If you've interacted much with the Internet in recent years, you probably understand that it's watching you: Web companies have found ways to tailor the ads you see to what they understand about who you are, based on how you travel through cyberspace. Buy some shoes on Zappos? You'll see similar models in Gmail ads. Visit a lot of left-leaning news outlets? Democratic candidates might start popping up on Facebook.

But it's not just what you read and buy. The music streaming service Pandora, which has in the past sold ads based on their customers' Zip codes, is starting to figure out what ads might be most effective based on what kinds of songs you listen to. And given that the primary business model for consumer web applications is figuring out more about you for the purpose of helping advertisers reach likely customers -- targeted ads are much, much more valuable than ones that are randomly scattered -- this is likely just the beginning.

So, what kinds of other ad targeting innovations can we expect to start noticing? Well, you might not ever  actually notice them. But here's what's in the works, with the help of Michael Cohen, an assistant professor with the Center for Measurable Marketing at New York University's Stern School of Business.

Digital ad revenue is rising fast, in part because targeting is getting so much better. (Interactive Advertising Bureau)

1. Profiting from losses

By now, "retargeting" is standard practice in digital advertising: Catching people after they've left your site, and showing them ads to plant reminders about the site as they browse further, in hopes that they might come back and actually buy something. The next iteration of retargeting is being able to tell whether a browser is likely to "convert" -- marketer-speak for "buy something" -- and to show them ads for your competitors if they're not. Take travel Web sites, for example. "If this person wasn't likely to buy anything at Travelocity, at least you can get some advertising revenue out of it," Cohen says, by showing ads for Orbitz or Expedia. Those ads are tremendously valuable because they target people who are definitely interested in traveling, and very likely looking for alternatives.

2. Catching you when you're ready

It's one thing to advertise something to someone who's probably interested in the product. It's another to catch them at the time when they're most likely to take action. For example, people use their mobile phones for different purposes: In "Me-time" or "download" mode, they're browsing around, maybe bored on the subway. That's the best time to hit them with an ad -- not when they're in "productivity" mode, maybe e-mailing people or checking their flight status before heading to the airport. "It's awfully important for an advertiser to know what mindset people are in," Cohen says. "Not just what people are doing, but why are they doing it."

3. Putting together all the pieces

Some media monitoring companies, like Nielsen, know a lot about what we watch. And credit reporting companies, like Experian and Equifax, know a disturbing amount about what we buy. Right now, though, those categories of the consumer experience are largely cordoned off from each other. Analysis firms get some sense of this kind of stuff through pulling together groups of consumers who agree to record all their purchases and media consumption habits -- but that's voluntary, and participants tend to leave out some purchases, like feminine products and birth control.

The holy grail of marketing is a more comprehensive understanding of how people live their lives. To that end, Neilsen and Experian have cut a deal to merge their datasets so that advertisers can know a household's income, education level, family status, and buying habits. In the future, it's not hard to imagine companies like Google and Facebook bringing their data to bear as well, creating an all-encompassing consumer profile.

"People are running around out there leaving traces of their behavior, and we can bring it all together and have single source data," Cohen says. "And the possibilities are really endless with what you can do with this stuff."

The problem is, consumers start to get a little jumpy when they realize how closely they're being watched -- which is why this stuff will phase in gradually.

"It's going to be a slow process," Cohen says. "Companies want to be careful, but they also know how valuable it is. It's this slow transition of people giving up their identities. You could definitely do a lot of damage to your brand if you're seen as violating peoples' basic rights."