Google and PPC: The future of pricing?
Google and PPC: The future of pricing?
Little did most of us realize that when Google implemented its pay per click (“PPC”) model back in 2002 the world was never going to be the same again. Most of us may not remember that Google started by focusing only on natural search. Leveraging the “Page Rank” algorithm that Larry Page and Sergei Bryn had worked on in their Stanford Computer Science PhD, Google started its path of success by simply providing the best research results. At its inception, Google offered no ads at all.
The roots of PPC go back to the founding of GoTo.com in September, 1997. GoTo.com, which changed its name to Overture in September 2001, offered a service comprised entirely of advertiser-generated listings where advertisers bid on keywords. Consumers came to GoTo.com to search for things, they clicked on keywords and advertisers paid. Overture later provided its paid listing service to partners such as AOL and Yahoo.
It’s not until October 2000 that Google entered the advertising market, more than 2 years after its launch, using a traditional cost per impression model. Google’s initial revenues were moderate. But when it announced a major overhaul to its AdWords platform on February 20, 2002, its revenues began to skyrocket. Google switched to a pay-per-click model, similar to Overture’s, except that it decided to introduce some refinements, including quality scoring, to help determine the order of paid listings. Google became a money machine (see figure below).
The PPC model is particularly interesting because it only charges the advertiser when the user actually clicks on an ad. The model is thus action based, and a better indicator of the consumer’s propensity to actually buy the product or service that is being offered. PPC works much better than the more traditional cost per impression model, and commands a much higher revenue-level per consumer. Because of the PPC model, and because of the efficiency of its auctions, the search-advertising model does a great job in matching indications of supply and demand. The auctions are an efficient way to assess the advertiser’s quality and quantity of supply. The consumer’s click is a great indicator of the consumer’s interest in demand. Demand and supply thus meet in the middle, and provide Google, with a service that essentially prints money.
Is PPC the future? A number of other settings already seem to be going that way. Take Spotify. It is free to the user (or charges a small, flat fee) and pays the content provider as a function of the number of times the song is played. The user’s actions thus drive the content provider’s revenue, in a direct fashion, kind of like a PPC model, but in reverse. The consumer clicks and Spotify pays the musician. Could the model be added by providing a quality scoring? Could a better rating system optimize the uniqueness of the service and provide more value added?
In contrast with Spotify, Netflix appears to pay fixed amounts for content, although the amounts are renegotiated often, increasing in magnitude, presumably as streaming volume increases. Could Google’s lessons apply to Netflix as well? Why shouldn’t Netflix work with something closer to Spotify’s reverse PPC model? Would the variety offered by the service improve?
The list of service providers goes on. If we examine Uber, Lyft, and AirBnB, their approach shares both similarities and differences with Google’s model. But none appear nearly as sophisticated as Google, and none appear to have deployed the same revenue engine. I wonder if more lessons from the Google and Overture model could be applied to optimize these services. Is the future of pricing in the new economy the PPC model or is Google just a unique and incredibly successful example? What else can be learned from Google’s efficiencies that can be applied to other environments? Time will tell…