really
buy the new equipment and install the whirlpool next month as
it claims? The Federal Trade Commission frequently pursues
rogue health clubs for high-pressure sales tactics, bait and
switch, and unfair billing.
These kinds of risks to consumers arise from what economists
call "asymmetric information," which occurs when the
seller knows more about the quality of a product than the buyer
does. The textbook case is the used car. The used-car dealer
may know that the sedan he's selling is a lemon with a bad
clutch and worn brakes, but the buyer, kicking the tires and
looking at the new paint job, won't know about these defects.
Even if the buyer hires a mechanic to look at the car, chances
are the seller is still going to know more about it. The buyer
therefore runs the risk of paying more than the car is worth.
The problem of asymmetric information has increased dramatically
with the number of new on-line vendors. Not only are
consumers unable to physically inspect a product in cyberspace,
but they often don't know whether the company selling it is big
or small, new or established, legitimate or illegitimate.
Consumers can fall victim to "moral hazard" as well. The
classic case of moral hazard comes from the pre-managed care
era of health care, when a consumer could purchase complete
medical insurance coverage and then proceed to visit the doctor
more often than he or she would have with limited coverage.
With the advent of managed care, the shoe is on the other
foot--the consumer, not the insurer, is at risk. Now that physicians
are under pressure from the cost-conscious HMOs that
employ them to reduce treatment costs, consumers no longer
blindly trust their doctors to put their interests ahead of the
HMO's, their employer's. Physicians may give their primary
loyalty to the HMO rather than to the patient. (Of course, vendors
can also fall prey to moral hazard, as when consumers falsify
information on surveys.)
Needle in a haystack
Product proliferation also plays a part in raising the interaction
cost of purchasing products and services: there are simply more
products out there than in the past. Companies used to introduce
their products once every five years or so. Intensified competition
and improved innovation now mean that companies
modify or replace products on six-month cycles. Technological
innovations have reduced minimum scale and made it easier for
smaller companies to enter and compete successfully in many
markets--bringing with them still more products. Information
technology, meanwhile, helps companies
expand their reach from local
markets to global markets, increasing
the choices available to the customer
in any local market. Widespread
deregulation (in the form of trade liberalization and the
removal of restrictions on entry into specific industries) also
encourages entry by new vendors.
The advent of the Internet has released an explosion of
choices for the consumer by removing the constraint that used
to hold back the proliferation of products--limited retail shelf
space. With the Internet, shelf space constraints disappear. By
logging on to the Internet, consumers can access all products
offered for sale within a particular category.
As the range of potential choices expands, the time and
effort required to sort through them also expands. Because different
vendors offer these different products, difficulty comparing
and evaluating products increases. Vendors, in an understandable
effort to differentiate their offerings, seek to design
and represent their products in a slightly different way, making
straightforward comparisons virtually impossible. In the case of
consumer electronics, for example, vendors will often take the
same model of VCR or "boom box" and change the model
number, color, and perhaps a marginal feature or two to allow
major retailers to differentiate their offerings from those of
These problems are difficult enough when the customer is
actively searching for a product to meet a specific need. The
problem becomes even more severe when customers are browsing
for products--in other words, when they don't know in
advance what product they want. The may not even be planning
a purchase. As product offerings proliferate, the effort required
to browse through thousands, if not millions, of product variants
within specific categories becomes like searching for the
proverbial needle in a haystack.
A widening gulf
Behind the continuing invasion of consumer privacy and the
constant expansion of product choices lurks an unrecognized
truth about consumers and marketers: their wants and needs are
misaligned. Marketers gather customer information and create
loyalty programs to build deeper and more lasting "relationships"
with customers, but the customer's demand for selection
and comparison is sharply at odds with a deep or exclusive relationship
with any one vendor. Marketers want all the information
they can possibly get hold of about customers, but customers
demand that their privacy be respected and protected.
The apparent conflict has its roots in the marketing
approaches that have come into fashion over the last 10 to 20
years. Approaches like database marketing, relationship marketing,
permission marketing, and loyalty programs aim largely
to help marketers overcome a fundamental lack of information
about the customers they don't know by giving them more
information about the customers they do know.
The limitations of relationship ...
"Relationship marketing"--also known as "one-to-one marketing"--first
came into fashion in part because companies were
(and still are) limited in the type of information they can obtain
about people who aren't already their customers. United Airlines,
for example, identifies business travelers who fly extensively
on United and often upgrades service to those travelers to
increase loyalty to United. But it has much less ability to identify
an American Airlines frequent flyer who happened to book
a flight on United. From United's perspective, this passenger is
a relatively uninteresting one because she doesn't appear to
travel much; therefore she doesn't receive special attention or
service. If United had access to integrated travel profiles of all
its passengers (even people who have never flown United
before), it could be much more effective in targeting and serving
highly profitable business travelers.
Because companies aren't as well positioned to learn about
people who are not yet their customers, relationship marketing
focuses companies largely on collecting additional information
about the customers they do have. The idea is to set in motion a
virtuous cycle in which companies deliver additional value to
customers. Customers are in turn motivated to provide additional
information to companies, which those companies can
then use to deliver yet more value.
This is why relationship marketers put so much emphasis on
"share of wallet" within a product or service category as a key
measure of success. To capture as much information as possible
about the customer, the product vendor must capture the full
range of the customer's business within a particular category.
For one-to-one marketing to work to its full potential, there
isn't room for more than one vendor. Any notion of customers'
spreading their business among multiple vendors undermines
the ability to build rich profiles of customers--and to capture a
high share of their transactions.
Companies using relationship marketing are thereby at odds
with the customer's need for selection and comparison. Moreover,
the relationship marketer's need to capture as much information
as possible often leads it to intrude on customers' lives
to an increasingly intolerable extent.
... and permission marketing
Another approach to marketing is known as "permission marketing."
Permission marketing explicitly acknowledges the
importance of obtaining permission from customers before
blitzing them with advertising messages and criticizes the
"interruption" marketing programs in which advertisements are
inserted in media or delivered in unsolicited ways, such as a
phone call at dinner. Advocates of permission marketing
instead propose contests and sweepstakes in which customers
will participate in exchange for agreeing to receive certain marketing
Permission marketing begins to address the challenge of
finding and reaching customers in a less intrusive way than traditional
marketing approaches. It introduces the notion that
vendors should be prepared to pay customers either in kind or
in cash in exchange for their attention. But permission marketing
fails to address the challenges marketers face in accessing
information about customers who purchase from competing
vendors. Even in the case of customers who do business with a
particular vendor, that vendor never really knows whether its
customers are giving it 10 percent of their business or 100 percent.
Unable to get information about customers whom the
company doesn't already have, the company must revert back to
its old techniques of interruption marketing to get more business
from existing customers.
An economic force works against permission marketing per
se as follows. The high value of an acquired customer enables
marketers to profit from making so many calls and sending so
many pieces of direct mail--even when consumers reply only 2
percent of the time. Moreover, marketers don't bear the cost of
the interruption--the consumer, who pays for it with his or her
time, bears it instead.
Thus we have a widening gulf between marketers and consumers.
Not long ago, consumers regularly responded to marketing
surveys. Today most will complete surveys only if they
receive rewards in cash or in kind. Customers once provided
companies with referrals for new business; today they rarely
give out such information for free. Ten years ago, many consumers
responded politely to telemarketers who called them at
home during the dinner hour to conduct surveys. Today people
resent the imposition on their time. Soon consumers will
demand that telemarketers compensate them, just as people
now routinely receive compensation for participating in focus
The Internet only makes the dilemma more acute. As the
Internet lowers barriers to market entry and the number of
product vendors expands, marketers will confront growing
competition for customers' attention. Most will increase their
use of advertising, direct mail, telemarketing, and spam.
Numbed consumers will pay less and less attention, prompting
all the more advertising in response. These same dynamics will
play themselves out as companies use the Internet to capture
ever more detailed customer information, and consumers will
respond with demands for stricter government controls on
information capture and use.
Power shifts to the consumer
The current conflict between marketers and consumers also
results from the economics of information capture. Consumers
have become all too aware that companies' ability to collect
information far outstrips their ability--or inclination--to
deliver meaningful value in return. As we've seen, the primary
use of customer information by
companies today instead seems to
be to generate growing volumes of
junk mail and unsolicited telemarketing
calls. It seems that one of
the easiest ways for companies to generate value from the customer
information they've captured is to sell it to third-party
list companies. The list companies in turn resell the information
to a variety of companies that use it to target their direct mail
and telemarketing offers. Consumers increasingly recognize
that they are selling their "privacy" cheaply to companies that
are using it to forward their own interests.
Seen in this light, the privacy backlash for many consumers
may have less to do with the desire to keep information about
themselves confidential and more to do with the pragmatic
assessment that the returns for the information they divulge
are, simply put, unsatisfactory. Consumers are rational beings,
after all. Most have shown that they are willing to release personal
information if they can profit by doing so. In a doctor's
office, consumers share intimate details about their health in
exchange for appropriate medical care. They share intimate
details about their finances with financial advisers because the
quality of advice they receive depends on a detailed understanding
of this information. They insist that the airline record their
frequent-flier numbers so that they may receive miles good for
upgrades, free flights, and a growing array of other products
and services. In all of these exchanges, the key is for consumers
to receive sufficient value in exchange for divulging their
Several new technologies will soon enable consumers to
challenge marketers for control of their information. (These,
and the other technologies discussed in this chapter, are more
fully defined in the Appendix, "The Technology Tool Kit.") In
the on-line world, these technologies include
* Anonymization software, which allows on-line users to
shield their identity as they surf the Web.
* Cookie suppressors, which defeat a Web site's ability to
plant information in an on-line user's computer that can
be used to identify the user and track his or her behavior.
* E-mail filters, which allow on-line users to screen out
* Anonymous payment mechanisms, which allow on-line
users to buy something without revealing who they are.
* Reverse cookies, which will allow consumers to keep track
of and store a record of their own on-line behavior.
In the physical world, these technologies include
* Smart cards, which act like credit or ATM cards but
which "remember" their transactions.
* Digital cash, which is like physical-world cash, except that
it's used on-line.
* Set-top boxes for televisions, which will allow the consumer
to record his or her television-viewing behavior.
These technologies, alone or in combination, will for the first
time enable consumers to seize control of information about
themselves and choose whether to keep it private or share it
with product and service vendors or a third party.
Taken together, or in combination, these technologies allow
consumers to obtain much more comprehensive and accurate
profiles of their own commercial activities than any individual
company--or plausible combination of companies--could
hope to collect. Through these technologies, users will be able
to choose whether to release or withhold information about
themselves. Their decisions will hinge, in large part, on what
companies offer them in return for their data.
As these technologies simplify information capture for consumers,
they complicate it for companies. Anonymizer sites can
cloak the identity of consumers as they surf the Web, shielding
the information from vendors. Consumers can use smart cards
and reverse cookies to capture and store the names of vendors
and transaction amounts (although the ability to obtain details
about the specific items a consumer buys will require a common
set of standards and protocols).
The smart card or reverse cookie
user can then routinely download
this information into a PC
to produce an integrated profile
of his or her purchases. More
ambitious consumers could merge this information with data
collected on viewing meters attached to their television sets to
obtain a profile that combines viewing habits with purchasing
patterns. Marketers would be willing to pay handsomely for
Thus, in one elegant stroke, these technologies will offer a
solution for people worried about privacy. If they don't wish to
reveal information, the technology makes denial possible. But if
they choose to make information available in return for something
of tangible value--as the evidence suggests most consumers
will--they will have that opportunity. And so should
the seller beware--and be ready with an offer to the consumer.
The rise of the infomediary
Consumers won't have the time, the patience, or the ability to
work out the best deals with information buyers on their own
(nor will vendors have time to haggle, customer by customer).
In order for consumers to strike the best bargain with vendors,
they'll need a trusted third party--a kind of personal agent,
information intermediary, or infomediary--to aggregate their
information with that of other consumers and to use the combined
market power to negotiate with vendors on their behalf.
In this book, we argue that companies playing the infomediary
role will become the custodians, agents, and brokers of customer
information, marketing it to businesses (and providing
them with access to it) on consumers' behalf, while at the same
time protecting their privacy. These new entities will emerge
from combinations of companies that provide unique brand
franchises, strong relationships with their customers, and radically
new strategies. They will become the catalyst for people to
begin demanding value in exchange for data about themselves.
By offering a variety of agent and targeted marketing services,
they will help consumers reduce the "interaction" cost of searching
for goods at favorable prices in an environment of proliferating,
increasingly complex products.
Because their value to the consumer will come, in part,
through lowering the interaction costs consumers face, infomediaries
will emerge first in markets where product lines are
rapidly changing and complex, and where pricing is opaque or
complicated in ways consumers have a hard time understanding.
Products in these markets often require substantial research
to evaluate and have prices that are hard to compare. Because
customers will interact with an infomediary primarily over the
Internet, and because the infomediary's services will be essentially
information based, infomediaries will also find fertile
ground in markets where products and services have high information
content and can be delivered in digital form.
The infomediary's role will, in fact, be a very traditional one.
As consumers take ownership of their own behavioral and
transactional data, they'll create a new form of information supply.
By connecting information supply with information
demand, and by helping both parties determine the value of
that information, infomediaries will build a new kind of information
supply chain. Thus will they bridge the widening chasm
that separates marketers and consumers.
This book explains how the senior managers of today's biggest
corporations--as well as farsighted entrepreneurs--can benefit
by taking the customer's side in matters of privacy and information
capture. Those who recognize the opportunity to truly
champion the customer (rather than simply paying lip service
to the idea) will be able to build infomediaries that generate
considerable revenues and market value. Companies that
choose not to form infomediaries must pay close attention as
infomediation invades the markets where they compete. Infomediaries
will be the catalyst for sweeping forces that the Internet
(and information technology in general) has already set in
motion. Companies will ignore these forces only at their own