Don Marti

Tue 05 Oct 2010 06:47:32 AM PDT

Ad targeting: better is worse?

(This is a followup to Web ad targeting: can customers get a better deal? Just doing a little more research on the question of whether better-targeted advertising is actually less valuable.)

Here's the famous "Man in the Chair" advertisement for advertising:

The man is a member of the audience for advertising, a reader of McGraw-Hill trade publications and a potential customer. What he expects to receive is a signal. Richard E. Kihlstrom and Michael H. Riordan explained the signaling logic behind advertising in a 1984 paper:

When a firm signals by advertising, it demonstrates to consumers that its production costs and the demand for its product are such that advertising costs can be recovered. In order for advertising to be an effective signal, high-quality firms must be able to recover advertising costs while low-quality firms cannot.

Tim Ambler and E. Ann Holliear, in an article called "The Waste in Advertising is the Part that Works," compare advertising to the male peacock's tail: something that a healthy company with a quality product can afford to do, but a fly-by-night company can't.

Back in the Don Draper days, if you had a good product that would sell repeatedly, you could afford to run an ad in some McGraw-Hill publication. And according to signaling economics, a lower-quality producer (out to make one sale and rip the customer off) would find it unprofitable to fake the signal.

Now, let's bring the scenario up to date a little. Today, that excellent steam-bent oak office chair is in someone's private collection, not an office, the man gets his business news from the web, and he gets one more line.

I don't know if your company is really spending a lot on advertising, or if you're just targeting me.

Here's the problem. As targeting for online advertising gets better and better, the man in the chair has less and less knowledge of how much the companies whose ads he sees are spending to reach him. He's losing the signal.

Mark N. Hertzendorf of the Federal Trade Commission, in a 1993 paper entitled "I'm not a high-quality firm—but I play one on TV," writes of the signaling model,

This result, however, is sensitive to the assumption that consumers can perfectly observe the firm's advertising expenditure. This assumption is somewhat unreasonable in light of the fact that much advertising takes place over various electronic media to which not everyone is "tuned in."

And that was with the targeting possible in 1993. Now, as targeting for online advertising gets more and more accurate, the signal is getting lost. On the web, how do you tell a massive campaign from a well-targeted campaign? And if you can't spot the "waste," how do you pick out the signal?

I'm thinking about this problem especially from an IT point of view. Much of the value of an IT product is network value, and economics of scale mean that a product with massive adoption can have much higher ROI than a niche product. (Sorry, Digital Alpha fans.) So, better targeting means that online advertising carries less signal. You could be part of the niche on which your vendor is dumping its last batch of a "boat anchor" product. This is kind of a paradox: the better online advertising is, the less valuable it is. Companies that want to send a signal are going to have to find a less fake-out-able medium.

In my humble opinion, this is a huge win for tech events. Anybody can put up a giant ad, but it takes a real committment of money or time to run or sponsor an event.

Even people who don't attend can get an idea of the sponsors' signal by reading news coverage of the event and looking at the photos on the event web site. In order to increase the signal sent, show organizers should put up more photos and videos of tangible spending, such as large booths and parties, and large numbers of vendor-uniformed staff. For event organizers, any increase in online targeting power is going to translate into a shift of marketing budgets into less-fakeable signals, and the more that an event can accurately convey the signal sent, the more attractive it will be to sponsors.