July 19th, 2006

The Transition of Online Advertising From Clicks to Conversion

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With click fraud moving quickly from the ridiculous (Clickmonkeys) to the absurd (“gangs” of click frauders), Google is clearly positioning itself for the coming transition from a click-based online advertising economy to a conversion-based online advertising economy.

Every day new evidence is emerging that Google’s new landing page quality scores and Google Checkout are all part of larger strategy to transition to a new advertising market where they control the value chain from attention to transaction.

Some of the power users of the AdWords/AdSense system like Graywolf are getting hit by Google’s effort to seize control of the system:

Over the past few days I’ve had a large number of my keywords disabled for “low quality” ( see Threadwatch.org). Other than the merchant the only sites who’s ads I see running where my keywords were disabled happen to be the big publishers such as eBay, shopping.com, bizrate.com and so on. I find the double standard of big guys getting keyword research on a silver platter while I can’t even get a straight answer as to why my ads are disabled very disturbing to say the least.

The problem for Google is they have a tremendous amount of crap in their system, all of which they incented. More interestingly, in the case of Graywolf, the issue is not crap but lack of Google control:

The landing page is not an arbitrage page, it’s a single product with descrption and a buy now button. The buy now button goes through a redirect page (for my tracking) and then onto the merchant. Since it’s an affiliate product getting them to put the google conversion tracking code is not an option, and to be perfectly honest shouldn’t enter into the equation.

And indeed, further evidence emerged today that Google is trying to drive gaming of the affiliate marketing systems out of AdWords (from Search Engine Roundtable):

A WebmasterWorld thread shows a conversation one Google AdWords advertiser had with his representative. Basically, what it says is that Google will be doing what they can to remove affiliate ads from the AdWords program.

To make the transition from clicks to conversions, Google needs to seize control of the system from end to end, and somehow find a way to control for fraud, which is still very much a risk with cost-per-action (from a comment on one of my recent posts on this issue):

What could save PPC value relative to CPA is just how difficult will the CPA model prove to be to implement? How do you monitor the middlemen? How do you monitor the merchants? Would any fraud simply be shifted from adsense publishers and random people clicking to Affiliate marketers and deep pocketed advertisers?

Markus from Plentyoffish.com has a similar concern:

My biggest concern these days when doing CPA stuff is am I going to get screwed over by the middle man? I can tell you there are a LOT of affiliate networks that are skimming off the top. Now even if you go direct to merchant what is the chance that the merchant isn’t going to screw you over? Lets say they decide to report only 80% of the leads you actually generate? Now in the CPA world this happens all the time, you have to remember these are the exact same people that will do anything for search engine ranking and do any kind of spam as long as they don’t get caught. Advertisers have also created 2 billion dollar adware industry, whose sole job it is to hack your computer and display ads. There are a lot more advertisers out to screw people over then there are people trying to game google adsense.

I was intrigued by the response to these concerns from Brian Wiegand at Jellyfish:

I agree completely with you about the difficulties of implementing a CPA based ad sytem and dealing with the trust issue (which has been called CPA fraud) with merchants participating in the advertising. They clearly would have an incentive to not report transactions which would be a nightmare for the intermediary. This is why at http://www.jellyfish.com we have built a CPA based advertising auction that actually brings another VERY interested and important party into the mix – THE CUSTOMER. We give a customer a share of the CPA advertising. This erases the CPA fraud issue because There are 3 parties involved that all need to get their share of the transaction. If a merchant doesn’t report a transaction we would have a very angry customer that would let us know immediately This eliminates the CPA fraud issues altogether and actually drives some additional value to the consumer who arguably deserves more for their attention and participation with advertising.

It remains to be seen whether involving the customer in the transaction incentive can act as a check again fraud, but I imagine that Google has similar ideas in mind when it waves the “user experience” banner over its efforts to drive uncontrollable affiliate marketing out of the AdWords system.

AdWords worked because it offered advertiser a much more accountable, more controllable, and, thus, more efficient advertising system, but it was only a transitional stage. The real question now is which system(s) will drive the next big leap in efficiency, and who will be able to earn (or keep) advertisers’ trust. For Google, the question is whether their tremendous scale will enable them to keep advertisers with them through the transition.

Comments (9 Responses so far)

  1. The right methodology for CPA already exists and is being used in offline transactions every day.

    Hint: Upromise, Rewards Network, EScrip.

    The problem with those businesses is that they don’t do anything to stimulate user action.

    It’s a cornerstone of what we’re building at Pegasus News. There are still issues to be worked out, but the model is there.

    So clear to me that it drives me crazy to see people floundering over this — but perhaps that’s just my personal windmill-tilting madness.

  2. Personally I would be thrilled if Google games all but the best affiliates out of its system. I do not see the value in 90% of the affiliate sites I see.

  3. If Google does not cull the junk from their results through various relevance measurements over time the quality of their paid results will deteriorate and people will over time begin to ignore them. When something is disabled for “low quality” it is not getting the same level of click-throughs as other sites on that keyword relative to its position. It is simple really.

    I don’t know what words Graywolf was removed on but the likely reason is that his ads do not perform as well as others on those words. In addition as a user, I do not want to land on a site that is an arbitrage for Google or other ads. Also the argument that the big publishers are getting keywords handed to them on a silver platter is moot as well. Such is business. Large companies get account execs to help them spend. Small companies don’t. It is that simple. The days of being a small niche player in the realm of adwords are coming to an end. The bargains, especially for arbitrage sites are harder to find. To be quite honest I think it is a wise move for Google to cull out the arbitrage sites that they come across – ultimately these sites will have to provide more and better content which is better for tue user.

    Mind you none of this is to say that Google is not trying to assert more control and get a bigger piece of the pie and/or move into CPA advertising. They should. Like any business they need to evolve and change. In the process, there will be people crying foul, but usually, those people are a very small minority and usually, as much as those people would like to think otherwise, are not high on Googles, or Yahoo!’s appeasement list.

  4. It’ll be a shame if Google goes too far, because many super affiliates are much more adept at AdWords marketing then the companies they represent.

  5. Brian, yes indeed — problem for Google is that the payment for the click doesn’t represent a big enough piece of the action — especially given that the “action” is likely to grow.

  6. [...] for the continued doubling of profits. Scott Karp – July 22nd, 2006 | Email | Print | Link Article Tags: Advertising ROI, Online Advertising, Google, Advertisers, Advertising,PPC [...]

  7. [...] Scott Karp has been on top of this issue, mainly from an affiliate marketing standpoint, and I agree with him that a transition from pay-per-click to cost-per-action is beneficial to both Google and advertisers. But the reasons for the recent trauma may not be all that nefarious, and instead simply a reflection of the way Google tends to evaluate relevancy. [...]

  8. [...] At Jellyfish, we believe that the Internet is rapidly moving from a click-based economy to a conversion-based economy.  Five years from now, we will look back at this time as the zenith of the Gross National Click (GNC) economy online.  Google moved advertising from impressions to clicks, but at the end of the day it is the sale of goods and services that makes the world go around.  And the Internet makes it possible to create a new, more accountable kind of advertising that is directly tied to the GNP, and not just the click.   [...]

  9. [...] Scott Karp has been on top of this issue, mainly from an affiliate marketing standpoint, and I agree with him that a transition from pay-per-click to cost-per-action is beneficial to both Google and advertisers. But the reasons for the recent trauma may not be all that nefarious, and instead simply a reflection of the way Google tends to evaluate relevancy. [...]

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