Does targeted digital advertising work?

Spending for advertising on the internet has far surpassed television commercials as the dominant way to promote products and services in America. Digital spending on ads exceeded TV earlier in 2020 globally. And while spending for TV still slowly grows year over year, spending on digital advertising has been growing exponentially. By 2021, digital ad spending will exceed that of all other mediums combined (TV, radio and print).

Collectively right now, more money has been spent on showing people of the world ads than recorded history - just over $150 billion dollars in 2020 in the US alone and $325 billion globally. That's a lot of money being spent on ads, and the vast majority of that spending is on targeted advertising.

Which brings me to this:

Does online advertising, including personalized ads that we're shown via Google or Facebook (due to them collecting personal data about us), actually work?

It must, right? If billions are being spent on it? And using our personal data to serve us ads must be an accelerant in advertising conversions, right?

Well, a former Google employee, Tim Hwang, argues in his new book Subprime Attention Crisis, that the problem with micro-targeting users with ads based on data collected about them doesn't always work.

If you think about it, the biggest tech companies in the world, regardless of how they promote themselves, are advertising companies. 99% of Facebook's revenue is generated through their targeted ads. 80% of Google's revenue comes from advertising as well. Even Amazon will see $40 billion in ad revenue by 2023.

Another point worth raising here is that the costs involved in collecting and analyzing the behaviour of consumers can be quite involved, as well as the cost of hiring agencies to both collect this data or run ads against this data. This creates higher expenses than traditional advertising. And, since targeted advertising has a much more limited reach (since it’s targeting not just blanketing), unless the advert converts a high level, it may end up costing a lot and netting very little.

Not all online advertising is created equal

While digital advertising is experiencing exponential growth, it's important to understand that not all ads are created equal. A bad ad will not magically convert well even if it's shown to people based on their behaviour. Not to mention, right now there's land-grab to collect as much personal information about us to better craft more persuasive ads for us all in the future. So if targeted ads aren’t working well for everyone now, perhaps they will if these companies just keep collecting more data about us. That’s why the biggest tech companies (i.e. the biggest advertising companies) on the planet all want to be the ones who have the most data about us. It's a game of one-upmanship where, even if one of them wins, we all then collectively lose.

And then if, as stated above, targeted ads don't always work very well, or cost more than other options, what's the alternative? Surely advertising will never just "go away". But there are companies like DuckDuckGo and Bing who serve ads solely based on intent. So instead of collecting and then targeting users based on personal information, we're shown ads on their search engine based on what we search for. It's a far less creepy and invasive way to do storing or sharing personal information about the folks who use their search engine).

Digital advertising and privacy, a changing tide

This all doesn't even take into account that the tide is turning as far as customer sentiment goes towards targeted ads in the first place. More than 30% of internet users now actively block ads and cross-site trackers.

So then, how does the advertising world respond to ad-blockers reducing their revenue? Ad tech vendors/sellers resort to fraud. Doing things like creating click-farms that are either bots of paid humans who refresh and click ads over and over against. As much as 56% of ad dollars spent were lost to fraud or bad placement (i.e. at the bottom of a page users rarely scroll to).

A study done by PEW found that most (68%) Americans are “not ok” with their behaviour tracked and analyzed for the purpose of serving ads. Our own study on digital privacy from last year yielded similar results - with over 70% of respondents saying they were extremely concerned about digital privacy in general.

Regulations are also changing around how that data is collected, stored and used - over 80 countries now have some form of digital privacy law in place. Privacy laws are getting bigger teeth in Europe and even in America. It’s clear that people are telling their governments they are not interested in being followed around the internet with ads.

If targeted advertising doesn't work, why do so many companies do it?

It's a fair question to ask, if targeted advertising is expensive and doesn’t always net worth-wild results, why do companies pour billions into it?

To start, most people who are in charge of buying ads don't know where those ads actually run, let alone how they are performing. This is even more true with small to medium companies who are the bread and butter of big tech's revenue. Most are so busy running their companies, have heard vaguely that ads work, and then they put money into ads and just hope they work. Not to mention, advertising companies will quickly take credit for a sale, even if it was something a consumer had intended to buy anyway (without seeing an ad).

Hwang says this is nothing new. There's an adage from the 19th century, from businessman John Wanamaker: “Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.” The problem is, since then it's gotten far worse. Back then, it was easy to verify that the print ads he purchased were in the newspapers he purchased them from. Now though, there's no way to verify that, and worse, there's no way to verify the clicks even came from real people.

Where do we even go from here with digital advertising?

The economy of the web is certainly a strange one. The thing that generates the bulk of the revenue is fraught with fraud, inefficiencies and lies. And then, when it does work, which it absolutely does sometimes, internet citizens are growing more and more concerned with how it worked so well, and what secret data stores were used to make it so effective.

Maybe intent-based instead of behavioural-based ads will play a larger part. Maybe the house of cards that built online advertising as the saviour to any/all businesses wanting to promote their wares will crumble. Maybe consumers will even further lobby their governments into better protecting them from these companies that have run amok with our data and our internet.

The tide does seem to be turning, even if the view I have of it is from the microcosm of Fathom. Our analytics software cannot profile the behaviours of people, our software is built on protecting the privacy of online citizens. And yet, we're growing. We charge a fair price for our product because our business model is selling software, not data, and we compete (and are profitable) as an alternative to Google Analytics.

Time will certainly tell. Ads can certainly be useful, but we should consider how they’re being served, and if we’re buying them for our business, how effective they truly are.