September 27, 2007, 12:00 AM

Google and PayPal collide at the checkout

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The competition between Google Checkout and PayPal burst into the spotlight during the 2006 holiday season. PayPal in early November announced discount offers of up to $100 million when consumers pay with PayPal Express Checkout. Google offered free processing on Google Checkout transactions and later in November offered discount coupons, typically $10 to $30 off, when consumers paid with Google Checkout. Google later reported spending $58 million on the promotional coupons; eBay never put a dollar value to the PayPal coupons redeemed.

The coupons drove traffic to Google Checkout merchants. Aéropostale reported that Google Checkout quickly accounted for 40% of its business after the promotion began, and 90% of those customers were new to the apparel retailer. Jeweler Zale Corp. says Google Checkout accounted for 8% of sales while discounts were being offered and 5% since then.

A powerful brand

PayPal was also aggressively signing up new merchants, who similarly reported increased sales. After Laptops for Less, which sells batteries and adapters for mobile devices, introduced PayPal Express Checkout last November sales went up 10%, although credit card sales remained steady. That suggests PayPal accounted for the lift, says Jeff Gardner, vice president of marketing and e-commerce.

While the discounts introduced Google Checkout to many consumers, PayPal remains far more popular, according to a recent survey by JupiterResearch. Among Internet users, 33% said they had a PayPal account and 23% called it their preferred way to pay, compared with 2% with Google Checkout accounts and 1% preferring it. “Google Checkout is on the board, but clearly there’s a way to go,” says JupiterResearch analyst Ed Kountz.

PayPal also matched Google’s offer of free transaction processing. Google first made the offer last November, saying it would last through the end of the year, then extended it through 2007. PayPal followed a similar path, and its current promotion extends for nine months from sign-up, going well into 2008 for merchants signing up now.

Although PayPal matched Google’s coupons and free processing, Google appears to have gained an edge by leveraging its powerful brand name.

Google originally added a blue shopping cart icon to paid search ads from Google Checkout merchants, but the icon did not say “Google.” In February, Google switched to a badge that says “Google Checkout,” and some retailers say that made a big difference.

Ritz Interactive, which operates such web sites as RitzCamera.com and BoatersWorld.com, says its click-through rate went up 23% after the Google Checkout badge was added to its ads, and that the conversion rate on those click-throughs went up 24%. Intermix, an apparel retailer, says its click-through and conversion rates went up about 20%. At sporting goods retailer Sportscloseouts.com, the Google Checkout badge boosted click-through rates from about 1.2% to 2.2%, an increase of more than 80%.

Paid search savings

Besides increasing sales, some retailers say the tie to Google gives them an image boost-which lets them economize on their paid search spending. For instance, Don McNichol, director of e-commerce at Intermix, a retailer of trendy apparel little known outside of the few major markets where it has 20 stores, believes he no longer has to bid high on keywords so that his search ads would appear above those of such well-known competitors as Neiman Marcus, Saks and Nordstrom.

“When I didn’t have the Google Checkout icon, I would have had to bid to be up there with that kind of brand,” McNichol says. “I can be a little further down on that page, but because I have the Google icon consumers still feel this is a viable organization.”

The higher click-through rates affect search marketing spend in another way: To the extent ads with the Google badge are clicked on more often they get a higher Google “quality score” for ad-positioning purposes. That is causing other retailers to adjust their keyword bidding strategy, says Wingo of ChannelAdvisor.

“If I’m bidding on the term iPhone at $1 a click, I’ll show up higher if I have a higher click-through rate,” Wingo says. “If I take Google Checkout, I can pull back to 90 cents and still hang with a competitor that doesn’t take Google Checkout, or I can continue to pay $1 and leap ahead of some competitors. It’s a hidden economic benefit of Google Checkout, but one of the largest economic benefits, aside from the inexpensive payment processing.”

One retailer that may have benefited from that effect is PlumberSurplus.com. The online plumbing supplies and housewares retailer reported a 14% drop in its Google AdWords pay-per-click costs during a January-to-May promotion. Consumers were offered $10 off on orders of $30 or more, a deal that boosted conversion rates on Google search ads by 30%. The company would not say whether the pay-per-click reduction came from lower prices paid for keywords, more clicks, or both.

PayPal’s icon

PayPal, meanwhile, has tested an icon of its own-a blue shopping cart similar to the one Google used initially-that appears alongside Yahoo search results. “The jury is still out” on whether an icon boosts click-through rates, says Stephanie Tilenius, vice president and general manager of PayPal Merchant Services, which handles PayPal’s off-eBay business.

She acknowledges that the icon Yahoo displays does not say PayPal, and thus might not benefit from PayPal brand awareness. “We’re testing a bunch of different icons,” she says. “You’ll see different buttons pop up, and some will say PayPal.”

But PayPal and Yahoo “are not one and the same company,” observes Manish Chowdhary, CEO of shopping cart technology provider GoECart, which could account for the less aggressive promotion he sees of the PayPal brand on Yahoo.

And because PayPal and Yahoo are not the same company they do not have Google’s freedom to use Google Checkout as a loss leader to promote its lucrative advertising business. That essentially is what Google will be doing, starting in 2008, when it offers Google Checkout merchants $10 in free processing for every $1 they spend with Google AdWords. For some merchants that will make Google Checkout processing free; at a minimum, it will reduce processing fees for Google advertisers.

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