Pay-Per-Click (PPC): The Advertising Medium of the Present and the Future

The much vaunted internet revolution that was on the tip of everyone’s tongues, filling the newspapers we read and fuelling the stock market bubble back in 1999, went pop. It goes without saying that the internet is back now and I contend that the revolution is firmly back in full flow.

There are only a couple of things you need to know: Google has become the most valuable media company on the planet in a seven year time frame. It took Rupert Murdoch 40 years to build News Corporation. There is a worldwide scramble by traditional media companies to get into the web and reinvent their businesses, which are suffering from an exodus of advertising funds. All this is well documented.

However, what I would like to explore and highlight are the raw mechanisms at the centre of this extraordinary transformation. David Harvey said: “Love and Money make the world go around but love of money is the raw energy at the centre of the whirlwind”. I contend that it is a new wave of transparency, measurability and profits that are the driving force behind the pay-per-click and performance-based advertising of the internet.

I invested in and joined Cheapflights, the 1996 pioneer of online travel price search and comparison in 2000. However, we had a problem. Unlike many internet companies Cheapflights.com was profitable, cash generative and growing like a weed with no advertising spend. Terrific you say, but there was a problem associated with this success. The traditional billing method of traditional media is to bill monthly in advance, usually as part of a longer term deal. Simply put, our business was growing so fast that the billing increases were very hard to implement because our travel industry partners were not used to increasing prices. They were used to a stagnant traditional media industry that would be lucky to be able to increase prices by 10 percent per annum. This factor, combined with the harsh seasonality of the travel industry, made negotiating our rates for individual travel advertisers complete torture.

Things had to change and our proposal back in 2000 was to charge on a click basis, so that what companies paid was fair and based on performance. You only paid for business that you received; perfect. With some education our partners relished the transparency of the model and the company flourished as a result.

The model came of age with the rise of Overture and Google, using the Keyword bidding format combined with PPC. But similarly there is a list of other companies who have thrived on the performance model: shopping.com, shopzilla, TripAdvisor, NexTag…the list goes on.

Why have these companies risen so fast and furiously? Apart from having a compelling consumer product, for which the internet is so perfect, I believe that the core reason is the new advertising model that they offer. Advertisers have never had so much control over their campaigns. The ability to track the exact business derived from every cent spent is enormously empowering. The internet is such a responsive medium that you are able to test and tweak the optimum advertising format, almost in real time. Apparently Barry Diller’s epiphany moment on the internet, and his reason for purchasing swathes of successful internet companies, was when he saw how television shopping channels could immediately expand sales volumes by real time feedback to the presenters to exaggerate any successful elements of their sales pitch.

The internet allowed this process to reach a whole new level of subtlety and visibility. Using an iterative process you can quickly transform the success of your advertising by optimizing your campaign in real time. Indeed, for those who have not used Google Adwords hands on, you may not be aware that this feature is built in: many competing adverts are used and Google filters out the most successful ones over a short period of time.

So, the PPC model is measurable, transparent and well-suited to the internet, where change can happen in real time. The final piece of the jigsaw puzzle is that this means that not only can the profitability of PPC be measured in a very clear way but that profitability can be improved by the iterative process described above. This, to me, is where the heart of the revolution is happening. It is this facet that transforms advertising, for the first time for many corporations, into a profit centre in its own right. The marketing team have a way of generating profits and free cashflow. That cash often goes two ways – into bonuses and back into more advertising… it is a virtuous circle that drives revenues and profits in a very rapid way. This is the motor of the success of the likes of Cheapflights.com and Google. I am not much of a car person but I think the analogy might be an eight litre verses 12 engine that has a lot of grunt to it.

Ok, if you are in the industry then this may seem obvious but I think it is a process that is still being fully understood by traditional media companies as their revenues are rapidly being diluted by this online shift.

Another factor in favor of the internet is the fragmentation of traditional media outlets, in particular radio and television. The internet’s ability to reach a mass market is overtaking traditional channels as they become more user-friendly and targeted by audience.

There are a couple of things to bear in mind though, that help to balance the picture. I heard a radio advert the other day (actually in the UK) proclaiming how successful radio advertising was at generating web searches for companies and products…I happen to think that there is a lot of truth in this, although my point is slightly tangential. PPC has been called ‘Marketing on Steroids’. Well we all know that steroids have fantastic results but might not always be that good for you, right. Well, I have also heard it called the Crack Cocaine of marketing too, which has rather too lurid connotations for my taste but it makes a point. In short, companies can get addicted to the growth that PPC gives their companies. Without a proper focus on the product you might be propping up a deficient business. However, most companies are too smart to go down this path but what is clear is that as a company you should never be reliant on anything.
Google recently announced changes to its minimum bids format, which impacted many smaller companies’ ability to compete in the PPC market. It has also been noted that a free marketplace leads to the dominance of a few strong players and it is certainly not a level playing field with different companies using different assumptions to compete. A solid marketing mix is imperative if you are to remain in control of your growth and deliver sustainable returns for the future.

In conclusion, PPC - and its consequence: rapid profit growth - is the raw mechanism at the heart of the internet engine. Companies that are not using PPC should be aware that they are losing out. Clearly, as with all good things, they should be aware of the danger of over-reliance on one channel and as always focus on the product. It is worth pointing out that Google has never spent a cent on pay per click….but there are always exceptions.