MIT Sloan Professor Glen Urban
MIT Sloan Professor John Hauser
From Fortune China
Everyone is trying to make their banner ads and new media more effective. In the banner area, 90% of the effort is spent on targeting. If you click on a link, you’ll get a particular ad. A whole industry has emerged focused on collecting click stream data and making recommendations.
But that is only half the picture. Equally important is the question of how you should talk to consumers once they are targeted. This is what ad morphing is all about.
For example, a car company may target a consumer whose click history indicates he is interested in buying a car. However, instead of just randomly sending him car ads, it can track the consumer’s online behavior to determine his preferred communication style. We also call this his cognitive or thinking style. Does the consumer want a picture of the car at a NASCAR race? Or would the consumer prefer to look at the technical aspects of the engine? Or does the consumer want a fashion shot of a driver pulling up to a country club? What will the consumer best respond to?
This is a multi-arm bandit problem because it’s like a slot machine with many arms. The advertiser needs to choose the ideal lever to pull to match the ad to the consumer’s thinking style. However, it’s more difficult with ads because there is uncertainty as to the consumer’s thinking style.
Our algorithm addresses this issue by monitoring click stream data to determine how a consumer makes decisions on the web. After enough information is gathered, the algorithm determines the consumer’s likely thinking styles and matches the optimal ad to our estimates of thinking styles – all in real time.
Partnering with companies like General Motors to test our algorithm, we found that morphing has tremendous potential to increase banner ads’ productivity. Companies work hard just to get a 1-2% improvement in click-throughs, but we found that morphing ads based on thinking styles can improve that rate up to 83%. We also found that morphing can lead to 30% better brand recognition. These are very significant effects.
While our algorithms (see our paper for the algorithms) can be implemented by any good programmer skilled in the art, morphing can challenge the budget. To use this tool, companies have to design more ads – ads that appeal to each of the various thinking styles of customers. There also may be cross-organizational issues, as the people who create those ads must coordinate with the analysts doing the targeting.
However, this is the only algorithm that we’re aware of that integrates thinking styles and morphing in real time. It’s very cutting edge, but it can help move the market to the next wave of action in banner advertising.
Also see the post in Chinese at Fortune China.
Glen Urban is the David Austin Professor in Management, Emeritus, Professor of Marketing, Emeritus, Dean Emeritus, and Chair of the MIT Center for Digital Business at the MIT Sloan School of Management.
John Hauser is the Kirin Professor of Marketing and a Professor of Marketing at the MIT Sloan School of Management.