The Implications of Advertising Personalization for Firms, Consumers, and Ad Platforms

The increasing availability of detailed data on consumers’ characteristics online allows firms to personalize advertising to the preferences of these consumers. The personalization of ad messages offers firms tremendous potential. If done right, firms can address consumers with ad messages that are considered more relevant leading to more positive consumer responses to ads. Firms understand the potential of personalized advertising and aim to positively affect their bottom line with the personalization of ads. Simultaneously, firms struggle with how to design and implement personalization strategies. Supposedly, personalized advertising leads to an increase in firms’ return on advertising investment. Nevertheless, firms face the challenge to correctly measure and assess advertising effectiveness to inform their marketing decisions. With this research, we advance the understanding of ad personalization and its implications for firms, consumers, and ad platforms. With the help of a large-scale field experiment, addressing 198,234 individual consumers with personalized advertising, we present evidence for how firms should design their personalization strategies. We find that high levels of personalization specificity pay off for firms. At the same time, firms need to take the relationship of ad personalization with other advertising features into account when personalizing ads. We show that socially targeting personalized ads, where names of consumers’ friends are included in the ad text, leads to less positive consumer responses to personalized ads. Firms need to be aware that the use of consumers’ information to personalize ads can trigger consumer privacy concerns. These privacy concerns negatively influence consumers’ responses to personalized ads. To advance the understanding of privacy concerns in ad personalization, we conduct a lab experiment using eye tracking technology to assess the role of consumers’ attention when confronted with personalized ads. Our findings show that firms cannot use intrusive ads, which cause consumer privacy concerns, to attract consumers’ attention. Such a strategy is harmful as it decreases consumers’ overall attention towards ads, eventually leading to less positive consumer responses. In programmatic advertising firms outsource the ad allocation process, the decision to which consumer to serve an ad impression and how much to pay for this impression, to ad platforms. An examination of how ad platforms handle the ad allocation process reveals that contracts between firms and ad platforms might not be in the economic interest of firms. We show theoretically that ad platforms have an incentive to target consumers that are more likely to purchase independent of the effect of ads on their purchase probabilities. We conduct a large field experiment in which we analyze an ad platform’s bidding behavior for 20,918 individual consumers over the duration of seven weeks. Our empirical analysis shows that the incentives specified in contracts between ad platforms and firms lead to an incentive misalignment that is harmful for firms. While ads generally increase consumers’ likelihood to purchase, firms pay more for ads that are not providing higher value to them.