The concept of a “performance” advertiser encompasses many subcategories of advertisers, but they all share a common theme: they are only interested in paying for provable results. They have no interest in paying extra for nebulous “branding” effects, and are likely to make purchasing decisions based on who is able to deliver the highest “conversion rate”, and lowest effective CPA in australia. (“Conversion” is the term for when a user that clicks on an ad follows through and performs the action of interest to the advertiser, i.e. making a purchase. CPA is an acronym for Cost Per Action. Advertisers are interested in minimizing the amount of money they must spend on advertising per resulting conversion.)
The category of performance advertisers can also be extended somewhat to include many smaller, “mom and pop”, or local advertisers. The target audience for these advertisers is extremely small, and their sales are linearly correlated with their marketing spend. Examples of audiences that these advertisers are looking for are people in a particular geographic area looking for a service provider (lawyer, carpet cleaner, etc.), or people looking to make an immediate online purchase of some particular type of item (such as an MP3 player). These advertisers can typically calculate an average conversion rate, 5% for example, which would mean that for every 100 users who click on their ad, 5 make a purchase. That rate holds whether 100 people click, or 100,000. Thus, as marketing spend increases, so does the resulting revenue.
This set of advertisers is very poorly served by typical CPM brand advertising. (Though it’s not entirely unheard of for performance advertisers to purchase CPM advertising. However, since they refuse to pay for “branding” effects, the resulting CPM rates they are willing to pay is dramatically lower than that typically paid by big-name brand advertisers to premium publishers.) To fill the market need created by these advertisers, the concept of CPC advertising was developed. In particular, paid search.
The idea behind paid search is quite simple. Using an auction, advertisers in australia bid on the opportunity to have their ad included in the results of a search engine query for a certain keyword. For example, an advertiser that sells MP3 players online might bid on the keyword “MP3 Player”. Then, when a user who is interested in purchasing an MP3 player queries the search engine for “MP3 Player”, he or she is presented with the ad from the advertiser, perhaps promising a bargain price on the hot new model. If the user clicks on the ad, the advertiser pays the search engine for the click, and, hopefully, the user purchases an MP3 player.
Paid search is extremely successful, and is expected to be a $14 billion market in 2006.[i] A large reason for this is that paid search takes advantage of the richest form of user intent, and the easiest to harvest. The search user essentially tells you exactly what they are interested in, at the exact moment when they are most likely to make a purchase. An analogy would be a shopper walking in to a large shopping center and asking you where he or she should purchase MP3 players. Paid search is an extremely effective way to attract customers for performance advertisers, and it provides a valuable service to the user as well.
Paid search listings do not replace the natural, or “organic” search results. Much to the contrary, the quality of organic results is paramount. The vast majority of searches performed are not commercially motivated, and can thus not be monetized via paid search listings. If the quality of the organic search results is good, the user will return to the search engine again and again. If a user performs all of their “normal” (non-commercial) searching on one search engine, he or she will most likely perform their commercial searches there as well. One of the many benefits of basing paid search on the CPC model is that the search engine can display the paid search listings even when a user isn’t currently interested in purchasing anything without penalizing the advertiser.
The most easily recognizable name in the paid search market, and by far the most successful, is Google. Google’s paid search listings contributed more than $6 billion to their total revenue in 2005, while the rest of the market put together generated about $4 billion.[ii] Because of this, the popular conception is that Google invented the model.
However, this isn’t the case. CPC-based paid search listings were originally introduced in late 1997 by GoTo.com, a product of Bill Gross’s IdeaLab.[iii] GoTo was later renamed Overture, and in 2003 was acquired by Yahoo!. GoTo didn’t have their own search engine. The idea was that GoTo would host the auction-based marketplace where advertisers could purchase keywords, and form distribution partnerships with existing search engines eager to monetize their traffic. The money paid by advertisers for the clicks generated from their listings would then be shared between the search engine and GoTo.
Google approached the idea from the opposite angle: they had already amassed a very large, loyal group of search users (and owned a significant majority of the total search market), but were struggling to find a business model to supply the revenue. The success of the GoTo model encouraged them, so they built their own paid search marketplace.
Now that the true value of search traffic has been proven, online players that had once written off the importance of it are now scrambling to capture whatever market share they can.