A cardinal rule for any successful business is to "know your customer." In e-commerce, a key way for companies to get information about their customers is through online profiling.
Online profiling data, which is information gleaned from a customer's use of a Web site, can be used to target advertisements, personalize Web sites and match services to a specific customer's needs.
But the practice of online profiling has come under intense scrutiny. Many lawmakers and privacy advocates say they're concerned that online profiling can be used to learn a customer's political and religious views, sexual orientation or medical conditions - information that can be sold and shared in a networked world.
Fearing government regulation, a consortium of nine network advertisers that collectively own 90% of the market are attempting to forestall privacy legislation through their recent adoption of self-regulatory guidelines. In new contracts that will be issued to Web sites by network advertisers such as market leader DoubleClick, specific terms will be set on how companies may accomplish online profiling.
For instance, Web sites that have agreements with network advertisers will have to obtain consumer consent to conduct online profiling. "Robust" notice and consent will be required before personally identifiable information can be merged with Web-browsing data. The guidelines also prohibit the use of sensitive personally identifiable information, such as medical or financial data, in online profiling. But the future is in a state of flux. Congress is considering numerous bills concerning online profiling, and it may well become a major issue in the U.S. presidential campaign.
In short, online profiling embodies both the promise and the perils of e-commerce. But, analysts say, one thing is certain: The practice is indispensable to any Web business.
Know Your Customer
"You have to do it if you are an online business. It's the critical element for evaluating the effectiveness of your site," says Chris Christiansen, an analyst at International Data Corp. in Framingham, Mass.
Online profiling begins once the host computer - the Web site being visited - places a "cookie" on the end user's computer. The cookie, which is a unique identifier, then transmits information back to the host computer. This information allows a business to track an end user's page views, the length and time of the visit and responses to advertisements. Purchases and search terms entered by the end user can also be tracked.
Companies can develop sophisticated profiles of their end users through personalization software.
This information can help customers use their time efficiently. For instance, officials at Saleoutlet.com Inc. say they know that the average visitor spends about nine minutes at the company's Web site.
"But is that nine minutes spent looking, getting frustrated, or is that nine minutes spent looking for things that they want to buy and research?" asks Michael Aronowitz, president of the New York-based company.
Saleoutlet.com uses personalization software developed by Wellesley, Mass.-based Manna Inc. to dynamically change content based on information about users. The information is gained through an analysis of clickstream data combined with demographic and psychographic data, which looks at the behavior of other end users.
This data can be used to anticipate a customer's actions. For instance, if it looks like a customer may abandon a shopping cart because of the particularly high shipping cost of a product, and if other customers have shown a pattern of doing the same thing with the same product, the Web site may provide an incentive, such as a discount, to buy the item.
Proceed With Caution
Experts advise businesses to be up front with their customers about their online profiling practices.
"The best thing you can do is build trust with your customers - tell them what you are doing with the information and why, and don't sell or trade information and try not to buy information," says Eric Schmitt, an analyst at Forrester Research Inc. in Cambridge, Mass.
The practice of online profiling becomes particularly controversial when end users are tracked over multiple Web sites by network advertisers.
A banner advertisement, when downloaded from a network advertiser's server, places a cookie on an end user's computer. That user can then be tracked across Web sites that have agreements with the network advertisers.
The Web-browsing data is anonymous as long as the network advertiser doesn't link it with personally identifiable information.
Privacy advocates say they fear that if advertisers begin doing that, not only could companies develop profiles of customers' Web-browsing habits, but the data could also be coupled with off-line databases, such as credit and court records or employment histories.
But network advertisers risk a public backlash if they link personally identifiable information with Web-browsing habits, as industry leader DoubleClick Inc. found out. Last March, the New York-based company dropped its plans to link people with Web-browsing habits after receiving considerable public criticism.
Network advertisers can develop customer profiles by collecting anonymous data that may also include some basic information, such as the sex and age of an end user. This information can be acquired through agreements between network advertisers and online businesses.
If the advertiser has information about a group of Web site visitors, such as their sexes and ages, they can apply statistical sampling techniques to browsing data.
But some observers, such as Jordan Rosner, director of new media marketing at Pfizer Pharmaceuticals Group in New York, say they wonder if online network-advertising profiling data can really deliver good customer information.
"When you really get into a good conversation [with network advertisers], you realize that they only know a small amount of information" about their Web audience, says Rosner. A lot of information that's used to compile profiles "is just statistical projections, and it's not really based on hard facts or data about individuals," he says.
The pressure is on for better online profiling data that businesses can use in targeting advertisements and serving customers. Without personally identifiable information, companies can't respond to individual customers who visit their Web sites.
"It's as if someone is standing in front of you with a paper bag over their head," says Schmitt.