Targeting Economics
Say that there is a company that makes more than one product. And users of any one of its products don’t use all of its products. In effect, the company has a \textit{captive} audience. The company can run an ad in any of its products about the one or more other products that a user doesn’t use. Should it consider targeting—showing different (number of) ads to different users? There are five things to consider:
- Opportunity Cost: If the opportunity is limited, could the company make more profit by showing an ad about something else?
- The Cost of Showing an Ad to an Additional User: The cost of serving an ad; it is close to zero in the digital economy.
- The Cost of a Worse Product: As a result of seeing an irrelevant ad in the product, the user likes the product less. (The magnitude of the reduction depends on how disruptive the ad is and how irrelevant it is.) The company suffers in the end as its long-term profits are lower.
- Poisoning the Well: Showing an irrelevant ad means that people are more likely to skip whatever ad you present next. It reduces the company’s ability to pitch other products successfully.
- Profits: On the flip side of the ledger are expected profits. What are the expected profits from showing an ad? If you show a user an ad for a relevant product, they may not just buy and use the other product, but may also become less likely to switch from your stack. Further, they may even proselytize your product, netting you more users.
I formalize the problem here (pdf).