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» About Google » Revenue Streams » Acquisitions of Google » Features and Products » Google's Products Milestones » Google’s IPO

Google’s revenue stream revolves around its pay per click program, AdWords. Google adopted revenue model which displays text ads along-side search results – based on the search query. The advertisers are required to bid for keywords associated with their sites. This model helps online media owners attract consumers to their site(s), exposing them to offers, ads and websites. This initiative took complete advantage of its dominant presence among the other popular search engines.

Google’s Revenue Model aims at increasing the visibility and traffic of its small business partners, streamlining their marketing costs, qualifying their leads and helping track returns on investment. AdWords is Google’s main source of revenue. AdWords offers pay-per-click (PPC) advertising, and site-targeted advertising for both text and banner ads. Google generate 97% of revenues from advertising (AdWords).

Google earns most of its revenue by allowing other website owners to advertise on their search result pages or by placing these same text ads (AdSense) on other sites based on relevance.  Usually, paid listings are shown on top of, or to the side of, any standard unpaid search results.

For the search engines, it is not enough to allocate ad space to highest bidder for any keyword. The providers’ willingness to pay for paid placement must be positively correlated with their true relevance.

Google introduced its advertising program in the first quarter of 2000. This program called the Premium Sponsorships enabled the advertisers to place text-based ads on Google’s web sites targeted to the users’ search queries. Advertisers paid Google based on the number of times their ads were displayed on users’ search results pages, and it recognized revenue at the time these ads appeared.

In the fourth quarter of 2000, Google launched Google AdWords, an online self-service program that enables advertisers to place targeted text-based ads on our web sites. The initial model of AdWords required the advertisers to pay based on the number of times their ads appeared on users’ search results pages. In the first quarter of 2002, Google began offering AdWords exclusively on a cost-per-click basis. In this case, the advertiser paid Google only when the user clicks on the Ad to the advertiser’s website. Google recognize as revenue the fees charged to advertisers each time a user clicks on one of the text-based ads that appears next to the search results on Google’s web sites.

Effective January 1, 2004, Google terminated the Premium Sponsorships program and now offer a single pricing structure to all advertisers based on the AdWords cost-per-click model. This change to a single pricing structure did not have a negative effect on its revenues because most of the advertisers switched to the AdWords cost-per-click model. The search engine’s potential for placement revenues depends on the overall demand for preferential placement. Intuitively, when more providers compete for paid placement, this will increase the market clearing price and the search engine’s revenues.

The search engine controls the number of paid slots it makes available. Thus, the more paid listings a search engine has, the more revenue it can generate from advertisers. However this expanded enrollment will most likely cause the search engine to enroll some listings with less relevance, thus negatively impacting the overall quality of the search engine as perceived by users. This may take some time but when the user is not satisfied, he will definitely reduce the usage. This in turn will reduce the total traffic at the search engine and the click through rates, thereby lowering revenue from paid placement.

Hence, increasing the number of paid slots will benefit the search engine up to a point, but that further increase in slots will cause reduction in overall placement revenue.

Search engines are an information gateway to many search and decision-making tasks due to the enormous amount of information they hold. Research shows that more than 50% of Web users visit a search engine every few days, the leading search engine (Google) gets over 300 million search requests each day, over 13% of traffic to commercial sites was generated by search engines, and over 40% of product searches on the Web were initiated via search engines. Paid placement advertising has become an important and fast-growing revenue source for Internet search engines.