Om Malik theorized in a recent blog post that Google's new Checkout system is designed to help Google move away from cost per click advertising to cost per conversion advertising, where advertisers are only charged if someone actually buys something. By managing the checkout process, Google has access to the data they need to charge advertisers for this ad format. Malik explains some of the advantages here:
"Lets compare the two - CPC and CPA based ads. In case of CPA, there are no wasted dollars, no click fraud, and all the revenues are coming from sales. As an advertiser, you have no risk. You sell, you make money, Google gets a piece of the action. Why would you bother with other options?"
Personally, I doubt Google is planning on ditching their PPC program anytime soon. It seems more likely that they want to diversify their revenue a bit by providing additional advertising formats to their client base. Additionally, CPC advertising doesn't even work for a large segment of Google's advertisers who aren't trying to convert traffic directly into online sales or leads. Conversion based advertising is by no means new, but hasn't been offered by Google to date.
Online Advertising Formats
Here are four common online advertising formats:
1. Impressions: Pay for the number of times your ad is displayed. Paying a fee per thousand impressions is a common way impression ads are sold.
2. Clicks: Pay for each click on your ad/visitor to your site through the ad. Google and Yahoo dominate this form of online advertising.
3. Conversions: Advertiser/merchant pays publisher a commission or flat fee for every lead or sale generated through ads placed by the publisher. This is the domain of Commission Junction and Linkshare who act as intermediaries between merchants and publishers willing to market merchant's offers in exchange for a commission on sales or leads.
4. Transactions: Advertiser/merchant pays for completed online sales. Homegain.com charges real estate agents a percentage of their commission on closed transactions.
Google currently offers #1 and #2 through their ad platform. #2 accounts for the vast majority of their revenue. The merchant plan could help them move toward #3 and potentially #4. #3 and #4 both require a shared customer relationship between the merchant (online retailer, real estate agent, etc.) and the intermediary (cj.com, potentially Google).
Does this change the playing field for advertisers? No. Does it really matter whether you're buying advertising on an impression, click, conversion or transaction basis if you're measuring the performance of your ad spend?
Which advertising options are most appropriate for your business? Whichever gives you the best return. If you're risk-averse or prefer fixed advertising costs, conversion or transaction based advertising are likely appropriate models for you. But if you have a great website that converts traffic at a high rate, impressions and pay per click advertising may allow you to generate leads or sales for less than the revenue shares expected conversion and transaction based advertising.
1. Posted by: raj on July 2, 2006 2:18 AM:
Agreed. There's no way they are going to ditch such a lucrative source of revenue. Especially for a model that probably only works for bloggers who can do copywriting and promote the products enough to get people to click on the links.