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On August 22, 2007, Marissa Mayer (Mayer), who leads the product
management efforts on Google Inc.'s (Google) search products,
said that the company's quest for the perfect ad pricing model
ended with the 'Cost per Action' (CPA) model. She likened the
CPA model, which Google was testing in its flagship advertising
product, AdWords, to "the Holy Grail". In the CPA pricing model,
instead of paying for clicks or impressions, advertisers can
choose to pay for a specific action or conversion, i.e., when a
user makes a purchase, signs up for a newsletter, or downloads
software, etc.
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Google had been testing this new pricing model in
AdWords since the early 2007.1
In the widely used 'Cost per Click' (CPC) pricing model, advertisers had
to pay a fee to Google or to any of its partner's site when a user
clicked on the ads displayed alongside its search results.
This type of ads accounted for a huge percentage of the US$10 billion
that Google earned through ad revenues in 2006. However, this model was
prone to click frauds. Click fraud occurs when a publisher displaying
advertising on their pages either manually or automatically clicks a
link repeatedly in order to generate revenue.
The advertisers became the victims as they had to pay for these false
leads generated. In fact, in 2005, Google was in the eye of a click
fraud controversy and a class action lawsuit was also initiated against
it. Experts felt that Google was testing this new ad pricing model to
mitigate the risks of such click frauds and to protect its advertising
partners from such frauds.
This new model was also expected to ward off any future click
fraud-related lawsuits. Moreover, the CPA model would also enable Google
to monitor the ROI from the ads more closely than it previously could,
they said.
The advertisers seemed to be more comfortable with the CPA model as they
felt that they were less susceptible to click frauds and wouldn't have
to pay for the ads that were impotent and uncultivable. Experts felt
that the advertisers would be ready to pay a higher price for these new
ads considering their effectiveness.
However, the publishers were not too enthusiastic. They feared that this
new model would complicate their business processes as they had to
optimize the limited space available for ads to generate maximum
revenue. What's more, this model could prove risky for them as it
wouldn't assure receipt of any payment for a particular ad.
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