Understanding the Trade-off Between Consumer Privacy Measures and Ad Effectiveness

Online display advertising has become the dominant digital ad format, and the industry is worth about $118 billion in the United States.

Many platforms, including online marketplaces such as Yahoo Shopping and JD.com, online retailers such as Macy’s, and social media giants like Facebook and Instagram, utilize multiproduct advertising designs. These multiproduct ads (MPAs) allow platforms to display multiple products within a single ad unit, which is particularly advantageous for platforms with diverse offerings.

By exposing consumers to a variety of products simultaneously, MPAs potentially capture more attention. This presentation style can lead to two key consumer behaviors:

1. Repeated exposure to similar ads from the same category in an MPA can lead to diminishing utility in click-throughs within that category. For example, consumers who clicked the first ad for a particular product may be less likely to click the third ad for the same product.
2. The simultaneous display of ads from two different categories within an MPA can influence a consumer’s interest in both categories. For instance, seeing an ad for skincare next to an ad for cosmetics may pique a consumer’s interest in both categories, leading to a complementary effect.

MPAs and Privacy Policies

In a new Journal of Marketing study, we focus on MPAs to investigate the unintended consequences of privacy-preserving policies adopted by tech giants like Google. Our focus is particularly on policies that reduce the retention period of consumer behavioral data. We examine how these policies, designed to enhance consumer privacy, affect advertising effectiveness, consumer behavior, advertiser profits, and platform revenues.

We find that while these privacy measures protect consumer data, they can inadvertently decrease consumer engagement and satisfaction with ads, ultimately resulting in fewer clicks and reduced ad performance. Our results show that this decline is largely driven by the reduction in ad variety displayed in MPAs due to the shorter periods of consumer data used for targeting.

This decrease in ad variety intensifies within-category satiation, which is when consumers lose interest in ads for similar products within the same category after repeated exposure. It also diminishes cross-category complementarity, a term used when exposure to ads from different product categories enhance consumer interest in both. These insights are critical for platforms as they strive to balance consumer privacy concerns with the need to sustain effective advertising strategies.

Lessons for Chief Marketing Officers

For practitioners and stakeholders in the advertising industry, our research underscores the importance of understanding the trade-offs between privacy policies and ad effectiveness. Our findings provide marketers and consumers with the following insights:

• Platforms should consider the implications of their privacy-preserving measures on ad variety and consumer engagement. While protecting consumer data is essential, it is equally important that these measures do not undermine the effectiveness of advertising strategies.

• The relationship between the amount of consumer data used for targeting and advertisers’ profits highlights the possibility of finding an optimal privacy-preserving level in MPA when the platform considers not only its own revenue but also the advertisers’ interests.
  
  
• Our results confirm the existence of within-category satiation and cross-category complementarity in ad-clicking behavior and reveal two consumer segments that differ in both the baseline preference and satiation in ad-clicking.

• Our study demonstrates the potential economic benefits of refining the ad-serving policy to incorporate advertisers’ bidding strategies and consumer preferences when allocating ad slots.

• Incorporating consumers’ clicks, accounting for within-category satiation and cross-category spillover, proves more beneficial for platforms than solely relying on advertisers’ bids in the ad-allocation policy.

• Advertisers should be aware of how changes in data usage and ad variety can affect their bidding strategies and overall campaign performance.

• Platforms can adjust the reservation price (minimum bid) in auctions that indirectly influences consumers’ within-category satiation and cross-category spillover through ad variety. We find that an increase in the reservation price benefits the platform but hurts both advertisers and consumers (within the range of reservation prices we explored). The platform must be careful when setting the reservation price and account for its potential impact on ad variety and category compositions in MPA.

Our study highlights the complex interplay between privacy policies and advertising effectiveness. As privacy concerns continue to shape the digital advertising landscape, platforms and advertisers must navigate these challenges to optimize ad performance and protect consumer interests. We hope our findings will inspire more nuanced approaches to ad-targeting policies and foster a more effective and consumer-friendly advertising environment.

Source: Shijie Lu, Sha Yang, and Yao (Alex) Yao, “Within-Category Satiation and Cross-Category Spillover in Multi-Product Advertising,” Journal of Marketing.

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