Dennis' blog

On Technology and Business

The Paradox of Targeted Advertising

What is the last time you saw an ad or targeted article that was really helpful for you? What was the last time you was one that was not? Most likely, your experience with ads is that all of them are bad. At best they are ads for things you have already bought. At worst, they’re clickbaity ‘try this one crazy trick to get [insert hard to obtain thing]’.

Yet, the advertising industry has the deepest customer profiles it has ever had. It has the algorithms and research available that were unthinkable only 10 years ago. They have more compute than ever before. In fact, advertising companies pride itself on its ability target so accurately. What is the last time someone in marketing promised you they could send ‘the right message, at the right time, to the right client’?

Even more, some of the most valuable companies of the world are build on top of user profiles and targeted advertising. Amazon being the 4th most valuable, Alphabet (Google) the 6th most valuable, and Facebook the 8th most valuable company by market capitalization (2021) . These companies continue to pour money into improved targeting and ever expanding user profiles. No industry would be this valuable or make these investments if targeted advertising was not working.

What explains this discrepancy?

The disconnect results from the different points at which consumers and companies consider targeting a succes. Ad companies are incredibly successful if they increase banner clicks from 0.06% A Google presentation from 2017 lists 0.06% as the average click rate for display ads to 0.6%. This 10x increase in clicks would translate to 10x more revenues. For consumers, this improvement is the difference between 1499 out of 1500 ads being worthless and 1490 out of 1500 ads being worthless. For the average consumer, this difference comes down to ‘all ads are worthless’.

One might argue that with further progress on targeting, we will eventually reach a stage where the promise of more relevant ads will be fullfilled. But, which the amount of ads shown today that’s impossible. Let’s say that ‘good enough’ targeted ads mean that 1 in 5 ads shown is relevant to you. This means a click rate of 20%. A 350x improvement from the current figures. If it is just about the ratio of ads you see and the ads you click, you would be clicking on 100+ ads per day. That’s unlikely, just because you won’t order that many products or services daily.

Consumers are optimizing to see the minimal amount of unneeded ads. In their perfect world, they see only few ads. And, those that they do see should be highly relevant. On the other hand, advertisers are optimizing to get as many clicks as possible. In their perfect world, they show many ads, and at least one is relevant enough to get your click. Advertisers - mostly - don’t care about showing you a bad ad, as long as they show enough relevant ones. This means that there are no incentives in the advertising industry to show you less ads. Doing so would only result in a lower amount of total clicks, and therefore lost revenue. But, at some point, increasing consumer relevance will primarily be held back by the large amount of ads that you see.

This is why, even in a future with highly targeted ads, your experience will remain poor.

So, when a company asks you for consent to ‘show you more relevant ads’, keep in mind that this means ‘more relevant for the company P&L’. You’re not going to notice the difference yourself. And, when someone talks to you about ‘reaching the right user, with the right message, at the right time’, tell them that this is only true from the company perspective. The average consumer will receive mostly irrelevant ads.