Why Cost Per Click ads are unfair to publishers

by Jason Preston on June 25, 2008

In February of 1998 Bill Gross, the founder of Idealab, launched a new search site called GoTo.com.

The basic idea behind GoTo.com was fairly simple: Gross figured that if he could buy generic web traffic (around 5 cents per visitor) and then resell that traffic as targeted traffic (which is inherently worth more), he could play the traffic market and make a killing.

He further reasoned that the best way to turn random web traffic into structured, goal-seeking web traffic was search.

Removing the risk

Gross knew that launching a new search engine where the results pages where made up of paid listings would only work if he had paying customers. So Gross had a dilemma: he had to convince people that search keywords were worth paying for.

In his book The Search, John Battelle explains how Gross approached the issue:

Gross solved his problem by adopting the time-honored approach of dumping—or perhaps drug dealing is a better comparison: the first one’s free (or nearly so). Gross built not one but two entirely audacious ideas into GoTo’s initial business proposition for advertisers: first was the concept of a performance-based model—one in which advertisers paid for a visitor only when a visitor clicked through an ad and onto the advertisers’ sites. Instead of demanding upfront money from advertisers, the way AOL or Yahoo did, GoTo.com’s model guaranteed that advertisers had to pay only when their ads were clicked upon. Of course, this is now the standard model for the multibillion-dollar paid search market.

Second, and even more audacious, was how Gross priced his new engine: one cent per click, an extraordinary discount to the market. He knew his price was seven to ten times less than what every Internet marketer was paying at the time, and in an environment where traffic was crack,
advertisers couldn’t help but look to Gross for a fix.

In essence, in order to convince people to advertise against an unproven metric (keywords), he removed all of the risk from the purchase.

Of course Google saw what Bill Gross was doing, thought it was a pretty good idea, and the rest—as they say—“just happened.”

The accidental marriage

What Gross might not have realized (or might have known perfectly well but didn’t care) is that the “pay only when you get a click” model is a terrible loss for anyone who actually has to produce their own content.

Adsense is such a success for Google because almost every page they serve is populated with links. Aside from server costs (which have shrunk significantly, unlike the cost of paying writers), Google pays nothing to display that page.

Beyond that, people go to search engines in order to find and click on links. Pay per click makes perfect sense.

The problem is that pay per click is a late nineties engineering solution to a business problem that has been accidentally married to an age-old publishing service. If it works for Google, it must work for everyone. Right?

Wrong.

What if advertisers only paid for print ads when a subscriber responded to their campaigns?

Google, Yahoo!, Microsoft, TextLinkAds, and all the other pay per click ad networks are not actually selling advertisements. They are selling traffic, which is an entirely different product.

To their credit, many big online publications are sticking to as much Cost Per Impression (CPM) ad sales as they can. But the push for Cost Per Click (CPC) ads is pervasive, and comes mostly from advertisers (who know what a great deal they’re getting) and consumers (who don’t realize what a sour deal publishers are getting).

Got Milk?

Why are there advertisements for milk?

Everybody knows that milk exists. The whole point of the “got milk” ad campaign is so that the next time you’re at the grocery store, you stop and think “have I got milk at home?”

The truth of the matter is that there are advertisements for milk because the ads get people to buy more milk. Not because you saw the ad and immediately thought “oh yeah! Milk! I’d click that!”

When a company makes an ad purchase, they’re getting a lot more than just some traffic. They’re also getting mind share, positive brand association, brand exposure, and hopefully a gain in reputation.

A recent study even showed that people exposed to search advertising routinely spent 26% more than consumers who did not see any advertising, and that nearly 90% of the sales generated by online ads (in addition to the sales credited to offline ads) actually happen offline in brick and mortar stores.

In the CPC model, there’s a lot of real value to be gained by placing an ad that nobody ever clicks on.

Cost Per Click was never designed to incorporate the intangibles of print advertising because Gross never intended to place the listings next to original content. GoTo.com was supposed to be a marketplace of links, where various sites jockeyed for pole position on search terms by playing the proverbial game of chicken (how much will my competitors bid? $1.32? $1.33?).

CPC has been co-opted by search and labeled as advertising, and as a result it’s hurting publishers everywhere by making it impossible to sell your brand instead of just your traffic.

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{ 4 comments }

1 Matt Hanson 06.25.08 at 9:00 am

Good writing. Keep up the good work. I just added your RSS feed my Google News Reader..

Matt Hanson

2 Mischa 09.02.08 at 11:57 pm

Cool history. But how do you convince advertisers? I’m not sure if linking to that study would do it for newspapers.

It seems to me like the only way is to increase the value of impressions.

If I could only show my ad for botox to only 40+ year-old women with an income of over $200,000 a year, I might go for per-impression.

Until the isps decide to be evil (which is where they’re headed), it’s hard to know that kind of information.

Of course, increasing the value of impressions could also be done by manipulating perceptions.

The nyt should commission massive studies at Harvard that say that pay per impression ads are lucrative.

3 Jason Preston 09.04.08 at 12:49 am

It’s a good question – how do you get advertisers to pay more than what’s already becoming “industry standard?”

In my mind, it’s all about metrics. As a publisher you need to provide metrics to help advertisers measure the effectiveness of their campaign.

I bet an advertiser would spend more money at a publication that gave them detailed measurement statistics every time they ran a new campaign. It’s worth the extra cash.

And as an added bonus, if you can measure the effects of CPM advertising effectively, then you can charge for them as well.

That’s the route that I would take.

4 demt 10.09.08 at 10:41 am

at least i now know why ive gone bust
every other struggling musician should read this

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