Washington takes aim at behavioral targeting

Zappos jumped on a growing trend among online retailers last year and enabled its website to present product recommendations based on choices they make while perusing the site – and it seems to be working in the shoe merchant’s favor.

“On-site recommendations create a more personal shopping experience which does lead to increased sales,” says Aaron Magness, Zappos, senior director of product marketing.

Beyond its site, Zappos has more recently begun experimenting with sending personalized ad banners in remarketing messages to customers who had previously visited the site. Each of the ads also includes a link for customers to turn off the personalized ads, in case a customer finds the messages annoying or intrusive.

“Early feedback is that most customers really like this kind of relevant advertising,” says Magness. “We see this as a big opportunity to allow the customer to cut through the clutter and focus on the types of things they’re looking for,” he adds.

The refrain heard throughout the marketing industry is, “Behavioral targeting rewards the seller but also the customer.” Washington isn’t so sure. The growing practice is under scrutiny.

New technology has given marketers the ability to target prospective customers in real time on the Web, based on data gleaned from the consumer’s online behavior on their own sites, as well as data reported by firms that specialize in collecting these breadcrumbs across the Internet. Data firms can sell the information to interested marketers who then place targeted ads or reconfigure their sites accordingly. Depending on the analytics, those profiles can offer marketers suggestions for retargeting of additional purchases.

As the business has grown – eMarketer analyst David Hallerman in February estimated that spending this year on ad targeting alone will be $1.125 billion, a 21.6% increase from 2009 – and mistakes have happened, criticism of the practice from lawmakers and consumer advocates has also grown.

Among the questions being raised in Washington: Do marketers have too much information? Do consumers know what is taking place? Can marketers be trusted to not track sensitive information?

Already there are signs that either Congress or the Federal Trade Commission (FTC) is about to change the game. In December 2009, the FTC began hosting a series of workshops on the issue of privacy online. In May of this year, draft legislation regarding consumers’ rights in online behavioral tracking was introduced in the House. In July, Congressman Bobby Rush (D-IL) went further and introduced an online privacy bill to the House Committee on Energy and Commerce. It preceded a Senate committee hearing on the issue where representatives from Apple, AT&T and the FTC testified.

At the same time, online leaders like Google and Facebook began to face increasing scrutiny over their privacy policies and missteps. An automatic opt-in for Google Buzz, which concluded in September when it paid $8.5 million to settle a class-action suit, is just one example.

“The jig is up,” says Jeff Chester, executive director of the Center for Digital Democracy, a consumer group that has been urging Congress and the FTC to start requiring marketers to obtain opt-in consent before engaging in behavioral marketing. “Right now marketers are shooting themselves in the foot.”

Chester says consumers neither fully understand the information marketers are gathering nor are they comfortable with it.

This issue continues to be the subject of legal debate.  At least two lawsuits about unfair marketing using behavioral tracking have been filed.

A Wall Street Journal August series on the topic called “What They Know” fanned the flames of discussion on Capitol Hill and the FTC’s chairman has suggested the agency might call for marketers to offer a “do not track” option when it releases its recommendations on the topic this fall.

“We are troubled by the findings in this report which suggest the price of consumers’ unfettered use of the Internet increasingly is [the] surrender of their personal information, preferences, and intimate details to the websites, data monitoring companies, marketers and other information-gathering firms that seek to track them online and develop digital dossiers or a range of marketers,” said US Reps. Ed. Markey (D-MA) and Joe Barton (R-TX) in a letter to 15 marketers mentioned in the newspaper. Markey and Barton are co-chairmen of the House Privacy Caucus. Markey and Barton then asked each of the 15 companies to detail the information they are collecting.

Fueling the growth of the industry are technology advances and a demonstrated boost in ROI. A Network Advertising Initiative study in March estimated that behaviorally targeted ads may cost more, but are twice as effective at generating sales as compared to non-targeted ads.

“What’s different is the technical capability to collect information when the consumer is on the Internet has gotten easier and the interest that companies have in trying to cut through the clutter to get to consumers has grown,” says Jennifer Barrett, chief privacy officer of Acxiom.

Lawrence Whittle, CEO of M-Factor, says the ability to get information on prospects and campaigns in near real time is hard to resist. Combined with the new ability to tag that data with information beyond an IP address and also analyze it quickly, the speed is rewriting marketing playbooks.

“The ability to capture that information, analyze it and then use it is very, very hot,” he says.

The data that marketers now have access to allows them to build patterns combining psychographic, demographic, purchasing information and sometimes offline behavior as well, points out Forrester Research analyst Joanna O’Connell.  

“Today it is a wild diversity of opportunities that extend way beyond classic marketing,” she says.

At Capital One Financial Corp. the first sign of behavioral marketing is that two people entering the website for the first time might see different pages.

The “What’s in your wallet” marketer has a variety of credit cards, some offering discounts, others offering miles or other benefits. Now, instead of everyone getting the exact same launch page, Capital One uses Nielsen’s Prizm database and analytic software from Xplus 1 to essentially reconfigure its site in real time, choosing which of its credit card products to feature.

Pam Girardo, senior director of corporate communications at Capital One, says the software allows the company “to make an educated guess at what consumers would like. It helps us to prioritize what gets featured,” she says. While the technology prioritizes the first page, consumers don’t actually get individualized offers and still have the choice of quickly switching to any of the other cards Capital One offers.

“It’s not used for lending decisions, just optimizing the site experience,” she says.

Bluestem Brands, an e-commerce and direct marketing retailer that includes the Fingerhut and Gettington.com brands, has changed its marketing processes dramatically since the advent of behavioral targeting. One immediate sign is the brands’ online ads.

Two years ago, a retargeted customer who bought a basketball might have received an ad from a broad sporting goods category. Now, the dynamically assembled ads are further tailored to a customer’s interest within sporting goods, says Mark Redetzke, VP, e-commerce and digital marketing. Another sign is that a customer, who two years ago would get catalogs mailed to a home address, now gets a combination of electronic marketing and mailed catalogs.

Those changes pale in comparison to differences in how the company finds new customers. Where two years ago Bluestem would buy ads in ad networks based on broad categories, it now watches ad exchanges for potential customers using analytics from Xplus 1 that acquire the profiles fitting its target.

“We know the makeup of our customers who we want to acquire. We can use technology and systems to leverage that,” Redetzke says. “We have a third-party database that combines a variety of data sources, and [we] employ our own models to decide who we think looks like a favorable customer. We have five levels at which we target, and in milliseconds we can determine if they are top priority or third down the line.”

Another marketer, Publishers Clearing House (PCH), doesn’t employ a lot of targeting in its own marketing — too many categories of people buy magazines. Instead, it employs targeting to deliver ads to consumers coming to its websites. The site’s advertising content changes as consumers go through the site.

Josh Glantz, VP, general manager of PCH Online, says the idea is to make the site as interesting as possible to consumers when they visit. One way to do that is to offer personalized ads.

“We are a publisher of free content. It is imperative we monetize the content… that the content attracts a growing audience,” he says. “Not only must the content of our site be relevant, the advertising itself must be relevant.”

PCH was sued by state attorneys general over some of its contests in the past. The company is among those leading the charge on transparency in behavioral marketing. The PCH site features a preference center where visitors can opt in or out of targeted content. Each of its ads links to a website that offers information on targeting. The company is also working with TRUSTe in a pilot program to ensure marketers are honest about their behavioral tracking.

“We are being careful because we need to be above the fray,” says Glantz. “We need to set the standard. Consumer trust is absolutely critical. When you put advertisements all over the Internet, they have to believe and trust that you are not going to use that information in unethical ways.”

Marketing groups concede that consumers do not know enough about the targeting, but argue that the critics vastly overstate the danger and concern. “No ad network has your name, e-mail address or credit card number,” says Mike Zaneis, VP, public policy for the Interactive Advertising Bureau, a group that represents publishers and sellers of advertising on the Internet.

The marketing industry hopes to head off regulation with a voluntary new program to monitor behavioral targeting. The program will be run by the Council of Better Business Bureaus and will educate companies on what is taking place in behavioral targeting and issues of transparency.

The industry initiative will include an easy opt out of all behavioral targeting; a logo for all online ads delivered using targeting; a link in the ad that explains how the ad was served and possibly information on the profiling used. In addition, the bureau’s National Advertising Review Council will start monitoring millions of online ads to ensure compliance.

“We think transparency is the key,” says Jerry Cerasale, SVP of government affairs at the Direct Marketing Association, which is also involved in the new self-regulation push. “Consumers may be able to get over the Big Brother aspect if they learn more about [what is taking place].

Charles Curran, executive director of the Network Advertising Initiative, the association of advertising networks, says NAI believes that a lot of the concerns are due to a lack of transparency in the targeting, problems that NAI is working hard to fix.

“The next step is to make all of the advertising categories visible,” Curran says. Already a number of members, among them Yahoo, Google and Microsoft, provide sites where consumers can see their own profile information.

While additional hearings could take place this year, legislation is unlikely to move forward until next year, meaning that what action Congress takes could be impacted by the midterm election results. “Whether the legislation goes anywhere will depend on how effective our self regulatory program is,” says Cerasale.