Google's Out to Remake the Ad World Again

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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 Snap.com, 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.

Snap.com 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 Snap.com'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.

Holahan is a writer for BusinessWeek.com in New York .