Online advertising is all about purchasing intent

A while ago I dug up this quote from Business Week from 2000:

But how will Google ever make money? There’s the rub. The company’s adamant refusal to use banner or other graphical ads eliminates what is the most lucrative income stream for rival search engines. Although Google does have other revenue sources, such as licensing and text-based advertisements, the privately held company’s business remains limited compared with its competitors’.

We now know what people were missing back then and why Google generates such massive revenues from advertising.  The lesson is that the RPMs* of online ads are directly proportional to the degree** to which the user has purchasing intent.  This is why when you search Google for “cameras” you’ll see ads everywhere (and those advertisers are paying high CPCs), but when you search for “Abraham Lincoln’s birthday” Google doesn’t even bother to show ads at all.

This is also why Nextag will have revenues this year in the ballpark of Facebook’s revenues, even though Nextag gets a fraction of the visits:

Screen shot 2009-09-27 at 9.33.10 AMScreen shot 2009-09-27 at 9.32.46 AM

When people talk about search being a great business model (for, say, Twitter), they should distinguish between search with puchasing intent, which is an incredible business model, and search without purchasing intent, which is a terrible one.

This may change as brand advertising moves to the web.  But for now web advertising is dominated by “direct response” ads, and those are all about purchasing intent.

* RPMs = revenue per thousand impressions – can we please agree to start saying RPMs instead of CPMs or eCPMs?  🙂

** degree being how close the user is to actually purchasing multiplied by the profit margin on what they are purchasing