Google is testing a new advertising model based on purchases rather than clicks that, long-term, could significantly shake up the web economy.
The company has invited a select group of AdSense publishers and advertisers to participate in its new cost-per-action system, according to emails leaked to the web.
While the model is not new – it has been popularized for years by the likes of ValueClick and Commission Junction – if Google can leverage its substantial user base, it’s potentially game-changing.
Google currently makes almost all of its revenue from people clicking on advertising links that are related directly to keywords they have search for or contextually to pages they are viewing. This is called cost-per-click, or CPC. Publishers displaying the ads get a cut of the revenue event.
Under the CPA model, the advertiser only pays out, and the publisher and Google only get paid, if the click leads to some other event, such as a purchase being made or a firm lead being generated. This potentially increases the bounty paid for each event, but reduces the number of events.
For advertisers trying to generate online sales, it makes sense because they only have to pay if they make a two-way connection with a potential customer. The cost of acquiring the customer can be more directly related to the revenue generated.
For publishers, CPA introduced more flexibility into how links are presented to the reader. They don’t have to be necessarily as advertising, allowing for some creativity.
For Google, introducing CPA to the mix is a potentially dangerous move, should it become very popular with advertisers and publishers. But it also has a couple of defensive benefits.
First, it could reduce click fraud. While it certainly could be possible to defraud a CPA system, it would be harder than defrauding a CPC system, where fraudsters merely need to write bot software that automatically clicks ad links on their sites.
Click fraud has been estimated to account for anything from a negligible amount to up to 20% of CPC clicks. It’s one of the risk factors that are often considered when evaluating Google’s financial health, although the company is notoriously quiet on the matter.
A CPA system could ease the reluctance of advertisers to spend big on click-based advertising, increasing Google’s overall revenue. It could also conceivably cannibalize its existing CPC revenue. Google usually gets paid whether a click is fraudulent or not.
Second, a CPA system, by tying ad expenditure more directly to revenue, would be less exposed to an overall decline in the advertising market – such as we saw in extremis during the dot-com bust years.
Google AdSense has been extraordinarily successful. To the point where a whole e-commerce ecosystem has been built up around it.
Built for AdSense websites – pages containing mostly useless content optimized to certain keywords, and three blocks of AdSense units – are commonplace to the point where they’re even affecting the quality of Google’s algorithmic search results.
This has even led to the practice of so-called domain kiting, where vast banks of domain names are reserved, filled with built-for-AdSense pages for the few cents each may generate, but never paid for.
Google introducing a new advertising model, knowing what kind of popularity and interesting exploitation ideas it could bring, is therefore no trivial event.