Information taken from warranty cards would be stored in which category of a customer profile?

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  • Privacy Isn’t the Issue
  • Power Shifts to the Consumer
  • The Information Bargain Is Struck
  • What Managers Can Do

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Companies have good reason to collect information about customers. It enables them to target their most valuable prospects more effectively, tailor their offerings to individual needs, improve customer satisfaction and retention, and identify opportunities for new products or services. But even as more and more managers begin to build strategies based on capturing information about their customers, a major change is under way that may undermine their efforts. We believe that consumers are going to take ownership of information about themselves and demand value in exchange for it. As a result, negotiating with consumers for information will become costly and complex. That process has already begun to unfold, but it could take several years to play out across broad segments of customers and products.

It is no secret that consumers are becoming increasingly edgy about the amount and depth of information businesses collect about them. The popular press regularly chronicles the public’s growing concern about privacy in an information-rich era. More specifically, people are starting to realize that the information they have divulged so freely through their daily commercial transactions, financial arrangements, and survey responses has value and that they get very little in exchange for that value. Why? Because the balance of power currently rests with companies, not consumers.

The balance could tip in favor of consumers, however, thanks to new technologies such as smart cards, World Wide Web browsers, and personal-financial-management software. These technologies make it possible for users to obtain much more comprehensive and accurate profiles of their own commercial activities than any individual vendor—or plausible combination of vendors—could hope to collect. Through these technologies, users will be able to choose whether to release or withhold information about themselves. Their decision will hinge, in large part, on what vendors offer them in return for the data.

Consumers probably will not bargain with vendors on their own, however. We anticipate that companies we call infomediaries will seize the opportunity to act as custodians, agents, and brokers of customer information, marketing it to businesses on consumers’ behalf while protecting their privacy at the same time. Only a handful of companies with unique brand franchises, strong relationships with their customers, or radically new strategies will be positioned to become infomediaries; but they will be the catalyst for people to begin demanding value in exchange for data about themselves.

What will this shift in power mean for most other companies? In general, businesses in industries that cater to consumers, whether they are product manufacturers or service providers, will need to rethink how they obtain information about their customers and what they do with it. That is, they will need to understand what information they must collect and how they will acquire it and use it to find new customers more efficiently, improve products and services or tailor them to individual needs, and build loyalty. Those companies that do the best job of using information to provide value to customers will be positioned to gain access to more of it.

Privacy Isn’t the Issue

We are witnessing the growth of a “privacy” backlash among consumers, which we believe has 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 increasingly recognize that they are selling their “privacy” cheaply to companies that are using it to forward corporate interests. More broadly, consumers regularly decry the invasion of their privacy by the government and the press. In those instances, too, they are outraged that those collecting the information are using it to create value only for themselves—or, in some cases, to damage the interests of the people surrendering the information.

These concerns are being voiced with increasing frequency. For example, consumer activists and the press attacked Lotus Development Corporation in 1991 when they learned that the software company was planning to release a CD-ROM product for direct marketers. Called Marketplace, the product would allow ordinary PC users to search across the country for the names, addresses, and phone numbers of individuals who matched specified demographic or psychographic characteristics. Although all the information contained in Marketplace could be obtained either from sources in the public domain such as the U.S. Census Report or, for a price, from market research firms, critics argued that the product’s low cost and user-friendliness would invite marketers and others to deluge private citizens with junk mail or telemarketing calls. In the face of considerable negative publicity, Lotus dropped the product and spun off Marketplace as a separate company.

Microsoft sparked a tempest in 1995 when it was revealed that its Registration Wizard, which allowed users of Windows 95 to register online, was automatically collecting information about customers’ software without their knowledge or permission. When users registered with Microsoft, going on-line for the first time, Microsoft took the opportunity to “read” the configuration of their PCs. The company gained instant knowledge, subscriber by subscriber, of the major software products running on its customers’ systems. When members of the online world got wind of what Microsoft was doing, they protested publicly. Microsoft quickly abandoned the practice.

Netscape faced a similar storm early last year over its “cookie” technology, which is embedded in its popular Internet software for accessing the World Wide Web. The cookie software enabled the Netscape browser to obtain automatically a record of Web sites visited and of the specific pages clicked to at each site; the software would store this information on the user’s own PC. Netscape intended the cookie technology to allow Web sites to do more than tabulate hits, however; it enabled them to develop profiles of the sites’ visitors. When a user arrived at a site, the cookie software on the user’s PC downloaded a record of any previous visits made to that site, making the data available to the site’s owner. (Even though the cookie software obtained an integrated profile of the user’s visits to all Web sites, Netscape designed the technology to download information only about the user’s previous visits to that specific site.)

When Netscape users realized that the software itself was divulging information about their behavior on the Web, they reacted much as Microsoft’s users had—and Netscape quickly announced that in subsequent releases of its browser software, users would have the option of turning off the cookie function and denying Web sites access to the information it contained. In other words, consumers once again rebelled when they realized that information about them was flowing to businesses—providing them with commercial resources—while the consumers themselves were getting nothing in return.

But to view such rebellions as concerns about privacy is to misunderstand them. Of course, some individuals consider privacy an absolute right, and many people are concerned about their privacy in an abstract sense. However, most consumers have shown that they are willing to release personal information if they can profit by doing so. We are all familiar with the success of frequent-flier programs, which have passengers clamoring to hand over detailed information about their flight histories to airlines in return for something of tangible value, such as discounts on future flights or, increasingly, the ability to purchase a broad range of other products and services at a discount.

Most consumers have shown that they are willing to release personal data if they can profit by doing so.

Consumers appreciate—and often pay premium prices for—the customized products and services companies can deliver when making thoughtful use of personal information. For example, car rental companies frequently collect highly detailed information for programs like Hertz Corporation’s #1 Club Gold and National Car Rental’s Emerald Club. Application forms request several credit-card account numbers and expiration dates, frequent-flier numbers for a dozen airlines, business and home addresses with phone and fax numbers, and E-mail addresses, not to mention driver’s license and Social Security numbers, insurance providers and policy numbers, and estimated frequency of travel. Consumers surrender this information willingly, knowing that they will receive substantial benefits in return, such as a wider choice of vehicles, more favorable rates, and fast, hassle-free pickups and returns. For most people, the benefits gained by providing such potentially invasive information far outweigh any of their concerns.

Benefits such as these, however, highlight the overall problem. Whereas Hertz and a handful of other businesses may compensate customers for information by providing elevated levels of service, most companies these days do not. For example, although consumer electronics companies capture valuable product information from customers who fill out registration forms, they fail to reward those customers with even a note of appreciation, let alone anything of tangible value. Automobile companies, through their dealers, know a great deal about their average customer, but when was the last time an auto company offered its customers anything of value, such as tailored services or promotional discounts? (Lexus, of course, is one notable exception.)

Indeed, some companies do not even intelligently organize and use the information they collect, much less deliver value to people in return for it. We are all familiar with hotels that make the weary traveler reenter basic information such as home and business addresses, telephone numbers, place of employment, and method of payment, even though the guest has supplied it repeatedly during previous stays. And many banks acquire broad profiles of their customers across multiple financial-service areas but have difficulty merging that information to present a single face to those customers.

Consumers have become aware that the ability of companies to collect information far outstrips their ability—or inclination—to deliver meaningful value in return. And the gap is widening as vendors amass huge databases of detailed information about their customers and wrestle with the challenge of mining the data for value. It is precisely consumers’ recognition of this growing imbalance that has begun to fuel their resentment over giving away still more information.

Consider how this resentment has already changed the way information is collected. Not long ago, many consumers regularly would respond to surveys, motivated by little more than a note of thanks for their efforts. Today they often will complete surveys only if they receive rewards in cash or in kind. For instance, hotels and restaurants once used comment cards in rooms and on tables to obtain feedback. Now response rates for such surveys are in the single digits, and hospitality companies such as Ritz-Carlton and British Airways frequently compensate customers who have experienced poor service not only to satisfy them on the spot but also to gain the trust and information necessary to customize services.

Similarly, customers once provided companies with referrals for new business; today they rarely give out such information freely. MCI Communications Corporation is, in effect, purchasing such referrals: its Friends & Family program rewards customers with discounts on long-distance calls for revealing whom they call frequently, thus helping MCI to acquire new customers. And consider this: 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. Can it be long before consumers demand that telemarketers compensate them, just as people now routinely receive compensation for participating in focus groups? Signs of consumers’ changing attitudes are everywhere, and they provide a warning to managers about the seismic changes ahead.

Power Shifts to the Consumer

Even as consumers grow more restive about giving away personal information for free, several new technologies enable them to challenge companies for ownership of this valuable asset. To understand the potential of these technologies, consider again the cookie software that Netscape has agreed to modify. What appeared to be a fairly modest compromise by Netscape—certainly in comparison with the nearly total capitulation of Lotus and Microsoft—in fact represents a major step toward a new approach to obtaining information about consumers.

New technologies enable consumers to challenge companies for ownership of personal information.

Netscape had anticipated from the outset that as commercial transactions over the Internet became more common, the cookie technology would capture information about those transactions, including the amounts users spent and the items they purchased. Users would have on their PCs detailed profiles of all the activities they conducted on the network, including (in addition to a record of the sites they visited) a log of the amount of time they spent at each site, the resources they accessed there, and any transactions they made. Because these profiles would cover all sites, not just one, they would provide rich portraits of individual users’ interests and needs in a way that no single Web site could hope to duplicate.

Contrast the information collected by Netscape’s cookie software with the more fragmentary data that companies acquire today. For instance, the typical point-of-sale (POS) scanner in a retail store obtains detailed information about the items purchased and prices paid by a customer on one shopping trip, but what if the customer returns to the store the next day and makes another purchase or buys something at another retail store owned by the same chain? Most POS scanners would not be able to connect the two transactions. Whereas vendors might make the connection if the customer used the same credit card on both occasions, what if the customer used the card for one article and paid for the second with cash? The most sophisticated retail technology available can develop an integrated profile of a customer’s purchases from multiple stores in a chain, but what can the retailer hope to discover about goods the customer buys in a competing store? Of course, the customer’s credit-card issuer could track his or her purchases from different retail outlets (assuming the same card is used for each transaction), but even it cannot learn certain details about the specific items and prices.

The broad, cross-category profiles of consumer behavior collected by Netscape users themselves promise to offer much more valuable information. Internet browsers are just one of the new technologies that allow consumers to obtain comprehensive information about their own activities using their own devices. Personal finance software, such as Intuit’s popular product Quicken, is another.

Used by roughly 11 million households around the world, Quicken helps people write and print checks from their PCs; it also lets them collect and organize information about their purchases, expenditures, and investments so that they can more adequately prepare their budgets, plan their finances, and do their taxes. Quicken users also can do their banking and pay bills electronically. Last year, Intuit even introduced a Quicken affinity card so that its customers would be able to download the details of their credit card transactions directly into the record-keeping software.

Intuit’s success is compelling evidence that at least some consumers—concentrated in high-income households and most likely to be the first to engage in electronic commerce—want to acquire information about themselves because it lets them monitor their own activities and become more thoughtful about how they spend and invest their money.

Smart cards are another technology that is changing the balance of power. Used frequently in place of pocket money by consumers in Denmark and some parts of Germany, smart cards are essentially electronic cash that can be used as readily as credit or debit cards. Consumers buy cards configured for a fixed value; each time the user makes a purchase, the amount can be electronically deducted from the card until the card is used up. Smart cards easily could be enhanced to capture and store the names of vendors and transaction amounts. (The ability to obtain details about the specific items a consumer buys will require a common set of standards and protocols.) The smart-card user then could routinely download this information into a PC to produce an integrated profile of his or her purchases.

More ambitious cardholders could potentially merge this information with data collected on viewing meters attached to television sets in their homes (similar to the meters used by A.C. Nielsen’s TV-viewing survey families) to obtain a profile that combined viewing habits with purchasing patterns. What would the value of this information be? Advertisers might be willing to pay handsomely for it. Such easily collected profiles would provide explicit measures of how advertising drives purchasing activities.

Other technologies for acquiring and storing information conveniently no doubt will appear when more people begin to buy goods and services over interactive networks such as the Internet and the commercial on-line services. In the world these new technologies are creating, consumers will carry their histories on their persons as well as in their hard drives, just as they carry a recollection of their activities in their memories. Collecting such information would be difficult for companies, but for consumers it is simple. The technology is already in many homes—especially the homes of those affluent consumers whom marketers most want to reach.

These technologies, alone or in combination, enable consumers for the first time to seize control of information about themselves and to choose whether to transmit it to a vendor or a third party. Consumers can turn off the cookie or refuse to share smart-card or personal finance information. Thus, in one elegant stroke, these technologies also offer a solution for people worried about privacy. If they do not 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 can hardly be concerned about their privacy, except for the possibility that information released to one vendor might be resold to other, less desirable vendors. Even that concern could be addressed: contractual provisions accompanying the release of information could prohibit its resale. Some customers might even be willing to permit resale for a fee. However, such secondary information may have little value in a world where companies can bargain for real-time data.

The Information Bargain Is Struck

With these new technologies, consumers will be able to collect information more easily than vendors will, to update the information instantly, and to collect both broad and deep information specific to an individual—literally, a segment of one. However, consumers won’t have the time, the patience, or the ability to work out the best deals with information buyers on their own. In order to help them strike the best bargain with vendors, new intermediaries will emerge. They will aggregate consumers and negotiate on their behalf within the economic definition of privacy determined by their clients.

Intermediaries will emerge to help people negotiate the best deals with companies for data about their transactions.

These infomediaries would, in fact, play a very traditional role. When ownership of information shifts to the consumer, a new form of supply is created. By connecting information supply with information demand and by helping both parties involved determine the value of that information, infomediaries would be building a new kind of information supply chain.

Intuit could evolve into such an infomediary. In the future, the company could easily offer to help users obtain information about on-line or smart-card transactions and automatically incorporate it into their Quicken records. Intuit even might act as an integrated payment and billing service for purchases on the Internet. By broadening the scope of transactions that it helps its customers capture and by deepening its understanding of their needs and preferences, the company could position itself to become a trusted intermediary and bargaining agent for cross-category information about its customers.

For example, Intuit might offer to screen commercial Internet messages, weeding out “junk” E-mail while reordering the remaining messages according to customers’ evolving preferences. The company also might introduce services that use software agents to search for information about products and services that meet users’ prespecified (and eventually learned) preferences, such as credit cards with the best combination of membership fees and interest charges, checking and money market accounts with the best features and interest rates, automobile loans, and leases or mortgages.

As customers begin to understand how software agents can provide enhanced services, Intuit might offer to train and activate personal agents that could draw on a broader understanding of an individual’s profile. For instance, if an Intuit user started to download information on home remodeling from the network, an agent might determine where to get remodeling supplies in the local area; and if the user’s financial profile suggested that financing might be necessary for the remodeling, the agent could start to poll banks offering home improvement loans to determine the range of fees and rates that might be involved. Agent-based services also could give customers access to a broader range of vendors that could meet their needs, and could supply the information necessary for choosing the best offerings at the lowest prices.

There are other ways in which Intuit, acting as an information conduit, could help its customers obtain value from vendors. The company could package elements of a customer’s preference-and-transaction profile and, based on his or her instructions, selectively make that information available to favored vendors that agree to use it to tailor or enhance their products or services for that customer. For example, if a hotel in London knew that a guest had a passion for Thai food and collected stamps as a hobby, it might provide the guest with a list of good Thai restaurants within walking distance of the hotel and with a directory of stamp dealers and stamp collectors’ clubs active in the city. Intuit also might draw on the experiences of its customers with such vendors to provide advisory services. On the one hand, it could advise customers on vendors’ behavior; on the other, it could help vendors develop the skills to serve its clients better.

Intuit could give vendors information if they agree to use it to tailor their offerings for that customer.

Of course, Intuit also might help customers receive payments from vendors in return for information. For instance, it could offer an airline the opportunity to deliver a targeted advertisement to those customers in Intuit’s database who are the most frequent fliers across all airlines. The advertising airline would not get a list of the customers but, instead, would give its message to Intuit, which in turn would deliver it to the appropriate customers. The airline might pay one fee if the message is delivered to an Intuit customer, a higher fee if the customer actually clicks to read the advertisement, and an even higher fee if the customer clicks on an icon requesting more information or purchases a ticket. Those fees ultimately would be paid to the customer, and Intuit would take a management fee.

Intuit could become an infomediary not only because its software captures a broad range of financial data about its user base but also because the company has developed a unique brand franchise with a specific audience and long-standing relationships with customers who trust and are loyal to Intuit. Other potential infomediaries share similar relationships with customers.

Nordstrom, the high-end retailer whose commitment to the well-being and satisfaction of customers is legendary, could begin to manage its customers’ information. Nordstrom already understands the buying preferences of its most active customers across a broad range of retail product categories. It might offer to equip its customers with credit cards or smart cards, television-viewing meters, or other tools for acquiring data, which would allow customers to build much broader profiles of their own activities, preferences, and transactions. Like Intuit, Nordstrom could manage, enhance, and broker this information on behalf of its customers. Of course, it also could use the data to offer tailored services that meet customers’ current and future needs.

But very few companies will be able to become infomediaries. The best candidates to play this role are companies that have ongoing relationships with customers in a variety of commercial activities and have earned those customers’ trust. Through such relationships, these businesses have the opportunity to collect detailed information. A bank will know a lot about a longtime customer’s financial transactions; a clothing store will know a lot about a customer’s taste in clothes and frequency of purchase; and a health maintenance organization will know a lot about a patient’s medical history and risk profile. But having the trust of customers is equally important for would-be infomediaries. If customers question a company’s professionalism, integrity, or commitment to high-quality service, they will be unwilling to entrust it with information—especialy sensitive information such as financial data or medical records.

For that reason, banks are better positioned to become infomediaries than, say, airlines or high-end clothing stores. Banks collect information that provides a broader view of a customer’s purchases and needs. Also, it may be easier for a bank to persuade customers to entrust it with information on their travel preferences than for an airline to persuade them to entrust it with information about their financial transactions. Clearly, the role of infomediary is not for everyone.

Still, predicting exactly how infomediaries will emerge and evolve is difficult at this stage. We suspect that infomediaries initially will specialize in managing information for general, albeit vertical, product categories. For example, we could see some infomediaries helping customers manage only their financial data and others focusing on addressing their travel information. But we also might expect to see such vertical infomediaries evolve over time into broad-based partners with their customers, managing more integrated and comprehensive profiles. That is likely to occur both because customers will find it inconvenient to deal with multiple infomediaries and because infomediaries will be able to offer even more value to their customers by exploiting cross-category information in their profiles.

The point is that a handful of elite service companies could work on behalf of their customers to force a shift toward the ownership of information by consumers. They would, in effect, become catalysts for change and thus accelerate the shift.

What Managers Can Do

We believe that the shift in ownership of information to the consumer creates an urgent need for businesses in a variety of industries to refocus their approach to such information. Companies today have every incentive to overinvest in collecting information about their customers and to underinvest in using it. Information has long been something that companies have obtained for free as a by-product of their transactions with customers. But when companies have to “pay” for information, the incentives will change. As a result, companies will have to become more selective about the information they collect, focusing on what they must know in order to understand and fulfill customers’ needs. They also will have to develop the skills to use the information to create value for the customer. Finally, they will have to manage partnerships with their customers to ensure continuing access to information.

Companies will have to manage partnerships with their customers to ensure continuing access to information.

How companies accomplish this will vary by product and customer segment. For instance, businesses that deal directly with consumers, such as retailers, hotels, and airlines, will be able to continue collecting information about their customers in the near term just as they do today. However, as more consumers purchase goods and seek information over networks, or as they begin to use smart cards or other forms of electronic cash (which preserve their anonymity), it may become harder for those businesses to obtain information without the assistance of infomediaries.

Consider how that might work: if a book retailer wanted to know the names of customers using various forms of electronic currency to buy a certain book, the infomediary would provide that information for a fee—or for a higher fee might arrange for the bookseller to reach those customers with targeted advertisements. What if the bookseller wanted to learn more about each customer’s reading preferences and buying habits—information formerly obtained through a simple survey? The infomediary would want to know what specific additional services or discounts the bookseller would offer in return. Would the bookseller want access to information that is not available to other booksellers? Well, perhaps the infomediary could arrange to provide it if the bookseller were prepared to pay a sufficiently high fee to ensure exclusivity.

To forestall or limit their dependence on infomediaries, such businesses could begin to think now about how they will obtain information about their best customers and forge strong relationships with them to earn their trust and loyalty. They also should start to consider how they will develop the capabilities to provide customized services that address their customers’ future needs and desires.

Product manufacturers, on the other hand, should begin to think about what it may mean to make the relationship with the customer—rather than with the product—the central focus of their business. Generally speaking, product manufacturers do not currently have direct contact with the end customer, but in a world of infomediaries, that could change.

Infomediaries could help manufacturers identify their most loyal customers and target them with customized services. For instance, automakers could offer their customers more than extended-warranty plans. Using information about them, they could offer targeted customers such products or services as auto insurance, travel services, customized maps, driving schools, auto-maintenance or safety tutorials, and even outdoor gear or travel apparel. In the long run, offering such extras could enhance the vendor’s clout in the market while diminishing the strength of dealers, agents, brokers, and retailers. Manufacturers can plan for these changes now by looking at the combinations of products and services their customers will want and deciding whether to make them or source them.

Finally, companies that have close relationships with their customers, such as banks and high-end retailers, may face the greatest challenges of all. They currently collect detailed data about their customers, so access to information isn’t their primary concern. But we suspect that they will come under pressure to offer their customers increasingly more. The more these companies profit from a customer over time, the more they can afford to “bid” for information about prospective new customers. One can imagine that expectations of service will continue to rise in these industries. How companies in them will create value with information will be critical to their success—and will also conceivably position them, more than others, to become infomediaries.

A sea change is upon us. We cannot discern its exact nature and shape, but the broad outlines are already visible. Businesses have generally assumed that information about customers is a resource waiting to be claimed, like land in the western United States during the great land rush of the mid-nineteenth century. But as consumers take control of the information about themselves, access to it could become more difficult and costly. Those alert to the potential for change will be able to ensure that they continue to obtain the information they need in order to compete in the next century.

A version of this article appeared in the January–February 1997 issue of Harvard Business Review.