On January 28, at the Computers, Privacy, and Data Protection conference, Apple’s CEO, Tim Cook, spoke about the importance of giving users more control over how their data is used for online advertising. To that end, Apple’s new operating system will soon require consumers to opt in if they want to allow businesses to track their data and use it for personalized advertising.
Facebook, which relies heavily on personalized advertising, responded fiercely to this decision, placing full-page ads in the New York Times, the Wall Street Journal, and the Washington Post that accuse Apple of hurting small businesses. Facebook has also created a website where small businesses can voice their concerns about Apple’s decision.
Facebook’s central claim is that small businesses will lose revenues if they can’t use personalized ads. “Without personalized ads,” the company says in its ads and on its website, “Facebook data shows that the average small business advertiser stands to see a cut of over 60% in their sales for every dollar they spend.” It’s an eye-popping figure, and one that suggests that Apple’s pro-privacy policy is poised to deal a devastating blow to small businesses. But where does the data for this apocalyptic claim come from? And does it hold up under scrutiny?
To properly evaluate this claim, you first need to understand the popular metric that Facebook used here to quantify advertising success: return on ad spend, or ROAS. The metric indicates the amount of revenues associated with advertising — but it does not indicate the amount of revenues caused by advertising.
To understand why this difference matters, imagine a company that knows its customers very well. It can predict with a high degree of accuracy how much a customer will spend in the coming month. If the company targets its advertisements to those customers who are expected to spend a lot, each dollar spent on advertising will be associated with high revenues. That’s great — the company has achieved a high return on ad spend. But here’s the thing: These customers would have generated high revenues anyway. That’s why they were targeted in the first place. So it would be a mistake to conclude that these customers spent more because of the personalized ads.
In its campaign against Apple’s new policy, Facebook is claiming that when it compared the ROAS for campaigns that leveraged personalized information with campaigns that didn’t, it found that small businesses would suffer a 60% cut in revenues if they were deprived of personalized advertising.
That scary-sounding number, however, is almost certainly too high. Randomized controlled trials that compare personalized advertising with no advertising tend to reveal much smaller differences.
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