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Why Pay For Ads That Don't Work?

Imagine if advertisers had to pay only when a customer bought something. That day may be here.
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Businesses have long worked to take the guesswork out of advertising. And for a time, pay-per-click ads on the Internet seemed like a pretty good solution. Not only did pay per click let marketers better target their campaigns, it cost them money only when potential customers actually clicked on their ads.

But for many businesses, pay per click has been a letdown. For one thing, between 20 and 50 percent of clicks are estimated to be made by people who have no intention of buying--and many are outright fraudulent. And the price of keywords is soaring; popular terms on Google cost an average of $1.95 per click.

Now a host of technology entrepreneurs believe they have a better answer. They're working toward a future in which online advertisers, instead of buying clicks of uncertain value, will pay only when an ad results in a phone inquiry--or, in some cases, an actual sale. Their services, which are just now becoming available, represent a kind of Holy Grail for marketers and could spark a revolution in the way businesses seek to reach customers. "Pay per click was just the beginning," says Bill Gross, who helped pioneer Internet advertising in 1998 with GoTo.com, the Web's first paid search engine, which he later sold to Yahoo. Gross has launched two new online advertising services, Snap and InsiderPages. "The real evolution is pay per action," he says--in which advertisers pay only when a customer actually does something, like signing up for a newsletter or purchasing a product.

The appeal of these new services is easy enough to understand. A phone call is far more likely to result in a sale. Some 30 percent of calls lead to sales compared with a mere 3 percent of clicks, according to Jupiter Research in San Francisco. "That kind of high close rate should put some pressure on the kind of fraud that happens over the Internet," says Bill Leak, CEO of Leads Customers Sales, an online marketing firm in Austin. "Where I'd pay $1 for a click, I might pay $10 for a phone call." Indeed, research by the Kelsey Group, a market research firm in Princeton, New Jersey, shows that 42 percent of advertisers would prefer paying for phone calls over clicks.

Pay-per-call advertising was pioneered and trademarked in 1999 by a company out of San Francisco called Ingenio, which has since partnered with AOL and Smartpages.com to bring the technology to market. It's similar to bidding for keywords on Google, except that when your company appears in the results of an AOL search, you're charged only when a potential customer picks up the phone and calls you. (The average price per call is about $5.50, according to Ingenio.) Ingenio supplies a toll-free number, which allows it to automate the tracking of unique calls. "We only charge once per each unique customer, not for each phone call," says Marc Barach, Ingenio's chief marketing officer. That means you don't have to pay over and over again to serve the same customer.

Another pay-per-call start-up, Jambo, based in Agoura Hills, California, recently partnered with the search engine InfoSpace. When a potential customer makes a call through Jambo, a voice lets the advertiser know the call is coming from Jambo and gives the advertiser the option of whether or not to accept the call--and the charges. Like a collect call, "it gives the merchant the option to opt in" and avoid paying for inquiries that are likely dead ends, says John Melideo, founder of Jambo.

Pay per call currently makes up only about 2 percent of the online advertising market, but it is expected to soar to some $4 billion, as much as 15 percent of the market, by 2009, according to the Kelsey Group. Despite its promise, it may not be the best fit for every business. So far at least, the technology is best suited to local merchants such as plumbers, electricians, and even mortgage brokers--many of them without websites of their own--that have traditionally relied on the printed yellow pages to reach customers. For businesses engaged in e-commerce, on the other hand, customers may not be interested in placing a phone call.

Bill Gross's Snap aims to have broader appeal. It's the first search engine that enables so-called pay-per-action advertising. If, say, an airline places an ad on Snap, it would pay a fee only when a customer buys a ticket. Another business could arrange a deal in which it was charged only when a potential client logged on and requested additional information or registered for a sweepstakes. "This radically changes advertising," says Gross. "It makes it much more accountable."

Google, Yahoo, and MSN are all expected to roll out their own versions of pay per action later this year. That's good news for Missy Cohen-Fyffe, president of Babe Ease in Pelham, New Hampshire. Babe Ease sells about $2 million worth of quilted coverings for shopping carts and public highchairs each year under the Clean Shoppers brand name. Cohen-Fyffe says she has been advertising through Google for several years but has become frustrated by the constantly rising price of keywords. An even bigger problem, she says, is that she's not seeing a corresponding increase in sales. A pay-per-sale program, on the other hand, would allow her to track the return on each and every advertising dollar spent. "If I'm getting orders routed to me, I'm more than happy to pay a commission," she says. "I'll pay for sales over clicks any day."


Resources

To read more about pay-per-action advertising, go to Internet Advertising Bureau, a trade group that researches new marketing trends. If you think you've been the victim of click fraud, go to clickfraudindex.com to learn how to investigate.

Last updated: Mar 1, 2006

DARREN DAHL

Darren Dahl is a contributing editor at Inc. Magazine, which he has written for since 2004. He also works as a collaborative writer and editor and has partnered with several high-profile authors. Dahl lives in Asheville, NC.




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