Trade-Offs in Online Advertising: Advertising Effectiveness and Annoyance Dynamics Across the Purchase Funnel

Abstract

In this study, we capture the trade-off between effective and annoying display advertising. We investigate both the enduring impact of display advertising on consumers' purchase decisions and the potential of persistent display advertising to stimulate annoyance in consumers. Additionally, we study the structural dynamics of these advertising effects by allowing them to be contingent on the latent state of the purchase funnel in which each consumer resides. The findings, based on the hidden Markov model that we propose, demonstrate that a tension exists between generating interest and triggering annoyance in consumers; whereas display advertising has an enduring impact on transitioning consumers farther down the purchase funnel, persistent display advertising exposures beyond a frequency threshold can have an adverse effect by increasing the chances that consumers will be annoyed. Investigating the dynamics of these annoyance effects, we reveal that consumers who reside in different stages of the purchase funnel exhibit considerably different tolerance for annoyance stimulation. Our findings also reveal that the format of display advertisements and the level of diversification of ad creatives as well as consumer demographics moderate consumers' thresholds for annoyance elicitation. For instance, advertisers can reduce annoyance elicitation as a result of frequent display advertising exposures when they diversify the display ad creatives shown to consumers as well as when they use static rather than animated display ads.