Cost-Effective Investments in Customer Information Privacy

Extensive personal information is gathered explicitly or implicitly when a customer interacts with a firm. Significant risks are associated with handling such personal information. Providing protection may reduce risk of misuse or loss of private information, but it imposes some costs on the firm and its customers. Risk is associated with improper handling of sensitive customer information. Profits from e-commerce that are earned when there is improper use of private customer information are subject to lawsuits, restitution and other undesirable outcomes. So a firm will want to ensure appropriate privacy protections are in place to safeguard customer information. We present a profit optimization model for customer privacy protection investments considering the potential value implications that arise. We employ a profit-at-risk approach based on value-at-risk methods from financial economics.