In a bid to take on paid search giant GoTo.com (now known as Overture Services), Google launched Google AdWords in October 2000 as a self-serve CPM-priced paid search listings service. In February 2002, after extensive testing, Google made the decision to phase out the CPM pricing of AdWords, launching as AdWords’ replacement the CPC-priced paid listings service, AdWords Select. Earlier this year, in 2003, Google one-upped rival Overture, beating Overture to market with the launch of the Google AdSense product, soon thereafter announcing the complementary acquisition of content-targeted advertising pioneer, Applied Semantics - both in a move to take an early lead in the burgeoning content-targeted ad arena.

In a span of three years, Google has risen from the status of non-player in the paid search industry, to become one of the space’s bellwether companies. On the heels of the advent and anticipated proliferation of local paid search marketing, daypart-based campaign targeting capabilities and a myriad of other paid search innovations that are expected to greatly expand the strategic opportunities available to the marketer, every step Google makes is the subject of much industry discussion and scrutiny. And rightfully so, as what action Google takes could well determine the future trajectory of paid search altogether.

In this first release in our series on Search Innovation, which aims to gather insights into key paid search trends and future directions from some of the major paid search venues, avant|marketer sits down with Google Vice President of Advertising Sales, Tim Armstrong. Here, in what follows in Part I of our interview with Armstrong, Armstrong talks to avant|marketer about the paid search usage trends that are currently being seen amongst Google’s advertising base, the evolution he expects to see on the tracking and performance metrics sides of paid search campaign management, and whether pricing for paid search inventory is likely, in the long term, to shift from CPC to CPA (cost per action).

avant|marketer: Recent research from iProspect suggests that the vast majority of marketers currently using paid search either use no metrics to estimate campaign success or do so solely by referencing clicks and traffic, while only a minority factor in conversion rate as a criterion and a very small minority use ROI metrics more complex than this. How closely do these findings match up against what you’re seeing right now? And how are things likely to evolve, going forward?

Tim Armstrong: I would say that campaign performance tracking is the most critical thing that marketers are focusing on right now. I’ve seen that iProspect report too, and from our customer base I can say we’re seeing similar things going on, with about just under half of our marketers tracking actions beyond the click, and the remaining marketers not tracking beyond clicks currently gearing up to do that kind of post-click tracking. That said, our most sophisticated customers have already invested in enterprise-level technology solutions to track the profitability of virtually every paid search action that happens in their campaign. This is a definitive shift that’s happened over the last year. The changes have been mostly driven by marketers in categories like Travel and Consumer Retail where there is very, very heavy competition for inventory and where there are also very tight margins. With the arrival of paid search, advertisers in these categories - these highly margin conscious advertisers - have really started to look at advertising as a margin-type transaction ... as a function of a cost-per-sale. I believe that as these bleeding edge marketers become more and more heavily invested in search, they will take progressive steps to squeeze out the maximum ROI from their campaigns. Basically, these marketers will prove out what works and how to optimally extract ROI, and marketers in other categories that lag slightly behind these more progressive categories will adopt these methods of tracking as being best-of-breed.

avant|marketer: What kinds of enterprise-level technology deployments are you seeing by the most sophisticated players?

Tim Armstrong: The more sophisticated players - these bleeding edge marketers - particularly in the Consumer Retail area, are running automation on both the front ends of their campaigns, in terms of getting their marketing programs up and running, and automation on the backends, as well, in terms of determining what kind of performance they are getting at their sites from their campaigns. On the front end, they have set up systems that tap directly into their product database and take all of that product data and automatically feed it into the various paid search marketplaces. And on the back-end, their systems are alerting them to how the returns from their campaigns are coming in and then the systems are making adjustments to their campaigns in real-time to optimize to ROI. What we’re seeing, in essence, is that the more sophisticated marketers have set up a closed loop of automation that runs many facets of their campaigns for them.

avant|marketer: There is a difference, of course, between tracking and automation - which are essentially technology issues - and marketing metrics, which is an issue of how to assess the value of a campaign. Right now, a number of large-scale marketers claim to be optimizing their campaigns to ROI, but when they explain what this means it’s clear they are looking at sales through search as strictly margin transactions, as you’d said earlier. The consequence is that there are often vast pockets of terms that seem very profitable on a margin basis - on that initial transaction - but which in fact would prove over the lifetime of a customer to be less profitable than terms that appear to be money losing on the initial transaction, and which therefore never get bought. This seems largely to be a question of metrics. What do you believe are going to emerge as the metrics that will ultimately be used to measure the performance of paid search campaigns?

Tim Armstrong: Metrics to assess paid search campaign ROI are going to become much more sophisticated over time, no question. I think customer lifetime value is really the holy grail of metrics. But lifetime value is a very complicated metric to use, which needs to take into account such things as whether a particular type of customer is a repeat customer, whether or not there are other products that you can sell that customer, how much does it cost to service them, all the way down to what is the value of the research information you get out of that customer that allows your business to operate more profitably or efficiently.

But, what you’re driving at is absolutely correct: There are many layers to the question of what is profitable and not profitable. We’re on the outside of the onion right now, though over time the onion will keep getting peeled back and peeled back; profitability analyses will continue to become more and more refined. Right now the bleeding edge marketers in the search marketing space are really running their search marketing by trying to find out which search advertisements are profitable and which are not profitable. I think what we will see now in the future is a shift from the question of what advertisements are profitable to what kinds of customers are profitable. There is going to be a shift in thinking in the search marketing arena from margin by ad to margin by type of customer.

avant|marketer: And, over time, what will happen to those marketers that are not able to bend their metrics to account for something approximating customer lifetime value? Obviously, paid search inventory is limited. To get that limited inventory, going forward, won’t the marketer have to be able to put a very precise value on a click to compete with those marketers that are able to do this and that can probably pay more for clicks as a result? In other words, is marketplace bidding essentially evolving into a war whose result is going to be decided by who can formulate and can measure against the superior and more complete set of ROI metrics?

Tim Armstrong: I think the way the marketplaces are set up - around performance-based pricing - the advertiser is incentivized to get their company lined up around really being able to quantify the value of a click very precisely. If I’m the CFO of a major advertiser and I know that my paid search campaigns have historically been profitable for my company all the time, paid search becomes a serious potential sales channel to me, and not something that I’m going to let slip away. So I don’t think advertisers are going to wait by the sidelines and look at the evolving paid search marketplace and say, “now its getting too expensive, I obviously don’t know what I’m doing, I should get out.” I think they’re going to say, “there are proven ways to make this medium effective and profitable, and to get sales volume at the same time, and I’m going to go ahead and make the investments of resources and time to make these proven approaches work for us.”

That said, I think there are going to be certain advertisers that do lag behind others, and some of those advertisers might lose out and not be able to capture as much inventory as their competition because they aren’t looking at deep enough metrics or they aren’t tracking everything they could be tracking. So advertisers can’t get lax; advertisers are going to have to constantly look to improve their metrics and improve what they can track. Like I said earlier, I think it’s going to be marketers in some of the super-competitive categories, like Travel and Consumer Retail, that are going to prove out the best practices for metrics, tracking and optimization, and these approaches will then trickle down to the other categories over time, and will show marketers in general what approaches are working.

avant|marketer: Google has said on more than one occasion that it will do whatever is needed is to enable the search marketer to operate in an optimally efficient fashion within the Google PPC marketplace. While this has been said, Google and indeed the rest of the PPC search marketplaces have not to-date offered much in the way of either optimization or pre or post-campaign analytics tools to the marketer. What sort of evolution are we likely to see here?

Tim Armstrong: Google has really bet the future of our advertising program on the premise that advertisers spend ad dollars for three reasons: One, to get more customers. Two, to get more revenues. And three, to save time. These are our advertisers’ objectives and so Google is committed to forwarding them. What you’re going to see from Google is that we are generally going to make investments - heavy investments - in all of the ways of helping our clients to understand how ROI advertising works that can that forward these three objectives. In the last three or four years since Google has launched its ad program, the paid search campaign tools sets that are available in the marketplace have not substantially improved in robustness, across the board. There is a lot of ground for improvement compared to where we are at now, and we are going to be working to make these improvements to the tool sets available to search marketers.

avant|marketer: Specifically on the campaign optimization front, what sorts of things should we expect Google to offer to clients?

Tim Armstrong: The optimization services we are going offer to clients - and many of our larger clients are already utilizing these services through us, but also independently - break down into two groups: technology optimization and human optimization. The technology optimization side has to do with using automated systems to track how campaigns are performing - which keywords are converting and which ones are not - and then allow the marketer to make changes to their campaigns so that all portions of their campaign are yielding a return on investment, and that there are no areas in a campaign that are losing money. We’re seeing now that as marketers expand their keyword sets to thousands of keywords, in many cases - and this is especially true of Google’s larger clients - it is absolutely not possible to get an idea of how well a campaign is performing without the use of this kind of automated technology.

The other area in which Google is providing optimization services has to do with the aspects of paid search campaigns that can’t be handled in an automated way; they have to be done by human beings. Improving sales volume for the advertiser often takes making adjustments to ad copy to improve the amount of qualified clickthroughs an advertiser receives on their ad. Likewise, improving conversions is not only about selecting the correct keywords, landing pages have got to be optimized so that they persuade the user to take the appropriate action. Google has specialized staff that work on these kinds of optimization for our larger advertising clients. All of this work has to be done by hand.

avant|marketer: Long term, will Google making available these sorts of optimization services alter the fundamental structure of the paid search marketplaces? Just a year ago, rhetoric in search engine marketing circles centered on traffic acquisition. As you say, much greater emphasis is now being placed on traffic conversion, even by the PPC marketplaces themselves. If we look at the space, we see that FindWhat just announced its intent to acquire shopping cart technology provider, Miva Corporation. Overture has recently introduced integrated conversion tracking capabilities into its system, an outcome of its acquisition of Keylime Software. In general, are we in fact seeing the PPC marketplaces steadily evolving beyond being mere traffic generation channels into being full closed-loop conversion engines?

Tim Armstrong: I think this is still up for debate. If you look at it, search engines are largely in the business of running information businesses for users. The search engines’ biggest asset to advertisers is traffic, which is really a bi-product of the information business. At Google we look at selling advertising against this traffic as a tool to use to fund our information business. The CPC, which is the pricing mechanism for the traffic is quite in line with our core competency: We need a way to price the traffic we send to advertisers, but it’s beyond out core competency right now to convert that traffic; that’s the advertiser’s core competency. Because the advertiser is in the business of converting traffic, most advertisers look at our CPC as merely a proxy for their CPA or cost per acquisition. That’s a very efficient relationship, which works very well for both the engines and advertisers.

avant|marketer: As the PPC channels such as Google immerse yourselves in helping advertisers get customers, revenues, and save time, as you said, won’t the situation become one of Google in essence optimizing for advertisers to a target CPA, while buying out of your own system on a CPC basis? Is it inevitable therefore that the increasingly large role Google, Overture and others aim to play in making paid search more efficient for clients will precipitate a shift in pricing from CPC to CPA?

Tim Armstrong: Well, this is why the issue is still up for debate. Whether, ultimately, pricing is done on a CPA-basis or a CPC-basis, we can’t be sure, because we can’t be sure at this stage how these developments we’re talking about will play out. CPA is certainly possible down the road.

For example, we talked about optimization: When we do campaign optimization for our clients now - both technology and human optimization - we’re really working from the customer’s “home court” - using their web sites, their business metrics, their customer data. They know their business and their objectives and they have assets in place to achieve those objectives. We simply help them achieve those objectives using paid search. Pricing on a CPC is one of the things that allows us the flexibility to do that. A CPA pricing system might not offer that same flexibility.

It is hard to predict, but what can be said is that there will be a continuing push to find out what exactly is the right pricing for an ROI-based advertising model ... which is what search advertising is. If I had to guess, however, I would say that pricing for search inventory is not likely to change from CPA in the near term, but that long-term there are likely to be multiple ways to buy search advertising, other than CPC.