Google’s Next Runaway Success, from Business 2.0:
The secret of AdWords Select’s success is the so-called network effect, the tendency of Internet services to become exponentially more valuable as more people sign up. Until now, no online advertising service provided the ad-to-eyeball chemistry to spark a network effect. Earlier search engines, like Infoseek, where I once worked, got close. But they charged for every advertisement that appeared, which proved too expensive, especially given that clickthrough numbers were low. AdWords Select blows past those problems like a Ferrari dusting a Yugo.
For starters, the program is pure self-service online: The advertiser opens an account with a credit card, writes up the ad, and then chooses the words that will trigger the advertisement. Absent a human sales force, AdWords Select can scale to the galaxy if it needs to, which is a good thing, since most of its advertisers are from the innumerable legions of small and medium-size companies.
But AdWords Select’s real genius is the unheard-of value it provides to advertisers. They pay for actual clicks on their advertisements, not each appearance of the ad. The price of an ad, as well as its position on the page (top, middle, or bottom), depends in part on how often the ad is clicked by users. In effect, the better the ad, the less it can cost and the higher on the page it appears. Yes, that’s right. Google wants to make sure that advertising is relevant to searchers, so it rewards advertisers who draw clicks by giving them better positioning. Average clickthrough is about 2 percent, the company claims, five times that of comparable online ads. Google also suspends stinkers that pull in less than a 0.5 percent clickthrough, on the theory that they waste the advertiser’s money — and the customer’s time. Google sends a polite e-mail suggesting that you log in to change your ad or keywords.
What Google lost in easy revenue, it gained in explosive growth. Best of all, it’s working for the right reason: Both advertisers and Web surfers like it.