Google currently uses the Cost-Per-Click pricing model, where advertisers pay based on the number of clicks to their advertisements. The value that a business gets from such an advertising model ultimately has to do with the number of ‘actions’ that the advertising triggers in a consumer. In some cases, this is easy to measure. If a consumer buys a product and was directly referred by clicking on a Google advertisement, it is clear that the ad triggered an ‘action’.  In other cases, it is not as clear when the ad has caused an action, especially when an ad is being run for brand or product recognition. Regardless, it is often useful to a business to understand what its advertising cost is per action generated. For example, if a retailer spends $2000 on advertising for 5000 clicks, and has determined that of these clicks, 500 led to a purchase (‘action’) then the cost per action is $4, although the retailer is really paying $0.40/ click.

Some Reports (http://internet.seekingalpha.com/article/12363) indicate that Google is considering the introduction of a Cost-Per-Action pricing model, where they charge not by the number of clicks but by the actual number of actions that the ad generates. In the example above, the retailer could sign up and elect to pay $4/action instead of $0.40/click. One reason this becomes attractive because of the concern for click fraud. The argument can be made that when paying per click the retailer risks paying for ‘fraudulent’ clicks whereas when paying per action this is much less likely. One way that Google appears to have created an opportunity here is through Google Checkout, a service where Google handles the monetary transaction of a purchase akin to ‘Paypal’. This would allow Google to more easily track when an ‘action’ is generated from an ad click.

So what is the motivation for Google to introduce CPA advertising? Clearly, it is not certain that CPA advertising will make its way out of current testing phases. Google must see a way to increase its revenue by using CPA advertising. If a company is currently paying $4/action in a CPC model and is not willing to pay more, then it does not benefit Google to move to a CPA model.

An interesting note about CPA relates to Google’s Quality Scores. In a CPC model, Google uses the ‘Click Through Rate’ as a metric in determining the relevance of an advertisement to a given keyword. In a CPA model, Google could use an “Action Rate” to determine the Quality Score. This is powerful because (perhaps not explicitly) a user now knows that prominent ads (high Quality Scores) have a higher chance of not only appearing relevant (likely for a user to click) but actually being relevant (likely for a user to act on).

It seems to me that this fact increases the value of advertising to the user, which in turn should increase the valuations given by advertisers and the prices that Google assigns to keyword slots, generating more revenue for Google. This also implies a way that a company would be willing to pay a higher rate in a CPA model than in a CPC model. Additionally, if many companies start using Google Checkout in conjunction with CPA Adwords, that also increases revenue for Google.  Overall, it seems that the addition of a CPA model could increase revenue for Google, and time will tell if this is the case.