Brian Smith’s post at ComparisonEngines today has some very interesting news regarding Shopping.com’s upcoming test of a Cost Per Action advertising model at its popular comparison shopping site.

The move by Shopping.com is a small step in what I see as the inevitable march towards Cost Per Action advertising. 

But what makes this even more interesting is the way in which Shopping.com is making the transition from clicks to sales conversions.  Taking a page out of the Google Checkout playbook, Shopping.com is launching their CPA experiment within a Universal Shopping Cart in which Shopping will take control of the entire order process AND a large part of the end customer relationship.  Essentially, this universal cart would allow Shopping.com to become a new type of super retailer-a Shopping.com customer can add products from any merchant in the search engine into a single Shopping.com cart and purchase the products directly through Shopping.com without ever having to go to the retailer’s site.

Why would Shopping.com transition to CPA advertising in this way?  In addition to the benefits of CPA advertising in general, I see three specific benefits:

1. They solve the Pay Per Click search engine loyalty problem.  Currently, Shopping.com and other PPC engines have a difficult time creating loyalty with their existing customers because they lack a means to create a strong ongoing relationship.  By setting up a Universal Cart, Shopping.com can create a new user-friendly feature and establish a stronger, ongoing relationship with each customer.
2. They learn more about each customer.  Customers using the Universal Cart will not only store their own personal data with Shopping.com, they will also share their actual purchasing habits directly with the engine. 
3. They enable Cost Per Sale advertising without having to track sales at third party merchant sites.  This has been a big hurdle to the adoption of CPA advertising; intermediaries have been leery of relying on third party stores to track and report their conversions at the merchant point of sale.  Like Google Checkout, Shopping.com has sought to avoid this problem by taking control of the sale itself.  This provides them with a direct and powerful new way to record the sales they generate and in turn, maintain direct control of their revenue. 

But will retailers go for this?  Will they turn over their customer relationship to Shopping.com in this way in exchange for the accountability of Cost Per Sale advertising?  Brian Smith raises these concerns in his post, and many others have already discussed the push back Google Checkout has gotten for controlling the customer (see Greg Sterling’s post here for example).  It will be fascinating to watch this play out.  Frankly, I will be amazed to see a large number of retailers essentially agree to give up a big part of the customer ownership equation and transition into more of a product shipping/wholesaler entity and away from being a customer-centric retailer. 

There is an alternative way to set up CPA advertising that avoids the customer ownership dilemma being pushed by Google Checkout and now Shopping.com.  Namely, allow the end retailer to continue to control the order process and customer relationship and set up a mechanism to record converted sales at the merchant point of sale rather than taking over the sale itself.  This traditional method has been used for years in standard affiliate marketing and it is the method we use at Jellyfish.  I assume you can guess which method I think is better.  Time (and customer demand) will certainly tell whether retailers decide they are willing to cede ownership of the order/customer in exchange for the sale. 

Mark Boslet at Dow Jones wrote a great piece on this subject yesterday “Internet Cos, Advertisers Study Changing Online Ad Market.”

The first sentence of the article makes it clear the potential game changing nature of CPA:

 “A potential shift in how online advertising is sold and billed has advertisers and Internet companies scrambling to understand its full effects.”

My take away from the article is this: Pay Per Click advertising is too profitable for CPA to take over at present.  Sure CPA eliminates risk for advertisers, but why should intermediaries like Google, Yahoo! and MSN take more risk if they don’t have too?   

The current pay per click system may hang on as the dominant model for several years, but CPA is inevitable in my opinion.  Technology now makes it possible to deliver advertisers 100% accountability and certainty in their advertising.  This is an extremely powerful concept that eliminates a tremendous amount of waste from advertising; waste that could and should be reallocated to end consumers. 

At the end of the day, advertisers are in the business of selling products & services, not clicks.  The transition from the Gross National Click Economy online is coming and I hope Jellyfish and its new VPA advertising model leads the charge and moves this transition forward. 

Since our launch in June, we’ve had remarkable interest from new merchants that want to get their products incorporated into Jellyfish.com.  Almost without fail, these new Jellyfish merchants express how great it is that Jellyfish aligns its incentives on the end sale, providing them with a risk free channel.  Most of these merchants highlight their concerns over the growing threat of click fraud, and the problems they have managing their Return On Ad Spend at the Pay Per Click engines. 

I don’t want to minimize this feedback, because it does represent a major shift towards more accountable search advertising (In fact, I kind of like the sound of this headline: “Jellyfish.com Eliminates Click Fraud & Makes Online Advertising 100% Accountable“).  However, traditional Cost Per Action (CPA) forms of online advertising have been around for some time (e.g., Affiliate Marketing) and at least one other search engine (Snap.com) is trying to move to a Cost Per Action search advertising model.  

So what makes our Value Per Action (VPA) search advertising unique for online retailers?  There are several unique elements, but the one element I would like to highlight in this post is the maximum value that retailers obtain from each advertising dollar they spend at Jellyfish.  This concept can be boiled down as follows: Jellyfish.com is the only search engine where retailers achieve both search promotion (moving higher up our listings) AND price promotion (driving conversions with price discounts) with every advertising $1 they spend on the site.  Let’s look at this concept at work in the following basic example:

I own an online store called Mark’s Camera Shop and I have $100 (easy math) to spend this month on my online search advertising.  

Pay Per Click: I can spend this $100 on links at pay per click search engines like Shopping.com, Pricegrabber, Google, etc.  And what does my $100 spend get me?  I get search promotion, which moves my product link up the search rankings and in front of more eyeballs.  But I have no guarantee that my $100 spend will earn me ANY sales.  Because of this, I might spend some of that $100 on improving my chances of converting those clicks to sales.  I decide to offer a pricing discount on my products that I project will cost me $25 of that $100 budget, leaving me only $75 for search promotion.

Pay Per Click Results:

• $100 total spend
• $25 used for price promotion (assuming my projected closure rate is accurate)
• $75 left over for search promotion

Jellyfish VPA: In contrast to the Pay Per Click engines, the Jellyfish VPA advertising gives me significant additional value for my $100.  In fact, I can spend my entire $100 on search promotion at Jellyfish AND I will automatically obtain an additional $50 of price promotion with the same $100 spend because Jellyfish shares back at least half of every dollar I spend with the end consumer.  What’s more, I obtain this additional power from my ad spend in a risk free channel where I no longer have to guess at conversion rates and hope I earn a positive return.  

Jellyfish VPA Results:  

• $100 total spend
• $100 search promotion 
• $50 price promotion

I may be biased, but I know where Mark’s Camera Shop is going to spend its limited ad dollars.  Is anyone aware of another search engine or online channel where my advertising dollar creates this much value?  If so, I would love to hear about it.     

I’m sure you’re familar with the Gross National Product, that all important measure of the value of goods and services produced in an economy.  But how important is the GNP in today’s online economy?  I’d argue that the Internet is running a bit fast and loose, somewhat unconnected from the realities of the GNP and its focus on the actual sale of goods and services. 

So you may be asking, if web sites aren’t measuring the sale of goods and services online, just what are they measuring?  The focus today, thanks to the remarkable success of Google and the Pay Per Click ad model, is on the click.       

Selling clicks is big business online.  A USAToday article titled “Google Search Ads find momentum” provides a great snapshot of this click selling bonanza and how Google Adsense has allowed millions of sites across the Internet to get into business of producing and selling clicks.  Citing figures showing the click market growing to over $20 billion, the article states pointedly, ”No wonder people are celebrating.” 

But how long will the party last?  The Pay Per Click model certainly advanced advertising by aligning it to a measurable action (the click), but how long will people be able to get by selling clicks without worrying much about whether the clicks they produce are actually converting to the sale of real products or services?  In otherwords, can the Gross National Click exist outside of the Gross National Product?  Will economics textbooks in the future replace their “Widget factory” hypo’s with ”Click factories”?  I don’t think so.          

At Jellyfish, we believe that the Internet is rapidly moving from a click-based economy to a conversion-based economy.  Five years from now, we will look back at this time as the zenith of the Gross National Click (GNC) economy online.  Google moved advertising from impressions to clicks, but at the end of the day it is the sale of goods and services that makes the world go around.  And the Internet makes it possible to create a new, more accountable kind of advertising that is directly tied to the GNP, and not just the click.  

Let’s look at some of the cracks in the wall that will ultimately bring down the Gross National Click (GNC) economy.  

Click Fraud.  Click fraud is quickly coming to the forefront as THE major threat to the GNC economy.  Lawsuits and studies estimating the size of the problem have the search engines on the offensive, but I’ve yet to hear anyway to effectively solve the problem in the Pay Per Click system.  The engines may play a cat and mouse game with the fraudsters, but the problem won’t disappear.  A recent article in Business Week sums this up nicely. 

Syndicating Clicks.  The syndication of click selling through programs like Google Adsense provide major fuel to the click fraud problem, unleashing armies of website owners with a financial incentive to join in click fraud.  But just as importantly, the sydication of the Pay Per Click system has also created a kind of black hole of sites that may not engage in fraud, but still have no direct incentive to drive sales for advertisers and are not held accountable if their sites don’t drive sales.  The Made For Adsense sites that do the minimum amount to create a click-selling site are the obvious example:

Adsense has created a financial model for these sites to work and remain almost completely unaccountable to advertisers.  And the more this occurs, the more of a threat we see for the Gross National Click economy.