When Effective Ads Backfire: The Risks of Ad Tracking [Consumer Impact]

Journal of Marketing Research Scholarly Insights are produced in partnership with the AMA Doctoral Students SIG – a shared interest network for Marketing PhD students across the world.

Digital advertising is in a near-constant state of flux in today’s data-driven landscape. With the rise of privacy regulations such as the EU’s GDPR (European Union’s General Data Protection Regulation) and California’s CCPA (California Consumer Privacy Act), firms face more restrictions on consumer data collection, and consumers are gaining more control over who obtains their data.

The trend toward empowering consumers to manage their privacy has numerous ramifications for digital marketers. A recent Journal of Marketing Research study delves deep into consumer opt-in choices in the context of digital advertising, revealing some fascinating insights. For many in the industry, especially advertisers and ad networks, the pivot toward greater data privacy has necessitated strategic adaptation to remain profitable and effective.

Relevance Is Key, but Wearout Is Real

Perhaps counterintuitively, and despite growing privacy concerns, many consumers continue to opt-in to ad tracking. This is because they prefer personalized, relevant ads over repetitive ads or ads in which they have no interest. Indeed, not highlighting the mutual benefits of tracking can cause consumers to opt out, leading to reduced effectiveness of ad campaigns.

The research shows that although ad tracking can improve ad relevance, it’s not just about showing consumers ads they might like. It’s also about reducing repetitive ads that carry little information value; essentially, firms must combat ad wearout even among opted-in customers.

The study finds that, to make an opt-in decision, a consumer weighs the cost of ad wearout from repeat ads against the benefit of obtaining relevant product information, and a consumer opts-in to tracking if either the effectiveness of ads is intermediate or if their sensitivity to ad wearout is low. This leads to the counterintuitive discovery in the study that even if ads are highly effective in driving sales, if they’re shown too frequently to consumers who have opted in, wearout-sensitive individuals might decide to opt out. This can lead to a drop in available consumer data, impacting ad targetability, reducing ad prices, and potentially hurting ad networks.

Even if ads are highly effective in driving sales, if they’re shown too frequently to consumers who have opted in, wearout-sensitive individuals might decide to opt out.

To avoid this, companies can utilize ad tracking data to infer a consumer’s stage in the purchase funnel and reduce ad intensity accordingly.

The authors of the study gave us further insights in an interview:

Q: What was the primary motivation behind investigating consumer opt-in choices in the context of digital advertising? Why should managers in the advertising industry pay close attention to this topic?

A: The primary motivation was the shift in data ownership and control brought about by strict privacy regulations (e.g., the EU’s GDPR and California’s CCPA). Before these regulations, firms could freely collect and utilize consumer data for marketing purposes; but now, consumers have more control over their data. This shift poses a substantial risk to major stakeholders in the advertising industry because having less data affects the targetability of advertising. For instance, Facebook suffered an estimated $12 billion loss due to Apple users disabling app tracking. It is crucial for managers to understand when consumers are willing to share their data and how they should adapt their advertising strategies to this new business landscape.

Q: What is ad wearout, and how do privacy regulations affect it?

A: Ad wearout refers to the phenomenon in which repeated ad exposure irritates consumers. Research has shown that wearout can be so severe that excessive repeat exposure decreases total visits to the advertising brand’s website. Building on the ad wearout literature, we show that privacy regulations can not only help protect consumers’ privacy but also help improve their ad experiences by reducing wasteful ad repetition.

Q: Research invariably presents unique challenges. Could you share any hurdles you faced during this study, and any significant learnings that arose from the process?

A: We aimed to create a theoretical framework that could shed light on the economic forces arising from privacy regulations in the advertising industry. One major hurdle was integrating a nuanced consumer utility model that accounts for privacy choices and advertising preferences into the already complex online advertising ecosystem, which involves intricate strategic interactions among various stakeholders. Fortunately, we received valuable feedback from the [peer review] team that helped us address this modeling challenge.

Q: With increasing awareness around privacy concerns, why do you believe consumers continue to opt-in to tracking their online activities?

A: Despite growing privacy concerns, consumers continue to opt-in to tracking because it can potentially enhance the overall advertising experience. Adopting the classic purchase funnel perspective, we identified distinct components of this improvement in advertising experience. By allowing tracking, consumers benefit not only from seeing more relevant ads tailored to their preferences but also from seeing fewer repeat ads that carry little information value. For example, when consumers opt-in, firms can more accurately infer consumers’ stage in the purchase funnel and reduce ad intensity accordingly.

Q: How can the insights from your research be incorporated into the marketing classroom, particularly for students aspiring to join the digital advertising industry?

A: Our research underscores a fundamental shift in the advertising industry where privacy regulations endow consumers with more control over their data. It is no longer about merely designing appealing ad copies and targeting them effectively. Marketing students aspiring to join the digital advertising industry should understand that when formulating advertising strategies, firms must jointly consider consumers’ privacy choices regarding when and to what extent they share their personal data, and what implications that has for targeting ads.

Q: Were there any results from your study that genuinely surprised you or went against the conventional wisdom in the field? And how do you see this research influencing or extending to other areas in digital marketing?

A: One surprising finding of our research is that increased overall ad effectiveness can negatively impact ad networks that sell ads. This counterintuitive insight revolves around consumers exercising their privacy rights. If ads are highly effective in driving sales, firms will show more ads to opt-in consumers than to opt-out consumers. The reason is that the targetability afforded by tracking further boosts ad effectiveness. In this case, however, wearout-sensitive consumers who dislike seeing ads, even if the ads are effective for firms, may opt out of tracking. The resultant shrinkage in consumer data compromises targetability, which, in turn, exerts downward pressure on ad prices, ultimately hurting ad networks. This research could extend into various areas of digital marketing by highlighting the interplay between consumer privacy, ad effectiveness, and advertising network dynamics.