The Companies That Know You All Too Well

Ever stop to think, "Boy, that Facebook ad sure knows what I want to buy right now!"? Probably not. Nor is it likely that the latest email from one of a thousand businesses you're subscribed to (willingly or not) pegged your innermost desires the day it was sent.

But advertising may be changing. For much of its history, advertising has been a way to sell you what you didn't know you wanted yet, and it did so in broad psychological strokes meant to reel in as many consumers as possible.

Now, thanks to technological and psychological advances, the day may soon come when advertising knows you better than you know yourself. Analytics? Call it ad-alytics. Only a few companies are on the bleeding edge, and their advancements could transform the way we interact with our advertising, whether we're ready or not.

Tastemakers and targeted influence
Few investors are aware of Omnicom (NYS: OMC) , but they should be. It's one of the largest publicly traded advertising and marketing firms in the world, with a raft of top companies as clients across multiple sub-brands. The company's standard business model, in which it develops campaigns and rolls them out to an ad-saturated public, hasn't brought much growth in recent years.

Enter sparks & honey, which aims to -- bear with me, as some pretentious marketing-speak is coming -- "leverage a proprietary next-generation real-time engagement engine to distribute culturally relevant brand content." In other words, it wants to grab you at the moment of interest and push a product when you're most likely to buy it.

This is a big undertaking, but it isn't necessarily a revolutionary step. You could make the claim that Google (NAS: GOOG) has been running rudimentary versions of this model for years with its keyword-targeted ads. But there's a huge difference between showing you Mediterranean trips when you search for Italy versus identifying an underlying interest in Italian food and steering you to a good restaurant -- or if a good Italian restaurant isn't available, offering directions and a coupon to The Olive Garden. Successfully identifying interests in real time and targeting advertising toward those interests would be the logical next step toward advertising that works constantly, rather than rarely.

How will it end?
Advertising that knows you better than you know yourself is still just over the horizon, but not for lack of trying. Google's and Facebook's futures both depend on catching and maintaining user interest in now-ubiquitous advertising. Yelp (NYS: YELP) and Groupon (NAS: GRPN) both have business models that demand the ads and options served up (especially with location-based mobile services) be both compelling and relevant -- "compellevant," if you will. But, like the similar-sounding pachyderm, highly targeted ads can be dangerous if mishandled.

There's an obvious trade-off between accuracy and privacy, as it's simply not possible to target advertisements to individuals accurately without knowing a good deal about them. Omnicom's particular strategy seems to be an ideal complement to a recent Microsoft (NAS: MSFT) ad initiative I profiled recently. Combining live bio-analysis with sophisticated psychological analytics would be the perfect combination to make sure that advertising offers a maximum impact. Such technology is years away from being feasible, but it would be foolish to dismiss the possibility. After all, few could have expected real-time body sensing as an advertising mechanism, at least not in 2012.

The ultimate goal of advertising is to get everyone who sees the ad to buy the product. If 100% of the target audience converts to being a paying customer, there's less need for advertising in the aggregate, but each ad served becomes far more valuable. This isn't going to happen any time soon, but it's where advertisers want to go. My recent article on Google's transition toward semantic search earned some interesting comments, which mostly point out that offering fewer search results will result in less ad revenue for Google. It may result in fewer ads, but if each ad served becomes more relevant and more immediately interesting to the user, Google can see similar levels of revenue, if not an uptick.

Foolish final thoughts
As investors, we often talk about consumer psychology alongside our own psychological weaknesses. We don't always think about how consumer psychology might be influenced in subtle ways from moment to moment by the constant barrage of advertising everyone is exposed to on a daily basis. Advertising's just there, a part of life, like the weather. What if it became a more active participant? The Groupons and Yelps of the world are already pushing us in that direction, but the results are frequently haphazard -- do you really need another discount manicure, especially if you're a 60-year-old war veteran?

Ultimately, every company that relies on advertising can and should learn to be more effective with less of it. And every company that uses advertising will be grateful for the greater conversion rates that result. It would be well worth your time, as an investor in any ad-centric company, to watch the trend toward personalization and real-time consumer connections. Those who master the art will thrive, and the rest might be left behind.

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At the time thisarticle was published Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights. The Motley Fool owns shares of Microsoft and Google. Motley Fool newsletter services have recommended buying shares of Google and Microsoft, as well as creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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