What is the benefit of targeting? Why (and when) do we need experiments to estimate the benefits of targeting? And what is the right baseline to compare against?
I start with a business casual explanation, using examples to illustrate some of the issues at hand. Later in the note, I present a formal explanation to precisely describe the assumptions to clarify under what conditions targeting may be a reasonable thing to do.
Say that you have some TVs to sell. And say that you could show an ad about the TVs to everyone in the city for free. Your goal is to sell as many TVs as possible. Does it make sense for you to build a model to pick out people who would be especially likely to buy the TV and only show an ad to them? No, it doesn’t. Unless ads make people less likely to purchase TVs, you are always better-off reaching out to everyone.
You are wise. You use common sense to sell more TVs than the guy who spent a bunch of money building the model and selling less. You make tons of money. And you use the money to buy Honda and Mercedes dealerships. You still retain the magical power of being able to show ads to everyone for free. Your goal is to maximize profits. And selling Mercedes nets you more profit than Hondas. Should you use a model to show some people ads about Toyota and other people ads about Honda? The answer is still no. Under likely to hold assumptions, the optimal strategy is to show an ad for Mercedes first and then an ad for Toyota. (You can show the Toyota ad first if people who want to buy Mercedes won’t buy a cheaper car if they see an ad for a cheaper car first.)
But what if you are limited to only one ad? What would you do? In that case, a model may make sense. Let’s see how things may look with some fake data. Let’s compare the outcomes of four strategies: two model-based targeting strategies and two target-everyone with one ad strategies. To make things easier, let’s assume that selling Mercedes nets ten units of profits and selling Honda nets five units of profit. Let’s also assume that people will only buy something if they see an ad for their preferred product.
Continue reading here (pdf).