Data Privacy: Effects on Customer and Firm Performance

Kelly D. Martin, Abhishek Borah, & Robert W. Palmatier
Article Snapshot
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Key Takeaways

​Mere access to data heightens vulnerability, leading to customer feelings of violation and reduced trust in the company.

Data breach vulnerability hurts firm performance, and these effects spill over to hurt close rival firm performance as well. But spillover effects flip to benefit a close rival firm if a data breach is severe.

Company efforts toward data transparency and providing customer control mitigate harm to the firm.

Article Snapshots: Executive Summaries from the Journal of Marketing​

Companies’ growing use of customer data is heightening people’s feelings of vulnerability that can create negative customer response and damage firm performance.



Research

Companies spend billions of dollars to capture and use customer information, but rarely are these practices viewed from the perspective of the customer. We expect that these efforts may have a dark side, yet firms have little insight into the potential ramifications or how to prevent negative outcomes. We enhance understanding of the effect of customer data vulnerabilities on customer behavior and firm performance, as well as key mediating mechanisms and mitigation strategies. We predicted that data use heightens customer vulnerability. Firms' data transparency and customer control can help.

Method

Using gossip theory, we offer three studies to examine the strong negative responses to disclosure of personal information by “gossipers”—or firms in this case. We test customer reactions to mere data access using a series of experiments. A large event study of data security breaches affecting 414 public companies and their closest rival firms tests the effects of data breach and spillover vulnerabilities. Firm transparency and control coded from their data privacy policies are linked to firm performance. A third field study tests four types of vulnerability with real customers and companies.


 


Findings

Across three studies and five outcome variables, we find that all types of firm data use—even mere access to information—create vulnerability, which leads to emotional violation and reduced trust. With data breach vulnerability, the affected firm and close rivals experience reduced performance. Our field study, with real customers and the firms they actually use, confirms that customers are aware of how firms provide control and transparency. Firms’ efforts to create transparency and offer customers greater control prevent damage to performance.

Implications

Our findings suggest that firms need a more tempered approach to data and analytics initiatives that involve the collection and use of customer information. To avoid negative effects, they must consider their approaches to data management carefully. Our findings are widely applicable given how many firms of all sizes, across multiple industries, collect and use customer data. Firms that collect customer information should be clear about how they use that information and give customers some say in how it is used.


Questions for the Classroom

  • Why do customers dislike their personal information being used? What are the trade-offs of this data use?

  • If transparency and control help firms reduce vulnerability, why aren't they more transparent and why don’t they offer greater control?

  • Describe how you think companies will be using customer information in 5 years? in 20 years?


Article Citation

Kelly D. Martin, Abhishek Borah, and Robert W. Palmatier (2016), “Data Privacy: Effects on Customer and Firm Performance,” Journal of Marketing, 81 (1), 36-58.
doi: http://dx.doi.org/10.1509/jm.15.0497


Kelly D. Martin is Associate Professor of Marketing and Dean’s Distinguished Research Fellow, Colorado State University (e-mail: kelly.martin@colostate.edu).

Abhishek Borah is Assistant Professor of Marketing, University of Washington (e-mail: abhi7@uw.edu).

Robert W. Palmatier is Professor of Marketing and John C. Narver Chair in Business Administration, University of Washington (e-mail: palmatrw@uw.edu).


Author Bio:

 
Kelly D. Martin, Abhishek Borah, & Robert W. Palmatier
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