The search engine giant crashed PayPal’s payments party with financial incentives to retailers and a tie-in between Google Checkout and AdWords. But some merchants are wary of Google, and PayPal is rallying support for its Express Checkout with the aid of parent eBay and Google arch-rival Yahoo.
By Don Davis
Jon Kuhlmann has had a front row seat as that competition unfolded.
Kuhlmann, whose company Grapevinehill.com sells discount footwear, had been taking PayPal for years, largely to service the eBay Inc. customers that account for 80% of his revenue. And when Google Checkout came along he added that payment option to his eBay store and his own site.
But eBay, which owns PayPal, was having none of it. “For the first few days we took Google Checkout for some eBay transactions, but that was quickly stopped by eBay,” he says.
A year later, eBay was still banning Google Checkout, saying it is unproven. And Kuhlmann was on hand in Boston when Google’s attempt to poke fun at that ban badly misfired.
Party crashing
Google invited merchants attending the annual eBay Live event in June to attend a Revolutionary War-themed party billed as “a celebration of freedom of choice.” Unamused, eBay, one of Google’s largest advertising customers, canceled its ads. Google sheepishly called off its party and eBay restored most of its ads the following week.
“It was all about Google Checkout,” Kuhlmann says of the spat. “It’s definitely a competition.”
It’s a competition that’s raged for 15 months now, with Google and PayPal wooing merchants with tens of millions of dollars in discount coupons that drive consumers to retail web sites, free transaction processing, attention-getting icons on paid search ads and new services. And there are no signs of a let-up.
“They both have really deep pockets and they want to win this space, so I don’t see any end in sight,” says Scot Wingo, CEO of online marketing firm ChannelAdvisor Corp.
The battle is important to Internet retailers because it could affect not only their payment processes but also their marketing programs in that both Google and PayPal are offering incentives to merchants that include search advertising discounts on Google or, in PayPal’s case, Yahoo.
It also could affect marketing in another way: A Google Checkout transaction ends on a Google page, altering the customer experience and in some cases masking the customer’s e-mail address. Retailers are watching to see how Google addresses those concerns.
From search to buy
Google executives say they designed Google Checkout to encourage consumers to shop online by making it easier to search for a product, find a reputable merchant and pay—without revealing a payment card number or other personal information to the merchant. “We felt we could provide more information about places to shop and, when consumers went to buy, save them time,” says Tom Oliveri, marketing lead for Google Checkout.
That improved search-and-buy experience, and added privacy protection, will make consumers more willing to shop online, especially at little-known merchants, Oliveri says.
To use Google Checkout a consumer registers a payment card and billing and shipping address with Google Checkout, then clicks the Google Checkout button at a participating web site and enters a user name and password to complete the payment on a Google Checkout page.
Google Checkout directly competes with PayPal Express Checkout, a service introduced in 2005 that, like Google’s system, allows a consumer to store card, billing and shipping details in an online wallet and then pay by entering a user name and password.
Express Checkout, of course, is just part of PayPal’s portfolio. The original PayPal payment service lets users pay by debiting value stored in their PayPal accounts or their bank accounts. PayPal also acts as a payment card processor for online merchants.
The game is on
But it is the competition between the two checkout services that has embroiled four of the biggest success stories in the short history of the Internet. Besides Google and PayPal, that includes PayPal parent eBay and Google’s closest competitor among search engines, Yahoo Inc.
Those four companies have plenty of cash and lots at stake in the tussle over online payments.
Google is Wall Street’s darling, with a staggering market capitalization of $164 billion and net income of $3.1 billion last year on revenue of $10.6 billion, almost all of it from advertising.
EBay and Yahoo are no slouches, either, though their combined market value is only half that of Google. EBay reported net income of $1.1 billion on $6 billion in revenue in 2006; Yahoo’s net income was $751 million on revenue of $6.4 billion.
For eBay, PayPal is an increasingly important part of its business. PayPal produced revenue of $454 million in the second quarter of this year, a quarter of eBay’s sales. And PayPal grew by 34% while eBay’s core auction business grew only by 26%.
PayPal, which started in 1998 as a way for acquaintances to exchange money through their Palm Pilots but gained traction among eBay buyers and sellers, is growing especially fast off-eBay. Non-eBay transactions accounted for 42% of PayPal’s business in the second quarter, up 57% from a year earlier.
It’s these businesses that are threatened by Google Checkout. Any purchase that goes to Google Checkout does not go to PayPal, either as a PayPal payment or as a PayPal-processed card transaction. (Chase Paymentech processes Google Checkout transactions.)
Building a roadblock
For its part, Yahoo has aligned with eBay and PayPal to try to slow Google’s robust growth. Google accounted for 53% of all U.S. searches in July and its search volume was up 49% over the prior year, according to Nielsen/NetRatings. Yahoo had just over 20% of the search market in July and had grown at a much slower rate of 16%. Now, Yahoo and PayPal have come up with a deal offering merchants that accept PayPal Express Checkout nine months of free transaction processing and a $100 credit toward Yahoo search advertising—if they maintain a search advertising program on Yahoo.
Yahoo is also promoting PayPal to merchants that use its e-commerce hosting service. And, like eBay, Yahoo does not allow its online retailers to accept payments through Google Checkout.
For Google, Google Checkout is another way to tie consumers to Google and to learn more about them. Consumers use the same user name and password to sign on to Google Checkout as they do for such services as their Gmail e-mail accounts and iGoogle personalized home pages. Thus Google Checkout transactions provide Google more data about those purchasers, allowing Google to deliver them more relevant ads—enhancing Google’s core advertising business.
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.
As long as that offer pumps up AdWords sales, Google can offer free processing indefinitely, says Jay DeWitt of consulting firm Glenbrook Partners. That, he says, poses a big challenge to PayPal.
“PayPal is in the payments business to sell payments services, while Google is in the payments business to sell advertising,” DeWitt says. “The question for PayPal is: what do you do when your competitor doesn’t care about the underlying economics of the business?”
PayPal’s Tilenius downplays the threat. “Google is competing in just one element of our business,” she says. “What they’re trying to do is interesting, testing whether they can affect advertising through payments. But we haven’t seen any effect on our business to date.”
Nonetheless, Google Checkout appears to have made headway with online merchants. By June, 26 of the top 200 U.S. online retailers as ranked in the Internet Retailer Top 500 Guide were accepting Google Checkout, up from 15 in January, reported stock analyst Jim Friedland of Cowen and Co. He found 52 of the top 200 accepted PayPal in June, but only 21 offered PayPal Express Checkout.
Where did the shopper go?
For all Google has going for it, there are aspects of Google Checkout some merchants find troubling. For instance, the last few steps of a transaction take place on a Google page, not on the merchant’s site, which means the retailer does not control the entire customer experience.
That’s a big issue for Jorge Perez, director of marketing at Alienware, a Dell Inc. subsidiary that sells high-performance computers. “We take a lot of painstaking work in making sure the customer is happy with the process of buying a computer,” he says. “We wouldn’t want our customers to have to check out from the Google page.”
Ending on a Google page also could limit a merchant’s ability to offer the customer additional items. Google does, however, include a link on the final Google Checkout payment page back to the retailer’s site.
Furthermore, Google lets Google Checkout users opt to hide their real e-mail address from retailers; the retailers instead get an e-mail alias for sending order and shipping confirmations.
Golf equipment retailer Golfballs.com says about half of its Google Checkout users withhold their e-mail addresses, making it harder to market to those customers after the sale. Many retailers put a high value on e-mail addresses. Cosmetics retailer Bath and Body Works, for instance, recently reported it sells $18 more a year to customers when it has their e-mail addresses.
Google’s Oliveri responds that giving consumers more control over their personal information will make them more likely to make an online purchase, particularly at merchants that are not household names.
Some selling to do
But the Google Checkout payment process gives some merchants pause. “Google is saying, ‘We’re taking your customer and we’ll take care of them from here on out.’ It’s something we definitely have considered as we’ve evaluated the payback,” says Alan Johnson, director of payments at Overstock.com, which is considering acceptance of Google Checkout and PayPal.
Rick Quiroga, vice president of finance at consumer electronics retailer Newegg Inc., says that, while the processing discounts are appealing, he is skeptical about Google Checkout. “They basically would own the customer and we would have no way of subsequently contacting them,” he says.
Unlike with Google Checkout, in a PayPal transaction the consumer only goes to PayPal to sign in, then returns to the merchant site to complete the purchase. PayPal executives point to this as a key difference with Google Checkout. “The whole strategy we’ve pursued is to be an enabler for the merchant, let them manage the buyer relationship,” Tilenius says.
She also emphasizes other benefits of accepting PayPal. For instance, of the 153 million PayPal account holders, 36 million have used PayPal in the past 90 days, suggesting a large and loyal cadre of PayPal users.
And many of them keep balances in their PayPal accounts, often accumulated through sales on eBay. At any given time there is $2.5 billion in PayPal accounts, and that money typically turns over every two weeks. Much of that gets spent online, and 18% of U.S. online shoppers in a recent PayPal-sponsored survey said they would not have made a purchase if the retailer had not taken PayPal.
PayPal, in addition, continues to add to the payment options it offers that can be accessed through Express Checkout. PayPal this spring introduced Pay Later, which lets PayPal merchants offer consumers deferred payment for 90 days without interest.
More enhancements are likely. Both Google and PayPal began testing this spring streamlined payment services for cell phone users. And Google has started a five-star rating system for Google Checkout merchants that some participating retailers hope will soon be visible to consumers.
Meanwhile, the competition goes on. Kuhlmann of Grapevinehill says PayPal recently offered him reduced processing fees if he would take PayPal Express Checkout exclusively, which would mean dropping Google Checkout. He can’t do it today because of integration issues with other technology providers, but he says he will consider it if those issues are resolved.
“We would take a real good look at the numbers and check on what we’re losing,” he says. “Then I would call Google Checkout and say, ‘Hey, we’re about to do this. Do you have any thoughts?’”
don@verticalwebmedia.com
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