Google's Dangerous Experiment

Google (GOOG) is testing an advertising system that is based on “pay-per-action” by consumers. Instead of the advertiser simply paying for each time a consumer clicks on an ad, Google and its partners would only be paid if the customer took some other action, like making a purchase.

Google describes the program this way: "You define a fixed amount that you’d like to pay for a completed action based on the value of that action to your business. You’ll only pay when that action is completed, not for a click or impression."

There is a real danger in this. If its works, advertisers might insist that Google begin to offer the program across all of its pages. That could undermine its "cost per click" model, which has been so successful in bringing it revenue.

Cost per click is easy to track. The user clicks a text ad and Google or its partner sites get paid.

Cost per action is a much more difficult program to track, and it could me much more expensive. It involves reporting whether a customer registered at another site or bought a product. How does this get audited? And, is the system more easy to "game", in other words can advertisers claim that people did not take a positive action when they really did? It would be a good way to avoid paying Google. The advertiser could benefit from misleading Google and its partners.

The system may be good for advertisers, but it could be bad for Google.

Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.