As a company built on search, it comes as no surprise that Google is heavily dependent on keyword-based advertising. A large chunk of Google’s revenue is generated from clicks on its search ads. Recently, a report from researcher comScore showed that Google’s search-related ads are experiencing a decline in the number of clicks. The research firm said that “clicks on ads declined 3% in February… and were up just 3% compared to last year.” In the wake of this news, investors are wary of buying additional Google shares. The day after the report was issued, the stock price of Google declined 3%. In response to this report, Google officials are pushing forward with the idea that fewer clicks can actually lead to more revenue for Google. By improving the “quality” of clicks, Google hopes to offset the decrease in volume by increasing the bid price per click. The “quality” of clicks can be improved by reducing the number of clicks that don’t lead to revenue for advertisers. Basically, Google wants to generate more with less, which is always a good strategy.

To improve the quality of clicks, Google has reduced the clickable area around an ad to reduce the number of accidental clicks. In January, it also introduced a “conversion optimizer” for its AdWords advertising platform to “enable its ad customers to buy ads based on the number of sales those ads generate.”

As learned in class, “ad quality” is a very ambiguous subject. By quantifying the effects of quality, Google is once again advancing the business of search. Keyword-based advertising is much more complex than the simple model that we work with in this class, and more investigation into this topic is crucial for a full understanding of the rapidly expanding internet advertising industry. Currently, the search advertisement agreement between Google and its ad customers is very inefficient. The customers pay Google per click, and this money goes to waste when people click without actually purchasing from the advertiser. However, if Google can continue to find ways to improve the chance that a person clicking on the ad will actually purchase from the advertiser, it can charge a higher price per click, thus generating more revenue. At the same time, excess clicks that do not generate sales will be reduced, which benefits the advertisers.

“Google’s Gamble” http://www.businessweek.com/technology/content/mar2008/tc20080328_837834.htm