Founded in 1997, the company has quickly grown to become the 20th most-visited site on the Internet according to the latest data from Media Metrix. Quarterly revenues have grown from $19,000 for the three months ending June 1998 to $3.6 million for the same period in 1999.
GoTo.Com is trying to set itself apart from its competitors in two ways. First, it is a very clean site that has little advertising and, as a result, search results pop up more quickly. Second, it has pioneered pay-for performance pricing for advertisers. Under the pay-for performance model, advertisers pay only for the “click-through” they receive for their advertisements.
“This pricing model …allows advertisers to choose the price they want to pay…”
While this model is not unique to GoTo.Com, the company has added another feature that takes advantage of the Internet and its interactive capability. The position for advertising in the search results is sold by auction. Advertisers can bid electronically for certain key words, and the highest bidder receives the first position in any search results for that key word. Prices for key words vary considerably across categories. The highest price we could find was almost $7 per click, paid by on-line gambling services. Financial companies, providing mortgages or loans, are willing to pay more than $3 per click.
Perhaps not surprisingly, companies doing business on-line are willing to pay a higher price for clicks through to their sites. Prices for some categories (computers, electronics) are as much as $2 per click. That compares with $0.40 for restaurants, and a host of others who pay nothing. All advertisers must still pay an initial listing fee of $25 to be part of the search results. The proximity as of prices paid within specific categories indicates that the auction is working. Price differentials for the top positions in the search results seldom vary by more than one cent.
Depending on the category, prices decline at different rates. For some highly competitive listings (e-commerce, for example), companies coming up 80th in the search results are still paying $0.17 per click. In other headings, the prices paid fall to zero. This pricing model has a lot of merit. It allows advertisers to choose the price they want to pay based on their perceptions of the volume and value of business the listing generates. For its part, GoTo.Com does not have to manage prices for every heading or even to know what the value of being in a heading might be.
That means the company can implement what appears to be a very complicated pricing structure without all of the administration required to manage a price list with several hundred different price points.
As GoTo.Com‘s traffic grows, its revenues will grow in two ways. First, the number of clicks on advertisers‘ listings will increase. Second, the price that advertisers may be willing to pay will also increase as the importance of Internet-based business grows. In the world of the Internet, it is difficult to get an apples-to-apples comparison of the performance of various companies. The chart below, however, is based on revenues and losses for four Internet search engines, and does provide some indication of profitability. Obviously, the larger search engines perform much better when it comes to revenue per site visitor. Both Excite and Yahoo are successful companies in this field and their revenues are indicative of their strong positions in the marketplace.
When losses alone are considered, GoTo.Com fares better, which may be an indication that its pricing system has the potential to be a better profit model.
Another point worth noting is that advertising rates, especially for banners, are falling – both because of changes in search behavior on the Internet and because advertisers are questioning the accuracy of the data on the number of “impressions” that their banner ads actually receive. So far, experience with the GoTo.Com model seems to suggest that prices will probably increase in many headings for the company in the near future, which should lead to more earnings per site visitor.