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Google's Out to Remake the Ad World Again

The search giant is rolling out a broad trial for advertisers, where they pay only if they get what they want

Google (GOOG) is trying to change the advertising game yet again. On Mar. 20, the king of pay-per-click search advertising said it would begin a broad new advertising trial in which marketers will pay only when customers take a specified action, such as completing an online purchase.

For marketers focused on turning ads directly into sales, as opposed to creating a brand image, the new service may be something of an answered prayer. For all its measurability, traditional pay-per-click advertising creates waste for some marketers because it forces them to shell out each time someone stumbles upon their ad and hits the mouse button, whether they are truly interested in making a purchase or merely curious.

Action Guaranteed

Pay-per-action advertising, on the other hand, allows marketers to pay only when users actively do something that has clear value to their business. That could be buying a product, requesting a catalog, or filling out a registration form for future offers. "I think it will be popular with advertisers," says Jeff Lanctot, senior vice-president and general manager at Avenue A | Razorfish, a global interactive marketing and technology company. "Among direct response marketers there is a great appetite for cost per action."

But will that appetite turn into more dollars for Google? UBS (UBS) analyst Benjamin Schachter thinks it could. "It allows Google to present advertisers more measurable ROI [return on investment]," Schachter wrote in a Mar. 20 note to investors. "This should enable Google to better maximize revenues on its network."

It also should allay the concerns over "click fraud," the term used to describe when someone clicks on an ad to deliberately drive up costs for the advertiser without any intent to check out the site. Some marketers have complained that competitors and people who were paid a portion of advertising revenues for the ads on their site were generating ad clicks that were not from potential customers (see, 10/2/06, "Click Fraud").

Testing Stage

The Google move comes just as rival Yahoo! is making significant progress in its own pay-per-click technology. For years, Google has had a more sophisticated way to figure out which advertisers are likely to generate the most clicks—and the most revenue—for Google. But Yahoo's new Panama is a major step forward (see, 3/8/07, "Panama's Promising Early Results").

Google ran a limited test of the so-called pay-per-action service in July with a handful of advertisers and affiliated online publishers on whose sites the ads run. Rob Kniaz, a product manager working on the service, says the feedback was positive enough to warrant a broader trial. However the company is reluctant to estimate the future impact on its bottom line. "It's way too early to say that," says Kniaz. "This is something that we have been very interested in doing in response to advertiser feedback."

This test only involves 75 Google's AdWords advertisers and 75 affiliated U.S. publishers, who allow Google to place ads on their sites relevant to the context on their pages. If the test is successful, Google could potentially roll out pay-per-action ads on pages related to search results, where many of the text ads Google users see currently appear. However, Kniaz says the company does not have concrete plans to do so.

New Models

Under the pay-per-action program, marketers will be able to set a price they are willing to pay for a result that they define, Kniaz says. Publishers can then go through the available pay-per-action advertisers and choose which specific ads, or ad categories, they want to appear on their site.

The setup is a major departure from the traditional pay-per-click model used by Google and others. With that service, advertisers compete in an auction for particular keywords and can also choose on which affiliate sites they want to appear. "We are entering an era where the parties that choose what advertising is shown are shifting dramatically," says Razorfish's Lanctot. "Now it is the publishers who are saying how ads appear on their site."

Google's test is not the first time a pay-per-action program has been tried. Several online marketing companies offer such a model, including ValueClick (VCLK) and search engine, an Idealab company started by entrepreneur Bill Gross. Gross helped found GoTo/Overture, the search company acquired by Yahoo (YHOO) that is often credited with developing the pay-per-click business model. CEO Tom McGovern says he believes that all online advertising will soon adopt the pay-per-action model because advertising has been gradually moving to models in which advertisers pay only when their ads are likely to result in a sale. Online advertising has evolved, he says, from paying just to get in front of large groups of people, to paying only when the ad is targeted to someone who is potentially interested in a product or service, to paying only when a potential customer clicks on a Web site selling the advertiser's merchandise.

"A Lot of Upside"

McGovern says that, of's 3,500 advertisers, roughly 95% have opted for cost-per-action ads. "The benefit from an advertiser standpoint is they are only paying when they get their desired business result," says McGovern. "It could be a registration, it could be a download, it could be an offline lead, it could be a page view."

Because they are often paying for actions more likely to lead to sales than would a simple click on a link to a Web site, cost-per-action ads are often more expensive than cost-per-click ads. McGovern says that, on average, advertisers pay about 100 times more for a sale than they do for a lead on a customer, which is arguably what a click is. For example, an advertiser who is willing to pay 5¢ for a click on its baseball card ad is likely to spend $5 or more for a user who buys a baseball card.

However, higher prices do not necessarily translate into higher revenues for Google. Most advertisers have long been able to measure how many clicks lead to sales and have adjusted their bid prices accordingly to avoid wasting money, says Lanctot. If they move to a pay-per-action model, they may keep the same advertising budget and just change the way they are charged.

For advertisers, however, Lanctot sees a big benefit in their ability to see just which messages and Web site designs are enticing customers. "There really is a lot of upside for advertisers," says Lanctot.

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