Digesting Google's New PPA Advertising Product

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Google announced the testing of a new pay-per-action, or PPA, advertising product today. It’s important for a number of reasons, not the least of which is the fact that Google controls so much of the online advertising market that just about anything they do in advertising has real consequences around the Internet.

Background

Until now, Google has primarily sold cost-per-click, or CPC ads. Advertisers pay a fee when someone on Google or a Google partner site clicks on the ad and is delivered to a web page designated by the advertiser. Advertisers like this because they only pay when a potential customer is in their hands. They don’t like it because of click fraud – publishers and advertiser competitors have an incentive to click those ads and generate revenue (or just cost to the advertiser). Since Google has a short term financial incentive to actually promote click fraud, there’s been a lot of debate around the subject over the years.

PPA advertising is meant to mitigate the risks of click fraud. Now the advertiser pays only if a customer has been delivered to a website and takes a further action, such as buying a product or filling out a web form.

Like CPC ads, PPA advertising wasn’t invented by Google. Search engine Snap has been selling ads this way for some time, for example. Another startup, Turn, is also in this business. As are others.

PPA requires an additional level of complexity in the ad network as well. Previously, Google delivered a user to a website, and sent a bill for the click. Now, Google needs to verify that an “action” has occurred by receiving confirmation back from the advertiser.

The advertiser will of course have an incentive not to confirm the action, but Google will be able to easily adjust for this. Like CPC ads, PPA ads will be ranked by profitability to Google. Google need only calculate the average value of a click to a PPA advertiser, and those ads can then be ranked by profitability. CPC and PPA ads could even be mixed, although Google isn’t doing that yet.

Consequences

This won’t affect big advertisers much, because they already track ROI on CPC advertising very closely. For smaller advertisers though, click fraud can wreak havoc. The ability to largely filter out click fraud will help them track ROI much more closely that they previously could. This will be a big help for them.

Affiliate marketing networks like Commission Junction and LinkShare are screwed. These networks also operate on a cost-per-action basis, mostly with online retailers. Even though some of them have scale, they will not have the ability to compete with Google on sheer size of network. Advertisers flock to volume, which drives average pricing up. When prices increase, publishers flock to the new platform because they’ll earn more. Look for serious publisher leakage from the big affiliate networks over time as this new product scales up. If you want to argue this point, note what happened to the stock price of Commission Junction’s parent company, ValueClick, today. And that’s even though the market has largely adjusted for this news already – this move to add PPA ads has been rumored for some time.

This should be good for Google’s overall market share and long term revenue growth. Anything that drives fraud out of the network will get advertisers to actually spend more money, not less, as their ROIs increase.

And Yahoo is now in the unenviable position of playing follow the leader again, even as they catch their breath from the massive Panama release earlier this year.

Oh Yeah, Google Also Released…

Google also announced a new “text link format” ad unit today. This was mentioned in the fourth paragraph of the blog post (not exactly highlighted), and is also discussed in the PPA product FAQs:

What is the text link format for pay-per-action ads?
Text links are hyperlinked brief text descriptions that take on the characteristics of a publisher’s page. Publishers can place them in line with other text to better blend the ad and promote your product.

For example, you might see the following text link embedded in a publisher’s recommendatory text: “Widgets are fun! I encourage all my friends to Buy a high-quality widget today.” (Mousing over the link will display “Ads by Google” to identify these as pay-per-action ads).

Though the maximum length of a text link is 90 characters, we’ve found that shorter links perform better because they allow the publisher use the link in more places on her/his site and in different context. The maximum length is 90 characters but less than 5 words is best. Even better, just use your brand name to offer maximum flexibility to the publisher.

No longer will Google ads need to be confined to their own space on the site – publishers can subtly embed ads right into hyperlinks within the main content of the site itself (see second paragraph of quote above). Other companies already do this, but Google has never tread into the “advertorial” space before.

They’ve crossed a hazy ethical line here. If this product was announced on its own, it would be heavily debated by the blogs and press. But by burying it in other, bigger news, they’ve mostly avoided the critical analysis that this actually deserves.

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