Targeted online ad campaigns face profitability problem

Advertisers should be cautious when running targeted online ads because this practice is less likely to be profitable than simply running an untargeted campaign, a study finds. 

The research looked at what audience segments advertisers should select for randomized controlled trials and found that the more narrow the audience segment, the less likely you will break even, much less become profitable. The authors attributed this to the role that data cost and reach play in profitability. 

Why targeting matters 

In 2018, global digital ad spend surpassed television ad spend for the first time. The primary appeal of online ads is their capacity to target users more strategically, based on user demographics and online behaviour. 

Intuitively, targeting should increase an advertiser’s profit by allowing the advertiser to stop wasting money on people who aren’t interested in a brand’s products; but targeting comes with extra costs and it reduces the number of reachable people, which can affect conversion and click-through rates.

Takeaways

• Researchers examined how a targeted ad campaign can be as profitable as an untargeted one, by developing a model that considers the trade-off between reach, cost, and performance (i.e., effectiveness). 
• Targeting extremely narrow segments is ‘highly unprofitable’ due to the large increase in performance needed (in click-through rates and conversion rates) to compensate for the loss in reach.
• One experiment looked at running campaigns on Spotify: approximately half of the audience segments tested required the click-through rate to double compared to an untargeted campaign, which is unrealistically high for most ad campaigns.
• The introduction of Apple’s ATT suggests ‘that advertisers benefit less from targeting narrower audiences with growing restrictions on third-party data’ because the true reach of audience segments might be overestimated. 
• ATT more negatively affects the click-through rate of narrow (versus broad) audience segments.

Key quote 

‘Our paper provides ad agencies with important arguments for why they must meticulously evaluate the profitability of narrow audience segments before committing to them’ – study authors, ‘Overwhelming targeting options: Selecting audience segments for online advertising’.

About the study

An Austrian ad agency designed broad, narrow, and no-targeting strategies for one of its clients (a car dealer in Vienna), to compare their profitability. The budget was 5700 euros and the experiment lasted three months. 

A second study looked at running a campaign on Spotify, while a third assessed the impact of Apple’s ATT framework on 86 different campaigns from six advertisers in diverse industries.

Sourced from International Journal of Research in Marketing