Google Testing Cost-Per-Action Ads

Google is testing an ad model that in theory isn’t vulnerable to click fraud, a serious problem that some believe puts in danger Google’s main source of revenue: search engine-based advertising.

Google has built its business on displaying text ads based on a keyword or phrase entered in its search engine or included on a webpage published by Google or by a partner publisher. In this model, known as pay per click, Google collects the entire click fee for ads displayed on its pages. If the ad is displayed on a third-party website, Google splits the fee with the publisher of that site.

While very successful, pay-per-click ads are vulnerable to click fraud, which occurs when someone clicks on a pay-per-click ad maliciously, without any intent to do business with the advertiser. Click fraud perpetrators engage in this practice for two main reasons. First, a company may want to run up a competitor’s advertising costs. Second, a website publisher may want to increase its commission revenue.

Click fraud is hard to track and detect, and estimates of its incidence vary widely, with some suggesting as many as 20 percent of clicks may be fraudulent, in which case Google’s business could be in jeopardy. Google derives virtually all of its revenue from pay-per-click ads. To a lesser extent, Yahoo, AOL and Microsoft’s MSN division also stand to lose from click fraud.

Now, Google has begun inviting some of the publishers on its AdSense website advertising network to test cost-per-action (CPA) ads, which are similar to pay-per-click ads but with a major difference: Advertisers pay only when the click yields a specific result, such as a concrete business lead or an actual sale. Some niche players already provide CPA ads, but Google’s entry into the market would bring the concept to a critical mass of advertisers.

A Google spokesman confirmed via e-mail that the company is conducting this test. “We’re pleased with how the test is progressing and will continue to gather feedback from advertisers and publishers,” he wrote.

“This type of program helps Google and other portals [like Yahoo and MSN] pursuing this type of ad product in several ways,” said Kelsey Group analyst Matt Booth in an e-mail commentary. Namely, actions like telephone calls, leads or transactions are more valuable than mere clicks, because they deliver customers who are closer to doing business with the advertiser, Booth said.

Word of Google’s test surfaced on Wednesday when a publisher in the AdSense network wrote in his blog that he had received an invitation to this test. David Jackson, editor and founder of the online financial publication SeekingAlpha, posted the full text of the e-mail, which the Google spokesman confirmed as legitimate.

In part, the e-mail reads: “The CPA ads come from a limited group of high quality advertisers that are interested in displaying ads on a CPA basis. They pay you whenever a site visitor performs a specified action, such as generating a lead or purchasing a product.”

-Juan Carlos Perez, IDG News Service (Miami Bureau)

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