November 1, 2012, 12:00 AM

Peeking for Profits

Balancing targeted marketing with privacy, retailers walk a tight rope trying not to be creepy.

Lead Photo

Zappos.com, the footwear and apparel e-retailer, knows something about making money, having surged to $1 billion in annual online sales within its first decade before getting acquired by Amazon.com Inc. in 2009.

And it could make even more if it peeked into the personal interests its customers have shared on the web in order to target them with highly personalized ads—such as a display ad that greets them on their favorite news site with an offer for the exact pair of running shoes they recently viewed but didn't buy on Zappos.com, says Darrin Shamo, the footwear retailer's director of direct and online marketing.

But Zappos, which has built a reputation for a high level of customer service, prefers not to get too personal—or "creepy" —in the way it markets to customers, Shamo says. Instead, Zappos takes the analytics data it gathers on what customers view on Zappos.com and "dumbs it down" through its product recommendation engine to pitch in ads a general range of products a consumer is likely to buy. A shopper who showed a clear preference for a pair of Nike "Free Run+ 3" running shoes in gray and red trim, for instance, may see a retargeted ad for similar products in multiple brands and styles—but not the exact same Nike shoe she checked out on Zappos—while subsequently visiting another web site within one of the advertising networks Zappos uses.

"Showing people exactly what they had seen, and producing more targeted ad content always converts better," Shamo admits. "But we back away from the revenue opportunity for the sole purpose of improving the customer experience. We feel that, long term, we'll get more customers and more sales."

Pushing the privacy envelope

But Zappos also has another motive for shying away from displaying the most personal of ads. And that's to avoid adding fuel to the debate already raging around how marketers collect data about online consumers and use it to present targeted advertising. Legislators in Congress have introduced several bills about online privacy, and the Federal Trade Commission has also weighed in. The online advertising industry, meanwhile, is arguing for self-regulation. "If online marketers do more relevant marketing without getting too creepy, then we don't need legislation" or stricter industry guidelines, Shamo says.

If marketers go too far in pushing the privacy envelope, Shamo and others say, it could lead to a new combination of laws, industry guidelines and consumer practices that could not only blunt the effectiveness of targeted marketing campaigns, but also impede how retailers make it easier to shop their e-commerce sites.

At the core of these concerns is how online marketers and web site operators rely on software code, or cookies, they place in consumers' web browsers to track what consumers do on the web, and then use that information. Research shows that consumers already make an effort to limit their cookie intake and what information they let companies collect. About 30% of consumers routinely delete software cookies from their computers, and at an average frequency of four times per month, according to web measurement firm comScore Inc.

In addition, 57% of U.S. consumers who use mobile apps have either refused to install an app or uninstalled one after learning that it would collect more personal information than they wanted to share, according to a March 2012 study of 2,254 adults by the Pew Research Center's Internet & American Life Project.

Worries about e-commerce

If efforts by legislators and privacy advocates successfully push for stricter privacy rules or standards, online marketing and e-commerce sites themselves could undergo significant changes, experts say.

And if privacy advocates convince more consumers to block or delete cookies more routinely, it could hurt e-retailers because they would not be able to provide services, such as recognizing a returning customer, that online shoppers have grown to expect, experts say. "There's a consumer expectation for a certain degree of personalization in the e-commerce site experience," says Eoin Comerford, CEO of Moosejaw Mountaineering, which sells outdoor sporting goods through stores and online. "If we're not careful and let politicians handle this, and more consumers say they don't want to get tracked at all, it will hurt online retailing."

Comerford and others assert that software cookies—both the first-party cookies retail web sites set to track activity and tailor what consumers see to their browsing behavior, and the third-party cookies set by ad networks and data-collection companies that log consumers' behavior all across the web—could be compromised if trends in privacy rules lead consumers to block or delete cookies in large numbers. "I'm concerned that an overreach in privacy legislation will hurt some benefits customers experience in more personalized, more relevant merchandising and marketing," says Kevin Ertell, vice president of e-commerce at kitchenware retailer Sur La Table.

While no one is expecting a ban on tracking cookies, privacy trends could still lead to fundamental changes in how e-commerce sites operate. Already the web browser software consumers use is changing as a result of the privacy debate.

The Google Chrome browser, for example, offers several options for controlling cookies. One option lets users allow cookies set by a web site to track click activity only during a visitor's session, then automatically deletes them once the visitor closes her web browser. This wouldn't affect in-session activity; a site could still show a shopper who views a blouse matching pants during the same session and could retain her address and payment card information through the checkout flow.

But with cookies deleted at the end of every browser session, "the site would have no way to recognize visitors upon return, so the return experience cannot be personalized, shopping carts are not saved, recently viewed items are not saved," Comerford says. Moreover, he adds, this could also make it harder for marketing managers to understand consumers' paths to purchase, such as how many times a consumer visited a product page, read a review or watched a video before ultimately purchasing. That's because there would be no record of any pages viewed during a previous session.

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