Targeted Promotions and Cross-Category Spillover Effects

Abstract

Targeted promotions based on individual purchase histories are known to increase promotional response while reducing search effort, yet the opportunity costs of such targeted promotions remain poorly understood. We use field experiments on a mobile e-book reading app and an online ticket exchange to test how targeted promotions can decrease cross-category search and purchasing. Findings from three randomized field experiments consistently showed that targeted promotions reduce cross-category purchase activity. These negative spillovers can be large; while direct response was higher for targeted promotions, total sales for one of the experiments was significantly higher for untargeted promotions. We find evidence that the negative category spillover effects are due to a decrease in search activity. Precisely targeted offers lead consumers to take a less active role in information search, limiting cross-category exploration. Firms using highly targeted promotions should monitor for reductions in search, as an indicator of missed cross-selling opportunities and lower sales diversity at the customer level.