Well, you knew this, but research has proved that targeted advertising works

A few days ago, I travelled to Shanghai for work. I booked a hotel room there via a popular online booking portal, and got a good deal on the price.
It has now been three weeks since the booking was made, and every website I visit seems to offer me deals on the exact same hotel and by the exact same website. Clearly this is not a coincidence – browser cookies in my computer have indicated that I was looking for hotels in Shanghai, and the desperate website has continued to follow me around ever since. It is not just this website, but most other e-commerce players and even offline businesses that choose to send targeted advertisements to web browsers, email users and cell phones across the world. Search engines and social networking websites now have access to previously inaccessible data about our about our likes and dislikes, our friends, our demographics, our lives and a lot more.
Targeted advertising is the reason a lot of online businesses make money. However, privacy concerns have cropped up of late – unethical sharing of personal information, email addresses and phone numbers have resulted in unprecedented amounts of spam, often leading to not just annoyance and frustration, but the fear of further misuse of our data. Many governments, especially in the European Union, have enacted laws to prevent misuse of personal data beyond reasonable limits. For example, European residents now have a “right to be forgotten,” where they can completely erase their online footprints, and make it illegal for search engines and social networking sites to use their data any more for targeted advertising.
Companies in the EU also have to inform national regulators within three days of any data breach, and mandate parental consent of under-16 minors using social networking services. Many banking and financial consumers are also required to erase clients’ past purchasing patterns after certain periods of time.
Clearly, such regulations do not please online businesses, because it affects their ability to accurately target large numbers of customers. However, such laws, and their variance across countries, also provide researchers the opportunity to measure the value of data. More precisely, it lets researchers identify how much more business can be generated with access to more accurate personal data.

Avi Goldfarb and Catherine Tucker answered this question to some extent, by studying 9596 advertising campaigns in different countries (both inside and outside the EU, with different privacy laws, and from time periods both before and after privacy laws were enacted in the EU) between 2001 and 2008.
They found that internet users in countries with strict privacy laws, by virtue of viewing fewer targeted advertisements, were up to 65% less likely to state that they would buy as the result of an ad campaign (they were asked this question as part of a survey). Thus, the value of personal information is immense – as it has a significant role to play in influencing a potential consumer’s purchase decision. Another study by Goldfarb and Tucker found that while people in US states with alcohol advertising bans were 8% less likely to state that they would purchase alcohol than in states without the ban, this gap was reduced to 3% when respondents were exposed to online alcohol ads (which are usually not banned). Thus, online advertising also reduces the effectiveness of offline advertising bans significantly, and could help drive sales of products and services whose advertisements may not be allowed on traditional media like newspapers, TV and radio.
Thus, when industrialists say that “data is the new oil,” it may be more than just a figure of speech. Multibillion dollar companies like Google and Facebook, and now Snapchat and Instagram, have thrived by using your browsing history to sell you personalized ads, and e-commerce retailers often gain an edge over their offline counterparts (who themselves have formidable data reserves) by gaining more granular insight into your preferences, all through your search and other online behaviour.
This column is intended to showcase interesting academic research in marketing. The technically oriented reader is encouraged to read the original research articles cited in the column.
Prithwiraj Mukherjee is Assistant Professor of Marketing, IIM Bangalore. Views are personal.