Targeted Promotions on an E-Book Platform: Crowding Out, Heterogeneity, and Opportunity Costs

Abstract

Targeted promotions based on individual purchase history can increase sales. However, the opportunity costs of targeting to optimize promoted product sales are poorly understood. A series of randomized field experiments with a large e-book platform shows that although targeted promotions increase promoted product sales and purchases of similar products, they can crowd out purchases of dissimilar products (i.e., e-books from nontargeted genres) by decreasing search activities of nontargeted goods on the same platform. The effects on total sales are heterogeneous, ranging from net decreases to insignificant drops, motivating a targeting exercise comparing strategies that optimize promoted product sales versus total sales. Targeting for promoted product sales tends to assign promotions to customers who purchased similar products, whereas targeting for total sales assigns promotions on the basis of other user characteristics. Targeting for promoted product sales generated incremental total sales that amounted to approximately 29% of the optimal incremental total sales when targeting for total sales (an opportunity cost of 71%). The optimal targeting exercise highlights how maximizing promotional lift can incur opportunity costs in terms of other forgone sales.