Internet Pay Per Click search advertising is getting complicated.  Our CEO often calls it Internet Chemistry, but it’s really more like a form of Actuarial Science that is increasingly applying complex statistical methods to predict future advertising performance (e.g. the likelihood of a conversion).

Niki at Bronte Media was recently discussing an interview with Anil Kamath, one of the founders of Efficient Frontier, a search marketing firm.  Anil’s interview is a great example of how PPC marketers are becoming more and more like hedge fund managers on Wall Street.  Why do you need a PhD in predictive analytics to be a PPC marketer these days?  Two main reasons: 1) the tremendous growth in the long tail of available keywords; and 2) the giant chasm that still exists between the click and the conversion. 

Basically, Efficient Frontier and other PPC gurus try to optimize search ad campaigns by analyzing click and conversion results from a really big data set of customers.  Here is an excerpt from Anil’s interview:

You can’t just Bid a keyword based on its own conversion; you need to look at the elasticity of the Bid as well in terms of how your bid effects your position in the market place that you are participating.  What the competition is bidding against you, and how many clicks you’ll get more or less based on whether you bid more or less on that keyword.  When you take the information of that keyword, and combine it with information that you have about other keywords; you’ll have a pretty complex problem. 

Complex indeed.  It seems to me that statistical expertise like this is the reason that Nextag-the master of using large sets of keyword data to create search arbitrage opportunities-was recently valued at $1.2 Billion. 

But does search marketing really need to be so difficult?  Efficient Frontier uses a lot of complex statistics to back into some pretty simple overall business goals on the minds of direct marketers.  In Anil’s words:

The business goal could be to spend a hundred thousand dollars and maximize my registrations, or maximize my revenue.  Or, it could be to get twenty percent margin, while getting you the most revenue possible.

Contrast this to the simplicity of Cost Per Action search advertising in general, and the Jellyfish Value Per Action model in particular.  The beauty of VPA is that it closes that chasm between the click and conversion, eliminating risk and a lot of math homework in the process.  Marketers’ jobs become much easier when they only pay for successful conversions because they can easily translate their ad spending into their overall business goals without a lot of complex math.  At Jellyfish, we have lots of advertisers now using our back-end ad platform to manage their CPA commissions at a product and category level.  And each time they set their commission level, they are directly setting their rankings in our system and the return on their ad spend, without having to worry about click burn, the potential for negative ROI, or the complex statistical analysis of the PPC system.   

This root simplicity (complexity will develop in CPA-optimization land as well) is one of the reasons that we think Cost Per Action advertising will continue to grow to become a dominant form of online direct response advertising.  Here’s hoping Jellyfish will be a big part of it. 

Jellyfish is pleased to announce a partnership with Channel Intelligence today that will help accelerate our efforts to add new retailer partners to the Jellyfish.com shopping search engine.  Full Release here.    

This news is an opportune time for me to talk briefly about the Jellyfish advertising model.  There has been a flood of new shopping search engines over the past several months, but to my knowledge, Jellyfish is the only shopping search provider that is doing the hard work of building its own Cost Per Action advertising platform.  (Please correct me if there are others).  Granted, there are a handful of shopping engines that utilize affiliate providers such as Linkshare to integrate CPA advertising into their mix, but these big affiliate providers have illiquid commission structures (typically a standard store-wide commission rate for any sale).  

Why are we building our own CPA ad platform?  It’s a key part of our long range vision for a more consumer friendly version of CPA advertising that we call Value Per Action, or VPA.  Retailers in the Jellyfish system can adjust their advertising rates on a global store level, product category level or at the individual SKU-level for each product.  This makes perfect sense, as retailers may be willing to pay more or less in CPA ad fees for a sale depending upon the product being sold.  

Probably the best way to consider the advantages of this platform is to compare the Jellyfish model to Google’s remarkably successful Cost Per Click keyword ad platform.  Through competition, Google has created a liquid marketplace of Cost Per Click ad rates on millions of keywords.  Every day, online retailers compete with each other to achieve higher rankings on keyword searches by agreeing to pay Google more for each click, creating higher and higher advertising fees for Google.  Over the past several years, the true market rate for a click on keywords such as ”nikon digital camera,” ”mp3 player” and millions more have been set by this efficient system.   

With the Jellyfish CPA ad platform, online retailers bid not on keywords, but on the actual products they sell that match up in our shopping search engine.  The more stores are willing to pay for a successful sale, the higher they go on our rankings.  But here is where our unique model creates a more consumer friendly version of CPA:  In our VPA model, we always share back at least half of those advertising fees with the end consumer.  Thus, as retailers compete for search ranking by increasing their CPA commissions, BOTH Jellyfish and the end consumer benefit directly from that competition.  It’s a liquid CPA marketplace that creates lower prices for end consumers.  (you can read a full description of VPA here)  

For Jellyfish to see this vision through, we need two things: 1) lots of people buying products through our site; and 2) lots of quality retailers taking advantage of our risk-free CPA model to compete for those sales.  Channel Intelligence is a tremendous partner to help us achieve goal number 2.  CI customers include nearly 200 of the world’s best known retail brands, all of which now have direct access to the Jellyfish platform.  We look forward to helping CI and its clients take full advantage of the accountability and precision of Jellyfish shopping engine.                      

Starting today, Fox network will start running short animated clips about a taxi driver named Oleg during its commercial breaks.  (Wall Street Journal article here).  Will Oleg be entertaining enough to get folks to ease off that DVR button?  I doubt it, but I love seeing traditional media starting to work to catch up with the enhanced power that consumers have to tune out advertising. 

As we’ve been saying at Jellyfish for some time, you need to give consumers a reason to engage with your advertising, not just figure out new ways to interrupt them.  We’ve tried to stand behind that belief with both Smack Shopping (advertising transformed into entertainment) and our main Jellyfish.com search (advertising transformed into cash back savings). 

As the WSJ article indicates, this isn’t the first or the last effort by the major networks to get viewers to pay more attention to their advertisements.  I think the future success of these efforts will depend on whether the initiative is just a slick way to trick viewers into figuring out what the new content is (unsustainable) versus whether it is content that actually delivers viewers some value.  Unfortunately, the Fox effort seems to be more of the former.  From the WSJ article, a Fox representative is quoted as saying “It’s something that pops up that is unexpected and the viewer says ‘What the hell is that?’  It may keep them around for a while longer.”  Yes, the viewer may stop once and watch, but if Oleg isn’t that funny or entertaining, don’t expect that viewer to stop again (or watch the rest of the commercial break, for that matter). 

Oleg, you have a tough job.  Good luck being funny enough to get me to put down my Tivo remote.

Much has already been written about Google’s news last week that they are opening up “Pay Per Action” advertising opportunities within their AdSense network (Google Post here).  After digesting the news and the blogosphere discussion, I have the following observations:

This Won’t Change the World Overnight

• Google has a huge cash cow to protect in its Cost Per Click revenue model.  But CPC advertising suffers from some growing problems (e.g., click fraud and search engine spam that will ultimately diminish its power)   Thus, Google is forced to move towards CPA advertising (which helps eliminate these problems), but I’m sure that Google’s moves will be slow and methodical.  This news is a case in point: the new CPA system is being rolled out in beta and is limited to its AdSense network of third party publisher sites (where click fraud and spam are at their worst).  But how quickly will advertisers, and most importantly third party publishers, move towards the model?
• Bad actors in the Adsense system are not going to adopt CPA unless there is an equal opportunity to defraud the CPA model within AdSense.  If a publisher has built a network of click optimized sites, or developed click fraud practices that allow it to fly under the radar, I doubt that that publisher is going to jump at the Google CPA option.  A number of comments in the TechCrunch post highlight the fact that Google’s CPA system will allow a number of different kind of actions short of an actual sale that might create new kinds of “Action Fraud.”  So if the scammers do move over, it won’t help advertisers or consumers.  This is just one reason why Google is also pushing its Checkout product to control the shopping cart and measure conversions with precision. 
• Legitimate third party publishers are being asked by Google to assume a significant amount of additional risk.  With CPC, publishers control the revenue generating activity (the click) on their own site; with CPA, that activity moves over to the end advertiser.  For publishers to jump in, they are going to have to see significantly higher advertising rates and a highly integrated relationship between advertiser and publisher that helps the publisher qualify traffic for conversions.  Google’s CPC system has thrived on a low touch, automated system.  Again, several of the TechCrunch post comments highlight this disconnect.  Google will need a long term, sustained effort to convince publishers that this added risk is worth it.  I suspect this will take several years.      

Google’s CPA System Will Create Some Benefits for Advertisers and Consumers

• Jellyfish was the first comparison shopping engine to adopt a 100% Cost Per Action ad model, so we are happy to see a giant like Google help to push mainstream adoption of CPA.  As Google’s CPA system gains traction with legitimate publishers, the scam publishers may start to be isolated in the CPC system.  If this happens, Google’s AdSense model may reach a tipping point where CPC rates start to drop because the quality publishers are no longer subsidizing the scammers.  This will help make the Internet a better place (To this point I disagree with Scott Karp’s conclusion that Google’s CPA network will create direct response hell online.  It is easy to dupe users into clicking on things, you have to deliver value to them to get them to sign up for a service, order a product, etc.)   

Consumers Still Aren’t Getting the Full Value of their Attention with Traditional CPA

• This is why Google’s news ultimately lands with a thud.  If we assume Google is wildly successful with their CPA model, it may help elimiate the search engine spam and click optimized sites that frustrate untold online consumers.  This is a good thing for consumers but it doesn’t go nearly far enough to deliver consumers the true value of their attention online (see my post on Buying Attention here).  At Jellyfish we take Cost Per Action one step further to create Value Per Action, which directly rewards consumers for making purchase decisions on our site.  In the Jellyfish VPA model, as advertisers bid higher and higher rates to reach buying consumers, the end consumers share directly in that competition for their attention through greater savings.  This won’t happen in Google’s CPA system.  As advertisers compete for CPA opportunities and bid up CPA rates, Google and third party publishers will make more money, but the end consumer will still be completely disconnected from this significant value creation.  Ultimately, this makes Google’s CPA moves of marginal benefit to online consumers.           

Piper Jaffray just released an extensive new report entitled “The User Revolution” that describes how the Internet is empowering consumers and dramatically changing consumer content consumption patterns (MediaPost summary of the report here). 

“The historically passive consumer is changing rapidly, not only becoming more informed and confident about purchase decisions, but also increasingly taking control of the consumption of information and content that used to be distributed by networks, studios, publishers and retailers,” said Safa Rashtchy, senior research analyst at Piper Jaffray. “We believe this will cause a significant rise in the prominence of the Internet as a major content consumption and marketing medium.”

In the report, Rashtchy goes on to coin a term for this new type of online content called “Communitainment,” defined as the blending of community, communication and entertainment into a new form of online activity driven by consumers.  The report predicts that consumers will shift more than 50% of their content consumption over the next decade to niche Communitainment formats (e.g., social networking, video and photo sharing sites), displacing traditional forms of media content like TV, magazines and large Internet sites.  This revolution will create a major challenge for advertisers and agencies that need to figure out new ways to incorporate their brands and messages into this new medium. 

As I read the highlights from this report, I couldn’t help thinking about how our Smack Shopping Show is a wonderful example of Communitainment (blog post on Smack here).  Smack Shows combine an entertaining live shopping event with an online community that creates a new form of original online content.  The content is highly engaging, with consumers tuning into Smack Shows for an hour or more each day.  Even more interesting, advertising is the centerpiece of each Smack Shopping program.  Leveraging the unique Jellyfish Cash Back auction, we use advertising dollars to actually create the shopping deals and entertainment that consumers tune in to experience.  By integrating advertising, entertainment and community, Jellyfish is helping drive this “user revolution” in media consumption and helping advertisers reach consumers in new highly efficient ways.  We think Smack Shopping is one great way that advertisers can meet the challenge laid out by Piper Jaffray in their report to stay relevant in the age of Communitainment.   

Since our launch in June of 2006, Jellyfish has been working hard to drive adoption of a new form of online advertising we call Value Per Action that eliminates the waste from traditional advertising and transforms it into added customer savings (you can read about VPA here and our vision of advertising here). 

With Jellyfish taking the high road against traditional forms of biased, interruptive advertising, many questioned how we were going to attract customers and generate awareness for our brand and our shopping search engine.  Not a bad question and one we asked ourselves many times.  Television ads, billboards, and even Google keywords were out of the question.  But what was left? 

The answer for Jellyfish has been something we call Smack Shopping.  The Internet’s first live shopping game show, Smack Shopping combines the fun of a game show with the fantastic deals generated by the Jellyfish cash back auction.  Smack shows run every business day at 12 CST and include multiple Smack Auctions where a limited quantity of products are offered for sale at increasing cash discounts.  Participants have the chance to buy the hottest online products at remarkable discounts, play games for prizes and interact with a virtual community of other Smack shoppers (a Smack by definition is a group of Jellyfish).

To our knowledge, Smack Shopping is the first game show broadcast live to an online audience that actively participates in the event.  There are other companies working on streaming video plus chat, see for example Pete Cashmore’s discussion of Lycos Cinema here and the much anticipated launch of Joost here, but Smack Shopping does more than view pre-assembled video.           

Fueled by Jellyfish cash back, the game and the entertainment is actually advertising, but I doubt any of our users would view it as such.  It’s a customer acquisition strategy that is consistent with the Jellyfish promise.  Instead of spending money interrupting people with traditional advertising, Jellyfish is using advertising dollars to create compelling game show like content that consumers seek out and invite into their lives.  And it is working.  From the beta launch of Smack Shopping on November 1 until today, Jellyfish has grown its user base over 5X, with Smack Shows regularly engaging 10’s of thousands of online shoppers for an hour or more of fun every day.   

Advertising as content.  It is a trend we are going to see more of as consumers gain more control over where they devote their attention and advertising seeks out new ways to be relevant.  We view Smack Shopping as permission-based, engaging advertising at its best. 

Mark Cuban issued an open challenge on his blog this week for ideas on helping the movie industry come up with a new customer acqusition model.  According to Cuban, the current economics are killing the industry, with studios commonly spending $8 to $12 per customer for an opening weekend movie run.

Why not the Value Per Action advertising model?  Instead of interrupting and annoying me with wasteful movie advertisments, billboards, banners, etc., why don’t the studios bring me directly into the value of their advertising by sharing back a portion of the advertising fee with me each time I book a ticket online.  Get rid of the waste and inefficiency of traditional advertising and use your ad dollars to drive demand in a risk free, verifiable fashion.  The system could work very similar to the initial Jellyfish.com retail shopping experience.  

I would propose the following:

1. Partner with Fandago, Moviefone, Movietickets.com and other online ticket services to leverage their ticketing infrastructure
2. Integrate the Jellyfish VPA sharing concept within this online ticketing system and promote a new online ticket service (VPAMovieTix.com)
3. Allow the studios to bid for sales using their advertising dollars, driving demand with pricing promotion in this new risk free channel

For example, I want to take my kids to a movie this weekend and visit VPAMovieTix.com.  I look for the latest childrens’ movies, watch trailers, read reviews, etc., and select which movie tickets to buy.  When I buy, the site gets paid a commission for the sale (the per sale advertising fee paid by the studio) and shares back at least half of that commission with me to lower my effective price.  In this way, I directly benefit from interacting with the movie advertising and have extra money in my pocket to buy more popcorn (how the theatres make most of their money, I believe).  The studios get an efficient channel and could spend lots more to drive demand for movies that weren’t hitting their numbers, and less for blockbusters that were doing well.  And again, all of this advertising would be risk free because the studio would pay only for sales and they could directly set what they want to pay per customer.   

Once this system is up and running there are a number of powerful means to drive additional demand.  These include:

• Syndication: Click on a banner and watch a movie trailer or advertisement; buy your ticket for this coming weekend and get a cash discount
• Promote to Friends: Get your friends to book their tickets at VPAMovietix.com and earn revenue
• Push Recommendations: VPAMovietix.com knows what movies you like and could suggest new movies that you might be interested in (with your permission and with a cash discount if you buy a ticket)

These are just a handful of possibilities, but I think they represent the potential when you connect the end consumer directly to the advertising value chain using Value Per Action advertising.  This is one way that the movie industry and others that are seeing diminishing returns with traditional interruptive advertising can adapt to the reality of today’s marketplace and empowered consumer. 

We just flipped the switch on the Jellyfish.com beta search engine, opening it up to the outside world. It is an amazing feeling and I’m really proud to be working with such a great group of dedicated people. Alright, enough sappy talk, let’s get down to business.

Over the past few months, we have been talking a lot about problems with online advertising, particularly some of the misalignment of incentives and limitations of pay per click advertising. We’ve also talked a fair bit about the coming Attention Economy and how we hope to be a tipping point for consumers to realize how much value their attention has online.

When Brian and I set out to start Jellyfish, we saw a remarkable opportunity to create a powerful new value proposition by evolving the underlying revenue model for search: pay per click advertising. So many start-up companies today create a better mouse trap and then try to figure out how to attach a revenue model to it (typically by slapping up some advertisements on their site). We did the opposite; we developed a revenue model that provided us a compelling value proposition for our end customer. We aren’t aware of many start-ups that are doing this today (we would love to hear of others), which likely means we are either idiots or geniuses (I’m guessing you will tell us pretty quick). I’m not sure which one we are, but at least we are different.

If you’ve followed our thoughts in the Jellyfish blog, you are aware that we think we’ve come up with a new form of consumer-centric search advertising that:

• More efficiently connects buyers and sellers
• Eliminates Click Fraud
• Provides online merchants with a risk-free sales channel
• Makes advertising transparent and unbiased for consumers
• Maximizes the value of a customer’s intention to buy something online

The Pay Per Click Auction

Like many people, Brian and I have been impressed with the efficiency and power of the Pay Per Click advertising auction that takes place every day at Google, Yahoo!, MSN and the other major search engines. As John Battelle so eloquently detailed in The Search, this NASDAQ-like market does an amazing job of setting the maximum value on our intentions through advertising competition, which has allowed search engines to reap huge rewards.

But we saw a limitation in this advertising auction, namely, the fact that it doesn’t directly connect consumers to the monetary value being generated. This isn’t much of a limitation when you use the search engines to find information. In fact, we love using search engines for this purpose and think that they do a great job. But when you want to buy something online—when advertising is the focus of your search—we think this limitation creates a big opportunity. Why? Two reasons:

1. Limited Relevancy. The sponsored results are ranked with one primary goal in mind; to maximize the amount of click revenue the search engines make. The results you see are from the companies that write the best ad copy and pay the most to get in front of you. But are these listings showing you the best product choice for you? Is there a less expensive option, a product with better value, or a store that is more trusted? This is a secondary consideration. What matters most is that the search engine derives maximum click revenue. Isn’t this why paid search results have to be labeled as Sponsored?
2. Failure to Maximize the Return on Your Intent to Buy. A consumer with a present intent to buy something online is the gold of the Internet. The more search engines can connect your search and the data they collect on you to some buying motivation, the more money they can continue to extract from advertisers. Thus, when a consumer announces their intention to buy something at a search engine, the advertising auction works its magic and the search engine makes increasing sums of money, none of which ends up in the pocket of the end consumer.

Enter Jellyfish.

Introducing Value Per Action (VPA) Search Advertising

At Jellyfish, we want to pioneer a new form of search advertising we call Value Per Action. Instead of charging fees on the click, we charge our advertisers only when people actually buy, and we share at least half of this fee back with those buyers in a cash back account. In other words, we connect people directly to the value of the advertising market. Instead of measuring how much money WE make when you click, we measure how much value the advertiser is willing to pay YOU for your sale. With VPA, the advertising value of your attention becomes transparent (you see it in the form of cash back) and changes from annoying advertising into a new kind of currency (we call it buying currency) that lowers your end price.

And to help you get the maximum amount of savings when you buy, we are launching VPA in the same kind of advertising auction system used by the major search engines. But instead of ranking our results by the amount companies pay us in the form of hidden advertising fees, we rank results by the end price for a product, after our cash back. We think this will create a perfect retail marketplace because retailers will increase their VPA advertising rates (keeping pricing constant on their own sites) to get to the top of our rankings and the value of that advertising competition will flow directly to our users in the form of lower net prices. You can see a simple picture of this system on our site here.

The power of the VPA auction is this: The more stores compete for buying attention, the more end consumers save. In this way, we think we hope to create a system that delivers the maximum return on a consumer’s intention to buy, and they don’t have to do anything more than search they way they would at one of the existing comparison shopping engines.

And what does this do for retailers? It allows them to spend the same $1 of advertising on both search promotion (paying for higher rankings) and price promotion (dropping price to drive conversion) in a risk free channel where click fraud is impossible.

A Big Idea–In Beta

We think this could represent is a major shift in online advertising and help advertising evolve to continue to be relevant in a world where the end consumer has ever increasing choices and control over their attention. You can read our vision of online advertising on the site here. But we also recognize that we are a start-up company with a beta search engine. Like the first PPC auction that started bids a 1 cent/click, we have to start somewhere as well. We could have waited a lot longer to build a perfect site with lots more products, but that doesn’t make sense. We wanted to introduce the VPA concept and start the bidding and the conversation as soon as possible.

Day one on our beta site you will see roughly five million products from approximately 1,000 online retailers. You will be able to search for individual products, narrow searches by store, manufacturer, and price range, shop by store, compare products, and earn cash back on most everything you buy. Things won’t always work perfectly, but we hope you will be able to visualize the power of Jellyfish.com as stores start to compete in a VPA system.

What We Promise During Beta

We recognize that our site will have limitations and bugs like most beta launches. Here are the main things we will be working on tirelessly during our beta period to get ready for our full consumer launch this fall:

• Adding thousands of additonal retailers and millions of additonal products at Jellyfish.com
• Promoting VPA-product level bidding and store competition
• Creating enhanced search functionality
• Expanding the tools to narrow your search results
• Launching better product review, merchant review, relevancy systems that leverage consumer buying data

We recognize that our site is far from perfect and we appreciate your patience while we move through our beta period. We also really look forward to your feedback and comments, both positive and negative, as we bring Jellyfish.com to market.