Does Retail Advertising Work? Measuring the Effects of Advertising on Sales Via a Controlled Experiment on Yahoo!

Abstract

We measure the causal effects of online advertising on sales, using a randomized experiment performed in cooperation between Yahoo! and a major retailer. After identifying over one million customers matched in the databases of the retailer and Yahoo!, we randomly assign them to treatment and control groups. We analyze individual-level data on ad exposure and weekly purchases at this retailer, both online and in stores. We find statistically and economically significant impacts of the advertising on sales. The treatment effect persists for weeks after the end of an advertising campaign, and the total effect on revenues is estimated to be more than seven times the retailer’s expenditure on advertising during the study. Additional results explore differences in the number of advertising impressions delivered to each individual, online and offline sales, and the effects of advertising on those who click the ads versus those who merely view them. Power calculations show that, due to the high variance of sales, our large number of observations brings us just to the frontier of being able to measure economically significant effects of advertising. We also demonstrate that without an experiment, using industry-standard methods based on endogenous cross- sectional variation in advertising exposure, we would have obtained a wildly inaccurate estimate of advertising effectiveness.

Keywords: advertising, field experiment, electronic commerce

JEL Classification: M37, C93, L81