Distance and Local Competition in Location-Based Advertising

This paper studies advertising performance in geofencing, a practice where mobile users are targeted within a pre-defined virtual geographic boundary around an advertiser’s establishment. The analysis emphasizes the impact of distance (between the focal establishment of the geofence and a mobile user) and local competition (defined in terms of the number of alternative establishments in the consumer vicinity zone) on consumer click and conversion responses. We develop a two-stage choice model and apply it to a unique data set of geofencing ad impressions provided by one of the largest location-based marketing agencies in the United States. The results suggest that local competition matters in the click stage, while distance influences the propensity of conversion. Quantitatively, our results suggest that having one more competitor in the consumer vicinity zone lowers the click-through rate by 1.03%, whereas a one-mile increase in distance is associated with a 17.64% decrease in conversion rate. We also find a significant interactive effect, whereby a greater degree of local competition amplifies the negative impact of distance on the likelihood of conversions. Additionally, product differentiation ameliorates distance and competition effects, while unplanned buying during off-peak hours makes these effects more prominent. Our results contribute to the literature by discovering the varying roles and the moderating effects of distance and local competition in location-based advertising.