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Why Google Is Doing Checkouts?

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The discourse and discussion in the blogosphere today is Google Checkout.

“The goal here is to make it be one nanosecond from the time the customer decides to buy to the time the transaction is complete and the product is on the way,” Eric Schmidt, Google CEO says in an interview with The New York Times.

End of CPC Advertising?

Read between the lines – this is a dangerous and most brilliant assault on the “cost per click” (CPC) plans of Microsoft, Yahoo and everyone else who is coming to the party … late. This move is about cost-per-action advertising. It is about kicking up the online advertising business … another notch!

Lets compare the two – CPC and CPA based ads. In case of CPA, there are no wasted dollars, no click fraud, and all the revenues are coming from sales. As an advertiser, you have no risk. You sell, you make money, Google gets a piece of the action. Why would you bother with other options?

Who Is Impacted?

This move impacts three companies mainly – eBay, Yahoo and Amazon – because these are the three premier gatekeepers of online point-of-sale info. Google doesn’t have the information, and needed it. If (bold for a reason :-) ) Google can make the Checkout work, the three giants suddenly have lost their advantage over Google.

Having said that – Amazon and eBay are more at risk. Despite having a large number of “proprietary eyeballs,” they lack their own advertising system, and need to depend on third party. Both should have built one, but they didn’t. Costly mistake perhaps, since they have existing merchants & eyeballs, and could certainly monetize their own traffic if they did.

Yahoo is in a better position comparatively speaking since it has its own advertising system. (Maybe there is room for a big merger in the web-space? Sramana Mitra believes eBay+Yahoo should just get on with it.!) A closer alignment might be necessary if these companies need to create a CPA based advertising model, and thus blunt the Google incursion into their e-commerce sales / reduce their advertising costs (many of which go thru Google).

Why Google Is Doing Checkouts?

Going forward, the much talked about Google Payment system (the Paypal rival) could give them even more leverage and hurt rivals in the process. But in a larger scheme of things, it could be trivial. Why because for Google, the real advantage is not just to gain payments market share & revenue, but to increase AdWords sales and reduce click fraud through the creation of a fundamentally better advertising system — that is, CPA-based ads.

Yahoo / eBay / Amazon had one significant advantage over Google the past few years — knowing point-of-sale data. As of today, it is not that much of an advantage. Sure they can launch CPA-based ads themselves also, but by the time that happens….

41 Responses to “Why Google Is Doing Checkouts?”

  1. Great Article Om, this will surely make all the incumbents scurry to make their offerings customer-friendly. The Simplicity of the “One account to rule them all” Approach of Google, is quite enticing and will surely have far reaching effect on the way people live, work and play.

    I strongly feel that Google has hijacked Microsoft’s punchline “where do you want to go Today?”, by giving people just One box to make their wish and bingo they’re served:) and this truly an intriguing prospect.

    They seem to be oncourse to a Grand Plan, which only Time will unravel.

  2. How is this for a very simple solution – CPM (COST PER MONTH)

    An advertiser offers a fixed monthly amount for what he is willing to pay Google. This eliminates all concerns about click-fraud, simplifies the debate between CPC, CPA, CPS, … and lets advertisers fix costs.

    For example (Agoracom deals with finance sites)

    I’m willing to pay Google $2,500/month to market my keywords on finance sites and Google search. As such, I receive a pro-rata amount of context ads and paid search results relative to my competitors. As such, I no longer care about click-fraud because my performance is based on my budget relative to my competitors with the same terms, not click-throughs.

    For affiliates, Google pays them a pro-rata amount based on number of click-throughs and ads served relative to other sites. If there is a click-fraud issue, its between the sites and has no affect on advertisers.



  3. To expand on Jeff Molander’s point that CPA netowrks are not fraud-proof:

    The core problem is that spyware and adware can “grab” CPA commissions on transactions that would have happened anyway (even had the spyware not intervened). For example, spyware can wait until a user goes to the Dell site, then invoke a Dell CPA link to get commission if the user makes a purchase from Dell.

    Think that’s just speculation, and that it doesn’t really happen? Think again. See . See . Everything discussed there is CPA fraud.

    CPA fraud may be a notch harder than PPC fraud. But it’s quite doable, and it’s been happening for years through most advertising-type spyware.

  4. Jesse Kopelman

    Since data can only travel through about 1 foot of cable in a nanosecond, Google is going to have to invest googles of dollars in distributing servers to cover the entire surface of the planet. I would have thought Eric Schmidt would be better at math, but I guess that’s why he’s the CEO and not an engineer.

  5. Om:
    You’re dead-on target and, indeed, this is merely another choice for advertisers not a signal of CPC to CPA conversion — although CPC is absolutely under fire (not just limited to Google but Yahoo now too).

    Readers need to focus on your comment in bold type font!

    Yet please be aware that CPA is absolutely not fraud-proof. I helped found a CPA “affiliate” network that Doubleclick now owns… and the entire “adware/spyware” dillema reaches into big brand advertisers.

    Then again, how do traditional affiliate (or even worse) CPA networks deal with fraud? That’s right, in reality they don’t deal with it… to the delight of advertisers who fund it… they pay it some lip service when needed otherwise they ignore it and keep ringing the cash register.

    I’ll stop at this point but provide more insights and backup that last statement here if anyone’s interested.

  6. Om,

    Microsoft maybe lagging in CPC/CPA based ad model but tell me how is Google Checkout different from Microsoft Passport effort which is currently subdued(atleast appears to be)?
    One thing is for sure, it is not just Passport, but it is more than that like most of the other folks have already said above. Maybe you can get to know from your sources in Google(Spy a little bit on Product Manager, LOL)

  7. Erik Schwartz

    How are they going to prevent advertisers who have no plans to sell online (say car manufacturers) from signing up and getting their ads for free?

  8. I’d argue that what Google is actually doing goes beyond CPC vs. CPA.

    What they’ve actually managed to do is come up with a model that “unhooks” the cost of the campaign from any real direct connection to click-throughs or actions. Instead users will begin to look at their aggregate costs based on total CPC expenditures vs. savings on Transaction fees (The $10 in purchases free for every $1 in adwords spending factor). Google will get the $$$ either way, it’s just a matter of whether users are coming or going).

    I think it’s healthy for the industry in a couple ways, the most obvious being reducing the obsession on the individual cost of every click. On the flip side though my concern would be that it puts up a bit of a hazy screen when it comes to click fraud – i.e. will it get worse when people aren’t watching as closely?

  9. “As an advertiser, you have no risk. You sell, you make money, Google gets a piece of the action. Why would you bother with other options?”

    Because not everything is about making a sale…

  10. but one thing which we all seems to be forgetting in this is that jeff bezos is a investor in Google . would he allow them to intrude in his area . remember he can exert a lot of pressure on Google Guys through his holding as well as KPCB Jhon Doer Connection since Eric is nothing but a KPCB-Sequia Guy in Google Plex . so i think we should expect some fireworks and hope to see some middle ground .

    the advantage google has is not very insurmountable if Ebay ,Amazon , Yahoo,MSFT any one grabs Riya with upcoming Visual search and sales refferal functionality . it will pull carpet under the feets of google’s plan .

    a more disturbing point is .. when you look at the history of google you will find that first they worked with yahoo now they are competing with them , they worked with Aol ,now they are competing with them (SF WiFi, dark fiber etc etc ) . now they seems to be competing with Amazon -E bay also . won’t it hurt there image in Biz World i mean i will think twice before doing business with them . they are doing it ditto on the line of Microsoft ( Apple ,IBM ) they should realise that they can’t be best at every thing point in being a company with a product line in which most product are not market leader .

  11. Both CPC and CPA are ultimately too restraining — just points on the pricing possibility curve. Google can (and in my opinion, eventually will) offer advertisers the whole curve: “Pay whatever you want for each click. We’ll use that info to try to get you more clicks like it in the future.”

    They could even let advertisers decide after receiving the click how much it was worth to them: “these clicks were all junk, we don’t want to pay anything for them.” “These clicks were looky-loos, we’ll give you a few cents for them.” “These clicks were small sales, $2/each, and this was a big sale, $15.” Across multiple periods, the feedback only helps Google and the incentives are aligned. (Underpayers ultimately only cheat themselves of future clicks.)

    (The decision on value could even be months later: “that click in January eventually resulted in a $6000 sale, it was worth $500 to us, here, take our payment and send us more that might be like it soon!”)

    For lack of a better name, call it Cost-Per-Whatever. Google or a competitor might back into it with half-steps like click money-back-guarantees and special variable pricing programs for sophisticated advertisers, but ultimately, the logic of paying for each click according to its own demonstrated value will be clear.

  12. i think the issue here is not a wholesale replacement, but instead it is Google’s attempt to evolve its business model. They have a lot of traction right now in the CPC market, but they will also have an increased amount of competition.

    Of course there is the whole issue of click fraud, which they need to get under control. It is not like it is something which is going to have an impact on Google’s sales right away, but I am glad to see they are thinking differently.

    Will they be successful? Who know? Their recent attempts on new markets haven’t been that sucessful – hence the big “if.”

  13. theidiot

    Om Malik is taking it naively that Google is planning to replace their pay-per-click with pay-per-sale. I doubt it very much. If you understand how they think, you would not make such a conclusion. And the way Google thinks is that they do a lot of things which on the surface are not directly related to the core search, but with quite long term view that Google has, those things tend to simplify online experience thus promoting usage of internet services on the whole and as Google hopes their own ones. It’s a very patient and long term strategy (which I like a lot) as opposed to greedy focus on immediate next fiscal period as many companies have.

    This payment system is non-for-profit feature for them – or better say a cost of doing business without intentions to make profit directly (just like Skype is probably for eBay). Google said they are willing to take initial costs until (as they hope) increased usage of their advertising system kicks in, which will (as they hope) more than compensate for payment costs. Along with increased usage of advertising system, Google will also get tangible differentiator (until Yahoo and MSN do the same with PayPal) and Google also gets very valuable statistics to know actual ROI (on one side they already know how much money is spent on clicks, but they don’t know how much sales is actually generated by those clicks). With this new payment system, they will have a good sampling of actual ROI range and might derive good conclusions to optimize rankings.

  14. theidiot

    have you noticed the trend? everything that Google does is hyped so much and predicted to be a killer of this and that. In reality, it turns out that Google mostly fails to gain ground in everything they do except for search. It’s a one trick company (although a good one)

    The outcome of this will be that PayPal will become even better and Yahoo and probably MSN will try to follow Google and incorporate payments into thier search. Yahoo already signed up with PayPal and I doubt that MSN will try to develop payment system (they are much more likely to use dominant PayPal). In terms of market share, Yahoo search MSN search is just a little bit under Google. But if Yahoo incorporates PayPal into their search, I see this as a very good reason for millions of loyal PayPal users give preference to Yahoo search. I will defenetly switch back to Yahoo search from Google if I can see there who accepts PayPal.

    As for me, I checked out Google checkout and since I am a rather heavy PayPal user, I absolutely see nothing atractive about Google payments. PayPal is incomparably more complete solution and is accepted at over 150K merchants off ebay and several millions on ebay. Google has what? mere 100.

    On a conceptual level, Google plans seem big and encompassing, but that does not translate into killing everyone everywhere – like I said above Google mostly failed to be known to average guy as something more than just a searchbox.

    Om Malik is so focused on being an advertising system. It would be good for eBay to have one, but they have something different and as valuable if not more – brand – which is associated with auctions and great bargains as Google’s brand is associated with search. There are research numbers that only about 15% of eBay traffic is coming from Google – that does not seem like eBay is so much dependent on Google that they cannot survive.

  15. What is more valuable – the money Google charges per sale or aggregate transaction and customer behavior data?

    While it is true that their service lowers merchants’ cost per sale it might be a net negative saving if they could easily provide (commercial) access to transactions statistics to interested 3rd parties.

    eBay and Yahoo could emulate this Google service by exchanging information from advertisers and merchants.
    eBay can start providing special discount to PayPal merchants that advertise on Yahoo.

    I think PayPal has lower transaction costs because many of their clients use bank accounts and not credit cards so I think Yahoo and eBay can make their service more competitive than Google’s. Actually they shouldn’t even do it accross the board – they should just hit Google where it hurts them – maybe small transactions or maybe only for merchants that advertise through Yahoo.

  16. Before you get to far down the CPA/CPS road, don’t forget that lots of searches result in NON-IMMEDIATE sales. I’ve heard that before the average online purchase, 12 searches are done – don’t know how many of those clicks are organic vs paid.

    My point is that Google makes a lot money from CPC searches that result in offline purchases (the current thinking is 10:1 for online research resulting in offline purchases compared to online purchases), and makes a lot of money from CPC searches that result in considered purchases that happen hours/days/weeks later.

    If suddenly they replace their current ‘quality score’ with ‘conversion rate’ as a factor in ad display (or why not go a step beyond and let merchants bid the amount of commission they’re willing to pay) then huge swaths of advertising/advertisors get broken/screwed. Even in categories where SOME people convert online and instantly, a lot do not.

    There are other issues, and this is a step in the borg assimiluting everthing it sees, but it’s not check-mate.

  17. heyisforhorses: you don’t need a transaction system to do CPA, but makes it a lot easier to setup… also helps provide better info & protection against payment fraud (just cuz you fix click fraud doesn’t mean you’re done with all kinds of fraud ;)

    if Google integrates payment / transaction info, then there’s less work either they or merchants have to do to “mark” the conversion, and they could even offer to float the Adwords campaign costs until after the sale closes (ie, no up-front costs).

    in any case, integrated sales / payment data makes measurement & tracking a lot simpler. might not be required, but reduces payment risk & feature adoption friction.

    • dave mcclure
  18. Matt Large

    Great article, all too true. It will be interesting to see how advertisers use this new. Even more direct when the sale is for an online service instead of a product.

    In the article though you said that Amazon and eBay have not built advertising networks, which of course is true in the strict sense. But Amazon’s Associates system is very close, especially when you look at how well targeted they tend to be.

    Just a thought.

  19. Seems easy to rationalize from the perspective of why Google would do this from an AdWords perspective but it’s a stretch for me to see what is so compelling about this that it will force consumers to change their behavior and adopt it. I just hope that Google doesn’t start altering my search results so merchants that use this service get prominence.

    Om, you have a pretty sophisticated audience here, why not run a survey on who plans to use Google Checkout as consumer…?

  20. Introducing CPS = Cost per sale.

    The holy grail, if there is one, is the ability to show an advertiser how to make $MONEY$.

    Following the click through to a completed sale allows G to estimate margin and profitability, and therefore a very deterministic ROI.

    It is the future. It’s smart.

  21. GoogleBase Web merchants Media Mobile Wi-Fi Canvased Cities Advertising Platform Google Checkout = Largest digital economic ecosystem we have ever seen.

    And so you see now small web merchants no longer have to work with ebay or Yahoo Shopping, media companies can sell content and people can purchase easily, small local movie theaters can sell tickets and I can purchase right from my mobile phone.

    Google takes on Skype/Ebay/Paypal, Apple, MS, Yahoo, and mobile carriers all at the same time.

    May be a bit conspiracy theorist or pie in the sky, but you can see the peices fall into place…

  22. heyisforhorses

    I believe that should be “another notch”.

    Anyway. I don’t understand why you need a transaction system to do CPA? Other companies do CPA without a transaction system.