Customer data. It’s increasingly viewed by businesses as the valuable asset it should be. But there’s a persistent problem I keep bumping into when it comes to talking about and describing customer data: misuse of terms.

Call me a pedant if you will, but getting the terminology right matters. With all of the complexities involved in collecting, managing, and using this asset effectively, no one can afford to be confused about the sources of customer data. Where customer data comes from has major implications for data compliance regulations as well as reliability and accuracy.

Let’s focus on three important and related terms that are bandied about a lot these days—far too often incorrectly: first-party, second-party, and third-party. In any sort of transaction, there are two parties: the buyer and the seller. Or, for our purposes here, the customer and the business. Anyone who is not directly involved in a given transaction between the customer and the business is a third party.

With these distinctions in mind, the sources of customer data become much clearer. Getting them right comes down to perspective—the perspective of the business.

First-Party Data

First-party data refers to any and all data gathered by a business from all of its interactions, communications, and transactions with customers. That includes direct observations of customer behaviors, for example, on a website or commerce site. As anyone who has taken even the smallest of baby steps toward building a unified view of the customer can attest, that covers a dizzying array of systems and data types.

Second-Party Data

In a business transaction, if the first party is the business itself, the second party is only ever the customer. There’s a reason we don’t see the term “second-party data” used very often. Although customers, both consumers and companies, collect and manage some of it, they rarely if ever sell it. As a consumer, I keep track of which companies I’ve made purchases from, for example. The company I work for does as well—we usually consider those suppliers. In either context, the data I manage as a customer serves my own needs. And just to complicate matters, as a separate business entity, all of that data is first party to me or my company. (Isn’t this fun?!)

Second-party data does NOT refer to data from partner organizations. Partners organizations may also have direct interactions with many of the same customers a business does. While the first-party business may consider partners a reliable source of accurate customer data, that data is still third-party data. More on this in a moment.

Neither does second-party data refer to data from other divisions within a business. As long as those other divisions are part of the same legal entity, it’s still first-party data.

Third-Party Data

Any data that comes from an outside organization—that is not either the customer or the business in question—is third-party data. That covers many different sources and types of data. It could indeed include partner organizations that have complementary relationships with the same customers. It also includes data brokers whose sole business is to collect and sell customer data. It includes publishing platforms and search engines. And the list goes on.

One particularly confusing use of the term “third-party data” is when technology vendors use it to refer to data that comes from outside their own systems. While this may be a useful distinction from an engineering standpoint, it does little to clarify customer data sources within an enterprise. I would argue that, with the possible exception of discussions within an engineering or development team, this usage of the term third-party data is incorrect.

Practically speaking, ALL companies that collect customer data do so through multiple systems. That means that there will always be customer data that comes from outside any given system. Indeed, finding workable strategies for consolidating and using customer data across different systems is one of the most important priorities for companies working to improve customer experience and operational excellence. So to refer to such data as “third-party” borders on the nonsensical. If you ever hear a technology vendor refer to third-party data, make sure they clarify what they mean by that.

Why Do These Distinctions Matter?

Beyond clarity, there are two big reasons why it’s important to get these terms right: regulatory compliance and operational effectiveness.

When it comes to issues of data privacy regulation and compliance, the sources of customer data make a huge difference. Liz Miller’s excellent blog post on California’s Consumer Privacy Act offers useful insight into how types of customer data, its sources, and the way it’s gathered influence what companies can and cannot do with it. And that’s just one state’s legislation.

The issue becomes even more complex on the topic of third-party cookies used to collect customer data. This type of data collection works through a particular kind of cookie that is embedded into websites that allows a third-party organization to observe and collect data on customers who visit those websites. As regulations on what kind of third-party data collection is allowed continues to evolve, many website browsers have either already eliminated support for such cookies (Safari) or have announced they will be sunsetting it (Google). These moves have big implications for what third-party customer data will be available for sale over the next several years. (Liz goes into some of those implications for advertisers in her post on Criteo’s analyst day in 2020.)

Most importantly, when businesses understand the variety of first-party customer data they already collect, they are in a much better position to make effective use of it. Unlike just about any kind of third-party data, you as a business know exactly how, where, and when your own first-party customer data was collected. You have clear visibility into its quality and reliability. You determine how to manage it and how to use it.

Bottom Line

First-party customer data is perhaps the most valuable data asset a business owns. Recognizing it for what it is, understanding where it comes from (and where it should), and determining how to use it effectively constitute three fundamental pillars to underpinning great customer experience and sustained business success. Only when we’re clear on the terms we use to describe customer data can we make the advances we need toward mastering all three of those pillars.