Targeting 101

22 Jun

Say that there is a company that makes more than one product. The company can run an ad in one of its products about the one or more other products it produces that a user doesn’t use. Should it consider targeting—not showing the same ad to all users? There are six things to consider:

  1. Opportunity Cost: Could the company make more profit by showing an ad for something else?
  2. Cost of Showing an Ad to an Additional User: The cost of serving an ad; it is close to zero in the digital economy.
  3. Cost of Worse Product: An ad for an irrelevant product lowers the user’s welfare. (The magnitude of the reduction depends on how disruptive the ad is and how irrelevant it is.) As a result of seeing an irrelevant ad in the product, the user likes the product less.
  4. Cost of Not Learning About the Relevant Product Sooner and Investment in Learning About an Irrelevant Product: the cost of not learning about a product they could use sooner. Plus the investment a user makes in learning about a product that is not relevant to them.
  5. Poisoning the Well: Showing an irrelevant ad means that people are more likely to skip whatever ad you present next. It reduces your ability to monetize future ads.
  6. Profits: On the flip side of the ledger are expected profits. What are the expected profits from showing an ad? If you show a user an ad for a relevant product, they may not just buy and use the other product, but may also become less likely to switch from your stack. Further, they may even proselytize your product, netting you more users.

I formalize the problem here (pdf).