Pedro Gardete: The Real Price of Cheap Talk

Do customers benefit from highly targeted online ads?

May 10, 2016

| by Eilene Zimmerman


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Do consumers actually benefit from giving out personal information to advertisers? | iStock/Kuo Chun Hung

We’ve all had the experience of searching online for a product and then being pelted with advertisements for that product – and every vaguely related product – for months afterward. The reason? Behavioral targeting, which gives advertisers the ability to personalize their messages to consumers, based on browsing history, location, and demographic information. Blame it on how cheap and easy it has become for businesses to collect and track that kind of information about us.

Yet it’s unclear whether consumers actually benefit from giving out personal information to advertisers.

Now a new paper from Stanford Graduate School of Business professor Pedro Gardete and Yakov Bart, a professor at Northeastern University, sheds light on who is likely to benefit from personalized advertising and identifies managerial best practices.

The researchers found that highly targeted and personalized ads may not translate to higher profits for companies because consumers find those ads less persuasive. In fact, in some cases the most effective strategy is for consumers to keep information private and for businesses to track less of it.

To examine this issue, Gardete and Bart used game theory to build a mathematical model that enabled them to look at the impact of a variety of advertising scenarios. Gardete wanted to test the boundary of what’s known in economics as “cheap talk,” or persuasive communication that may appear baseless at first. In this case, the researchers were looking at cheap talk in retail, for example, an ad promising “Lowest Prices in Town.” That can be credible when it’s used to draw in appropriate customers; in this case, those who are price sensitive.


It might seem counterintuitive to say to a business, ‘collect less data and disclose it,’ but being open about what data a company collects is actually to its advantage.
Pedro Gardete

They found that the most personalized ads were less effective because consumers worried they were being exploited. For example, says Gardete, someone looking for a prom dress “might get an ad from a retailer saying, ‘We have a wide selection of prom dresses! Click on this link!’ The consumer clicks, and it turns out the retailer has dresses for all occasions but not specifically proms,” says Gardete. Those kinds of ads frustrate consumers and eventually become meaningless to them.

To offset the skepticism ads like those engender, Gardete says businesses may be better off collecting less data from consumers and letting them know it by being transparent about what information they collect, what they don’t collect, and why. In addition, the more mass marketing a business does, the less information it should collect, says Gardete. “It’s to companies’ benefit to know less about consumers and also disclose up front, on their site, exactly what they do collect,” he says, “because consumers don’t want to feel a business has tailored its ads to them based on what it knows about them. That feels manipulative.” Firms that ignore this rule, he says, will find out consumers don’t believe their ads.

So when should consumers offer up their personal details? If they are looking for specific or niche products and the companies that offer those products are selective about where they advertise. Niche and small businesses often lack the resources to blanket the landscape with ads, Gardete says, but they can provide great value by being able to target the right customers. If you’ve just had a baby, for example, and want to find a cloth diaper service, or you are looking for hemp bedding for the crib, you’ll probably need to provide that information so that these retailers can find you.

But in general, a “less is more” policy is the best one, Gardete says. “It might seem counterintuitive to say to a business, ‘collect less data and disclose it,’ but being open about what data a company collects is actually to its advantage,” says Gardete. “It makes them more trustworthy.”

Pedro M. Gardete is an associate professor of marketing at Stanford Graduate School of Business. “Tailored Cheap Talk” is a working paper.

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