When: 1996
Where: USA
Why: The pioneering method of payment transformed the emerging world of online advertising
How: By only charging companies when their ads were clicked through, pay-per-click payment models ensured effectiveness and value for money
Who: The founders of Open Text and, later, GoTo.com
Fact: In 2010, 4.9 trillion pay-per-click ads were displayed in the USA
They’re easy to ignore, but those links that you see down the right-hand side and across the top of your internet searches haven’t happened by accident. In fact, a huge amount of effort has gone into creating bite-sized ads specifically targeting what you’re searching for.
Pay-per-click advertising, or PPC, works by charging the advertiser each time someone clicks on their link. The amount charged depends on the popularity of the search – the more common the keyword, the more it costs to get your ad displayed by the side of the search listings, and the more competitive it is too.
But there’s no doubt that PPC is one of the most effective ways to get the word out about your company. For large firms, such as Amazon, that rely on it, it means millions of clicks a day. In fact, it’s a revolutionary way of marketing – effectively guaranteeing to advertisers that every penny they spend will translate into a view of their website.
When PPC advertising was first introduced in 1996, it caused an outcry among the users of the Open Text search engine, which pioneered it. People were scandalised at the idea that the ads were presented as text-only results: they could hardly believe anyone would try to confuse innocent web users by attempting to pass advertising off as real search results (despite the fact that they were clearly labelled).
But, as a model, PPC isn’t completely new. In fact, the idea has been around for some time. Since the 1950s, savvy advertisers had been negotiating deals with publishers whereby they would pay the publisher a commission for every response they received to their ad in a newspaper or magazine. If they didn’t get any responses, they didn’t pay – exactly how the PPC model functions today.
As with many good ideas, though, the idea to show simple, text-based ads alongside search results was rejected outright after that outcry from Open Text users. In fact, for a while, advertisers reverted to brightly coloured (and, during the 1990s, increasingly irritating) banner and pop-up ads. These were sold on a cost-per-impression basis – that is, the advertisers paid up front for their banner to be displayed X number of times per month.
It wasn’t until 1998 that the idea of paid search was resurrected by a little-known search engine called GoTo.com. At the time, GoTo sold all its listings to the highest bidder, based on the idea that the websites willing to spend most on appearing at the top would probably also be the most relevant to the user’s search.
In hindsight, that model had various flaws – but GoTo’s Eureka moment came when it decided that it would charge advertisers not for impressions, but for the number of people who clicked on their ads. The ad could be viewed by plenty of users, but unless it was relevant – unless someone clicked on the link – the advertiser didn’t pay a penny. Not only was it the ultimate indication that the ad was effective, but it opened the internet up to a whole new generation of small advertisers with restricted marketing budgets.
GoTo’s problem, though, was that, as a search engine, it simply didn’t have enough users to create the number of clicks that would translate into anything like the kind of money it needed in order to sustain itself.
But this was still the early days of the internet, and companies like GoTo were flexible enough to change their model entirely.
Thus, GoTo decided to do away with its search offering altogether, instead partnering with other search engines. Its idea was simple: the search engine would provide the results, while GoTo would provide the mechanism and software for advertisers to place ‘sponsored’ links at the top of the search listings, and they’d split the revenue between them. It worked. By 2001, GoTo was powering the sponsored search engines of MSN, AOL, Alta Vista and Yahoo!.
Google came up with a way to ‘rate’ ads and decide which ones should be at the top.
The one search engine it couldn’t persuade to use its services, though, was Google. Despite its attempts at persuading Google to go into partnership, the search engine’s founders, Sergey Brin and Larry Page, had clearly seen the potential of PPC and didn’t want to share their slice of the pie.
Google’s own offering, though, faltered at the first hurdle. Launched in 2000, it was still based on the classic banner ad payment model of ‘cost per mille’: advertisers paid per 1,000 impressions, rather than per click. After about six months of failing to persuade advertisers to part with their cash, Google realised that it was wrong, and decided to opt for GoTo’s PPC model – with a few crucial changes.
The thing that set Google’s new offering apart from its rivals was its bidding model – the amount advertisers bid to have their ads displayed at the top of the page. Google realised that users won’t automatically click on ads if they’re not completely relevant. In order for them to click on the link (and thus, for Google to get its revenue), they need to be displayed next to the most targeted results possible.
Google came up with a way to assign a ‘quality score’ to ads. Combining the keywords advertisers used in their copy, the quality (and popularity) of the page the advert linked to and the click-through rate, Google came up with a way to ‘rate’ ads and decide which ones should be at the top. An advert’s ranking would depend on its relevance to a particular search, the relevance of the landing page it linked to, and the number of clicks it received.
Using an algorithm, Google then combined these three factors with its bidding system – so while advertisers couldn’t simply buy their way to the top of the page, they were still expected to pay a certain amount to come higher. The user found what they were looking for, the advertiser had their website viewed and Google got more in ‘unrealised revenue’ – everyone was a winner.
While its new AdWords offering caused a storm among online marketers in the early 2000s, it was the birth of Google AdSense in 2003 that really started to bring in the revenue. Google came up with a simple piece of code that allowed webmasters and bloggers – or affiliates, as they’re known – to place ads on their own websites, thereby getting their own share of the revenue.
This innovation meant that businesses were no longer limited to simply advertising alongside search listings. Using the same system as its search engine listings, AdSense picked out keywords from the text of a website or blog and displayed highly targeted, relevant ads next to it. It caused a sensation – everyone from the smallest bloggers to some of the most popular websites on the internet began doing away with gaudy banner advertising when they realised they could generate cash using Google’s discreet, more relevant ads instead. Bloggers, in particular, were highly impressed: here was a way to make money out of their hobby, with very little hassle.
Having bought GoTo, later renamed Overture, in 2003, Yahoo! was reasonably confident that it knew how to maximise the financial potential of its new acquisition. And anyway, there was no way of telling how much Google was making out of its own offering, because it didn’t publish its financial information.
The advantage for business owners with the PPC model was that, because it was based on clicks, rather than impressions, they could be confident their ad was working, every single time.
Until 2004, that is, when Google went public. As the rest of Silicon Valley continued to lick its wounds after the dotcom bubble’s disastrous burst three years earlier, Google geared up to list on Nasdaq. There are reports of uproar in the Yahoo! boardroom when Google’s first quarterly results came out: not only had AdWords gained considerable market share, but somehow, Google was managing to make three times the amount of revenue that Overture was making – per search.
There’s no question that the marketplace was shaken by the revelation: not only did it prompt various search engines to switch from Overture, or Yahoo! Search Marketing as it was then known, to Google (by 2006 Overture had lost all its partners), but it also suggested to rival search engines that the only way they could maximise revenue from search advertising was by building their own systems. Suitably encouraged, Microsoft’s MSN network began work on its own version of AdWords.
It was months, though, before Yahoo! announced that it would be getting rid of its old bidding system in favour of something decidedly more Google-esque. By the time Yahoo!’s version of the quality score system was launched, in 2006, the company was way behind Google in terms of innovation. And while Google had spent the time tweaking its algorithm, thereby increasing the amount of revenue it made, Yahoo! had merely been struggling to keep up.
It wasn’t just big businesses that were affected by AdWords. Many small businesses’ marketing options were changed for good, too. Now, instead of spending on ads in the classified sections of newspapers, or even big banner ad campaigns on websites, businesses could designate an exact amount to spend on search engine marketing – and when the limit they had set had run out, their ad wouldn’t be shown any more. The advantage for business owners with the PPC model was that, because it was based on clicks, rather than impressions, they could be confident their ad was working, every single time.
Since AdWords’ inception, Google has continued to hone its algorithm in order to keep ads as relevant as possible. This, in turn, has affected which advertisers make it to the top of searches. It has also spawned a new industry in search engine marketing. Companies charge a premium to help clients phrase their advert correctly, and will even recommend changes to a client’s website to give it as good a chance as possible of reaching the top of the results.
In the UK, with consumers making almost five billion searches a month … paid search marketing is now the single largest form of online advertising.
And while Google is now the clear market leader in search, capturing 65.1% of web queries in the USA in July 2011, competitors have been working hard to catch up. Microsoft has continued to enhance its search offering, culminating in the launch of Bing in June 2009, while a strategic alliance between Bing and Yahoo! appears to have enabled both players to strengthen their market positions. Comscore figures show that Bing commanded a respectable 14.4% of the US search market in July 2011, while Yahoo! maintained its second-place position, with 16.1%, up from 15.9% in June.
Meanwhile, search engines have become one of the most popular ways to spend advertising money. In 2010, the search engine marketing industry in the USA alone grew by 12%, as cash-strapped advertisers were attracted by the prospect of seeing exactly where their money was going. And this growth shows no signs of abating. A recent study conducted by Econsultancy and SEMPO (Search Engine Marketing Professional Organization) predicted that 2011 spending in the North American search engine marketing sector will grow from $16.6bn to $19.3bn in 2011, an increase of $2.7bn.
Meanwhile, in the UK, with consumers making almost five billion searches a month (according to ComScore, November 2010), paid search marketing is now the single largest form of online advertising, owning a 60% share of the market.
That’s undoubtedly due, in part, to the tools that the likes of Google, Bing and Yahoo! make available to advertisers, allowing them to track everything from the number of clicks they receive every day to the most popular search terms, and even the percentage of clicks that translate into sales. In fact, advertisers are allocating greater proportions of their advertising spend to PPC every year, moving away from more traditional forms of advertising – in particular, local newspapers and printed magazines. PPC finally gives marketing executives the answer to their key question – which half of their advertising spend works? With return on investment easy to calculate, PPC seems set to remain an important part of the marketing mix for the foreseeable future.