Study: Even Moderate Privacy Regulation Reduces Ad Effectiveness
A new study by two marketing professors concludes that banner ads are less effective in Europe, where online privacy laws restrict ad targeting, than in other parts of the world.
"The empirical findings of this paper suggest that even moderate privacy regulation does reduce the effectiveness of online advertising," states the paper, authored by University of Toronto's Avi Goldfarb and MIT's Catherine E. Tucker.
Europe's data protection laws ban marketers from tracking users via Web bugs or cookies without notifying people and obtaining their consent. It's not clear whether that consent must be opt-out or if opt-in will suffice. But the report authors speculate that marketers responded to the ambiguity by adopting a "conservative legal interpretation" and curbing their use of targeted ads.
The study draws on surveys of 3.3 million Web users who had been exposed to a total of 9,596 online ad campaigns between 2001 and 2008. Researchers asked one group of users who had seen particular ads whether they intended to purchase the products marketed; researchers also asked a control group who hadn't seen the ads whether they intended to purchase the products marketed to the first group.
The researchers measured effectiveness by looking at the difference in purchase intent among the two groups. The report authors compared the results for users in EU countries and non-EU countries and concluded that Europe's laws reduced effectiveness, as measured by purchase intent, by over 65%.
They also concluded that Web sites that had general news saw a larger drop in effectiveness than specialized sites like travel or parenting sites. "Customers at travel and parenting websites have already identified themselves as being in a particular target market, so it is less important for those websites to use data on previous browsing behavior to target their ads," the report states.
While the authors attribute the results to a drop-off in marketers' use of targeted ads, other explanations are possible. Pace University's Catherine Dwyer speculated that the shift could also have occurred as a result of greater consumer awareness in the EU about targeted ads, and not necessarily because marketers stopped using them.
Goldfarb responds that even if that's the case, the greater awareness still seemed to come about as a result of regulations, which means that privacy laws contributed to a drop in ads' effectiveness.
"There might be lots of reasons why you care about privacy regulation, but it has a cost," he says. "The cost is in how effective the online ads are."
In the U.S., Rep. Rick Boucher (D-Va.) recently floated a proposal requiring that companies notify people about ad targeting and obtain their consent (opt-out in many cases). Goldfarb says that proposal could result in less effective online ads in the U.S., but perhaps only on a temporary basis. "At least in the short run, the U.S. online ad industry would be affected. In the long run, they might adjust," he says. "They might figure out how to do the right kind of advertising that works, but that doesn't violate the privacy regulations."