For the millions of holiday shoppers who recently spent $42.3 billion for online purchases, the conveniences are irrefutable, from browsing the virtual aisles 24/7 — even from home all cozy in our pajamas — to seeing our stuff delivered to straight to our doorstep.
 
But online shopping has a secretive dark side, some consumers lament, that emanates from the burgeoning power of online businesses to "spy" on our online shopping habits and determine, among other things, if we might be willing to pay more for an item than the next guy. Using "dynamic pricing" to maximize their profits, online retailers can list different prices for different customers — one customer may see a TV monitor priced at $500, while another customer looking at the same site sees the same monitor for $550. Regardless of who’s shopping, prices can also change over time, and quickly: The $550 monitor could go up $25 tomorrow, or maybe even later today.
 
While dynamic pricing has prompted some ire among online shoppers, customers are actually accustomed to this longstanding business practice in other realms, said Dominique Hanssens, the Bud Knapp Professor of Marketing at the UCLA Anderson School of Management and an expert on dynamic pricing and other revenue-producing strategies used by retailers.
 
Dynamic pricing looks to factors like customer demand, said Hanssens. At your local farmers market, for example, "you may see peaches at 9 a.m. at $3 a pound, and at 4 p.m. they’re $2 a pound, the same peaches," with the price-cutting vendor eager to sell his remaining inventory during the customer slow-down right before the market closes.
 
What’s unique about dynamic pricing online is its use of software to collect information on individual shoppers from their computers.
 
"When you shop online," Hanssens said, "you leave a trail."
 
Marking that trail are "cookies," small data files sent from, say, the massive online retailers amazon.com or ebay.com while you’re visiting their websites. Cookies are stored in your computer’s browser — Internet Explorer, Firefox or any other — and can be accessed by retailers at a future date to see what items you’ve been browsing for, what you’ve purchased and how much you paid, among other details.
 
While many brick-and-mortar establishments track customer behavior as well — a clothing chain may award you "loyal customer" rewards when it sees that you’ve spent a significant chunk of cash in its stores — "computers are now being used to detect these patterns very, very quickly," said Hanssens. This capability gives some shoppers a creepy "Big Brother is watching" feeling. "Except in this case," Hanssens quipped, "it’s more like Big Walmart."
 
And while the peach vendor at the farmers market uses personal business smarts to determine price changes, online vendors use sophisticated computer software to churn data through complex algorithms to hit on the prices that best reflect — or so they think — their customers’ preferences. One of the biggest drivers of dynamic pricing is how customers value a particular item.
 
"The notion is that same product or service has a different value level for you versus me," said Hanssens. Take airline companies, for example, which employ dynamic pricing strategies not just to earn profits, but to survive, since too many empty seats can make a flight a financial loss. Given the exact same flight from L.A. to San Francisco," Hanssens said, "that flight will take you to a business meeting that you must attend, and, for me, it’s for a visit to a family member that I could easily see the next day. The exact same flight has a different value for you than for me, and you will be willing to pay more for it" — with the business traveler willing to pay, for example, nearly $600 for a first-class seat on the flight. Meanwhile, the other traveler can decide to wait for money-saving Internet-only deal flying coach class— a choice that prompts the airline to add him to its email list for bargain hunters.
 
If your cookie trail shows a habit of shopping at high-end retail websites, merchants are likely to infer that you’re willing to spend more than a discount shopper. According to marketing science, a field in which Hanssens conducts research and teaches, "recent purchase behavior has been shown to be a good predictor of future behaviors," he said.
 
And while charging some people more for a particular item than others may seem patently unfair, many shoppers actually prefer to pay high prices, especially when it comes to "prestige brands" like designer clothing. "So somebody will pay more, and that’s totally consistent with what that person values."
 
Dominique Hanssens, the Bud Knapp Professor of Marketing at the UCLA Anderson School of Management.
For many shoppers, spending more money is a time-saver, Hanssens noted. A shopper in need of a new toaster may simply plop their credit card down for the most expensive one they see at an online site. "That buys a certain perceived insurance that you’ve actually bought the best that there is," without having to spend precious time comparing the features of a dozen toasters.
 
Valuing time over money was also confirmed in a Nielsen Online survey two years ago. Among 1,000 online shoppers surveyed, 67 percent said that one reason they shop online is to save time, while only 47 percent cited saving money.
 
Yet for those in the bargain-hunting 47 percent, dynamic pricing software may actually work to their advantage — their cookies will mark the trail of self-declared cheapskates. "If you always buy the cheapest item in the set, you declare that you’re price-sensitive," said Hanssens. "My guess is that a software program will not raise the price on an item … and may even lower it."
 
Consumers should also know that there’s plenty they can do to outsmart online pricing software altogether, from visiting price comparison websites to disabling your browser’s cookies, Hanssens said. Find a list of his tips here.