Gilt Groupe Inc. has acquired most of its more than 5 million members by word of mouth, as shoppers tell their friends about the deals they can get on fashion apparel and other items through Gilt’s limited-time deals. But Gilt has found that it can profitably cast the net more widely with online display ads that are targeted to find the right kind of customers, says Jason John, senior director of marketing.

Gilt, No. 49 in the Internet Retailer Top 500 Guide has been working for the past year or so with MediaMath, whose technology automates the bidding process across online advertising exchanges, enabling clients to put ads before the kind of consumers most likely to become loyal customers. “Their algorithms are able to optimize who is seeing that ad, and make sure these are people who are very likely to become members and customers,” John says. “It’s a level of targeting we can’t get to internally.”

He emphasizes that Gilt is not just interested in finding customers who will sign up to receive e-mail notices of its daily sales. The e-retailer wants customers who will buy often, and who will refer friends who will buy often. And that’s what Gilt measures. “We track members from each sources, mostly within a year, to see from money spent and members acquired how much are they purchasing and how often? And are we covering the cost of acquiring them?”

MediaMath, he says, has outperformed similar online ad-buying systems by driving 8% more traffic at the same level of ad spending and generating a 10% higher conversion rate.

It’s all about finding the right customers, John says. “We’re not interested in the volume of members but the quality of members,” he says. “How many are converting to become customers and how much in revenue they’re giving us in a year.” Gilt’s target audience is higher-income women. 61% of its customers are women and 64% have annual incomes above $60,000, according to data supplied by web measurement firm Compete Inc. for the Internet Retailer Top 500 Guide.

Gilt initially paid MediaMath on a cost-per-acquisition basis—that is, paying a fee only when the customer took certain actions—but as the program grew the companies modified the fee schedule to take into account broader ROI criteria, MediaMath says, without providing details. Founded in 2007, MediaMath has 140 employees and offices in New York, Boston, San Francisco, Chicago, Los Angeles and London.

John will be speaking at the Internet Retailer Conference & Exhibition  in a session entitled “The many flavors of a social strategy: What will work for you?”