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

by Catherine Holahan

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 BusinessWeek.com, 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 BusinessWeek.com, 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.