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Pay-per-click (PPC) advertising is an advertising system where the advertisers pay only for each click on their advertisements.
While it is most often used as an advertising system offered by search engines, such as Yahoo! and Google, it can also be used for banner advertising (where the advertiser pays for clicks on the advertisement as opposed to impressions). PPC is also the system on which many shopping engines and directories, such as NexTag and Shopping.com, are based. Sometimes PPC advertising on search engines is referred to as paid search.
PPC advertising revolutionized the online advertising industry, and today, advertising generates 97 percent of Google’s revenue. Google’s revenue for the quarter ending March 31, 2008, was $5.19 billion, and that figure continues to increase.Rob Hof, “Google Defies the Naysayers,” Bloomberg BusinessWeek, April 17, 2008, http://www.businessweek.com/the_thread/techbeat/archives/2008/04/google.html?campaign_id=rss_blog_techbeat (accessed June 18, 2010).
In this chapter, we’ll use PPC to refer to paid-search advertising, that is, PPC advertising provided by search engines, but we will touch briefly on other advertising systems based on PPC.
PPC advertisements on search engines are easy to spot—they’re the results listed as “sponsored links.” They can appear on the top of the results page, usually in a box, and also on the right-hand side of the results page.
Figure 7.1 The Location of PPC Advertisements
PPC advertising is keyword based—this means that it is based on the search term that a user enters into a search engine. A search term can have one word or be made up of many words. Sometimes a multiword search term is referred to as a “key phraseA multiword keyword.” or “keyword phrase.” Advertisers target those keywords for which they want their advertisement to appear.
For the advertiser, the beauty of PPC advertising on search engines is that their advertisements are displayed when potential customers are already expressing intent—they are searching for a product or service. It allows advertisers to present their offering to a potential customer who is already in the buying cycle.
You have learned that search engines display results to search queries based on proprietary algorithms. Each major search engine uses its own formula to determine what results to display for any term. All of this is available to Web users for free! With about 80 percent of Web users using search engines as a starting point,Bernard Jansen and Paulo Molino, “The Effectiveness of Web Search Engines for Retrieving Relevant Ecommerce Links,” Information Processing and Management 42 (2006): 1077, http://ist.psu.edu/faculty_pages/jjansen/academic/pubs/jansen_ecommerce_ipm2006.pdf (accessed April 3, 2008). that’s a lot of traffic going through search engines each day. So search engines require a way of generating revenue from all that traffic.
In 1996, the Open Text Index search engine began allowing Web sites to pay for a preferred ranking in selected results pages, to mixed response from business owners and other search engines. However, this was pay for placement, not that different from paid inclusion, where advertisers were paying to appear in the search results, whether or not a user clicked through to their site.
In February 1998, GoTo.com was launched. This was a new search engine that allowed Web site owners to bid for placement in the search results pages for specific search terms. Results were ranked according to how much the Web site owners were willing to bid, with the highest bid appearing at the top of the page. The Web site owner would only pay for each click, as opposed to for appearing on the results page. By July 1998, advertisers were paying up to a dollar for each click! GoTo.com changed its name to Overture Services, Inc., in 2001, and was acquired by Yahoo! in 2003. GoTo.com partnered with the portals Yahoo! and MSN to monetize their search queries.
Overture successfully patented their PPC mechanism for search engines (“system and method for influencing a position on a search result list generated by a computer network search engine” was patented in 2001) and has since then pursued, successfully, lawsuits against other PPC providers, including Google.Danny Sullivan, “Overture Files Lawsuit against Google,” Search Engine Watch, May 6, 2002, http://searchenginewatch.com/2164761 (accessed June 18, 2010). Overture initiated infringement proceedings under this patent in 2002 and settled with Google after it had been acquired by Yahoo! Google agreed to issue 2.7 million shares of common stock to Yahoo! in exchange for a perpetual license.
Google started search engine advertising in December 1999 and launched AdWords in October 2000. AdWords allowed advertisers to place keyword-targeted listings but charged advertisers on a CPM (cost per mille) basis. Google launched PPC advertising in February 2002, and today, advertising accounts for about 99 percent of Google’s revenue.