The idea is that the advertiser ultimately wants to buy a certain amount of conversions. With their ad budget being roughly constant, better targeting means that you need to show fewer ads of that advertiser to get to that point. So, you're decreasing the denominator, increasing cost per impression.
This is obviously oversimplified, because actual payment happens at the intermediate step of click. But the inherent feedback loops finally work out to the above.
> the advertiser ultimately wants to buy a certain amount of conversions
That's not right at all for a large segment of advertising: the cheaper conversions are, the more most advertisers are willing to spend.
Imagine I currently earn a marginal profit of $10 on each conversion (widget sold etc): this means roughly I'm willing to pay up to $10 for a conversion that wouldn't have happened otherwise.
Conversions that cost more than $10 are definitely not worth it to me. I have some appetite for conversions that cost close to $10, but at some point I run into (likely temporary) capacity constraints and my marginal profitability decreases. The cheaper conversions are, the more I can continue to increase volume, and so the more I'll spend.
Additionally, internet advertising is competing with other forms of advertising, and advertisers want the most cost effective medium. Increase the cost of a conversion, and the marginal advertiser shifts away from online ads.
One way to see this is to imagine that instead of talking about online ads we are talking about any other product. Raise the price (cost per conversion) and people will decrease the amount they buy.
(Disclosure: I work on ads at Google, speaking only for myself)
>Raise the price (cost per conversion) and people will decrease the amount they buy.
This is just a form of supply/demand curve.
The issue here is Google controls most of the market, giving them far more power to optimize the supply curve to maximize Googles profit leaving the consumer no other competitor to fall back on to lower prices (FB maybe?, more likely to collude and keep prices high).
Google cannot act like ads are 'any other product' where there are healthy, competitive markets.
That said, Google and Facebook captured most of the value from targeted advertising and left only crumbs to publishers, so they don’t really have an incentive to maintain the status quo. The use of invasive tracking technology is forced onto them by advertisers.
The problem is, the really big publishers have a cachet to the point where ad targeting works against them.
As an advertiser, why would I pay big money to target an ad to the affluent New Yorker reading audience when I can target those same people for pennies on the dollar on other websites?
'Brand Safety'... advertisers are very keen on this. They don't want their ads being flung across the dregs of the internet. Take grindr as an example... this app was blacklisted by most advertisers not because of homophobia, but because they don't want their brand appearing next to potentially pornographic content.
The same happened when covid first broke out. Brand conscious advertisers didn't want to be associated with any covid-related content, no matter what the context.
