How Targeted Ads are beneficial all around.
Targeted advertisements are a fairly hot topic in today’s world. With giant companies such as Facebook and Google making a majority of their revenue through advertisements, it makes sense to take a deeper look. The idea behind targeted ads is that a person’s personal information is used to present them with ads that companies think may interest them. For a while now we have seen people arguing both for and against targeted ads. In this case I am going to argue that they are beneficial, both to companies and the consumers.
One of the topics covered in class is the concept of applying matching markets to advertisements. In order to construct our market we define the following:
- ri = clickthrough rate of slot i
- vj = revenue per click of advertiser j
- vij = ri*vj = benefit of ad j being in slot i
- valuation vij is the valuation of ad slot i by advertiser j
In our analysis we assume that the revenue an advertiser makes per click is constant. Thus we are mainly focusing on the click through rate and the valuation. In old style digital advertisements ad slots would be sold based on click through rates or the number of visitors to a website. However, in these cases, visitors to a website would be seeing ads they aren’t necessarily interested in and thus may not click all the time. With targeted ads the story changes as now the ads displayed to consumers are geared specifically towards things that may need based off of data collected such as recent searches or events that have gone to.
With targeted ads it has been seen that click through rates increase greatly, sometimes even as much as double in the case of location based mobile ads. Looking at this case within our market we would see an advertisers valuation of a slot double if its click through rate doubles (vij = 2*ri*vj = 2vij). So the question becomes why is this a good thing? Well for the companies selling advertisements such as Facebook and Google this is fantastic news. Since the valuation of their advertisements slots have now doubled, this means that they can raise the prices of said slots while still being attractive to potential advertisers. On the flip side, provided the cost of the slot doesn’t increase enough to counteract the increase in click through rate, then the advertisers will also see an increase in revenue as the additional customers will bring in additional revenue. Looking at Facebook’s statistics this is exactly what we see happening. Despite the fact that the number of daily active users on Facebook did not change by much between 2017 and 2018, Facebook saw an increase of $15 billion dollars in revenue. With Facebook having 99% of its revenue coming from advertisements, we can clearly see that much of this revenue increase is thanks to the increased precision and accuracy of targeted ads. According to databox, the average click through rate on Facebook is between 1% and 5%. Comparatively, the average click through rate of old style display ads is roughly 0.4%. Thus, we see here how targeted ads can have a large increase in click through rate for companies such as Facebook and Google.
Looking at this we can see how targeted ads are beneficial all around. Both advertisers and companies selling advertisement slots benefit financially from targeted ads as we have seen. Additionally, consumers benefit from targeted ads as the advertisements being shown to them are often more relatable and often feel less like spam. Additionally, the increased revenue from targeted ads has the potential to allow companies to decrease prices in the case of advertisers, or add additional functionality, in the case of companies like Facebook and Google. Much of the convenience apps such as Facebook offers society would not be possible without ads, and targeted ads only allow these companies to continue to further develop these platforms.
Resources:
Targeted Ads – Facebook Revenue