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How Yahoo and Google Make Money
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How do Yahoo and Google make money? This is a frequently asked question, so let me give a high level overview.
The short answer is targetted advertising. Why and how does it work?
What do you use Google for? Search. Let’s look at search. Say the user searches for “mountain bike San Diego”. Chances are he’s looking for a place to go mountain biking. Or, perhaps he’s looking to buy a mountain bike. Google will go and find the most relevant Web pages on that topic.
Now imagine you own a mountain bike store. If somebody told you they would let you show your advertisement to this specific user exactly at the moment he’s expressed interest in mountain bikes, while it’s foremost in his mind, would you be interested? Sure you would. That’s what Yahoo and Google do: not only do they find the most relevant Web pages, they also find the most relevant ads and show them to the user in the form of Sponsored Links.
The sponsored links are actually relevant, so some percentage of the people that see them click on them. Note that this is very different from Banner Ads – those are generic ads targetted at a demographic (or sometimes not targetted at all).
Each time a user clicks on your ad, Google or Yahoo has effectively sent you a lead, someone who’s likely to buy something from your mountain bike store.
This lead is valuable to you and you’re willing to pay for it. But how much?
Turns out you’re not the only mountain bike store in San Diego. I own a store too, and I want that same lead. I’m willing to pay for it too.
So how do we determine the price? Very approximately speaking, by bidding on it. It’s sort of an auction.
I want to advertise my mountain bikes. I go to Yahoo or Google and tell them: every time somebody searches on “mountain bike”, show my ad. I do this by specifying a bunch of terms related to mountain bikes, and I provide the text for my ad, and a link to my Web page. Something like:
keyword: mountain bike, offroad bike, offroad bicycle
advertisement: buy my wonderful mountain bikes, they’re the best
url: www.mywonderfulmountainbikes.com
You own a mountain bike store too, so you do a similar thing.
Along with my advertisement, I specify how much I’m willing to pay for each lead. What is a lead? It’s defined as a click on my ad. So my bid says I’m willing to pay X each time someone clicks on my ad.
Note that I pay for clicks, not for my ad being shown (aka impressions). It’s a good deal – I only pay if the user is interested enough in what I offer to click on it.
I specify a bid. You specify a bid too. Approximately speaking, the higher the bid, the more prominently/more frequently the ad is shown. Other factors go into picking the actual ordering of the ads, but bids play a big part.
So there you have it. Lots of advertisers bidding on many millions of keywords, and hundreds of millions of users doing billions of searches, a small charge each time somebody clicks on an ad, and you get a big business.
There are also contextual ads, the ads you see on blogs and other random web pages. Same idea, except instead of using the user’s search term to select the ads, the contents of the page you’re looking at is used. So if you’re looking at a page about mountain bikes, you’d see ads related to mountain bikes.
There’s more to it than this, but to a first order approximation, this is the core of the business.
Very informative, thanks. Is that how “portal sites” make money too? Are Yahoo and Google considered to be portal sites? Thank you. — Barbara Williams
The info aren’t full thou. Anyway google does make money from its own software.
It’s really informative..bundle of thank’s for increasing my knowledge.
i’m trying to understand how google makes so much money, and i still couldn’t understand.
i just can’t believe companies pay for clicks on ads, from which very few % make buys.
it’s weird guys
If you look the services they do both of the companies you can tell how they make their money. Advertisement is part of the business but not all. Google is data storing company, who knows if the company provides huge servers and data storage systems to all telephone , utility companies and even hospitals.
Nuradiin, I know, they don’t. Since both are public companies you can look at their public statements to see their sources of revenue. Advertising is the bulk of the revenue for both companies.
Prand Daruger, so you are saying google is not in business of storage data? i dont know yahoo. But iam sure google advertising is not only thier prime business
Nuradiin, I can tell you with complete confidence that advertising is google’s prime business. They store a lot of things, as does Yahoo, but data storage is not a business for them. That is, they don’t recognize revenue from storing data. Feel free to take a look at any of the multitude of sources that explain Google’s business and you’ll understand.
I too heard that search engines make money through advertisements. And the following link is the authentic source from where I learned it.
http://www.google.com/corporate/tenthings.html
But somehow I was not convinced with that. There are two reasons for this. 1) The number of users who really buy a product from the advertised shop after clicking on the ad will definitely be very less. So its looking very weird to pay to google just for a click. And the other reason is 2) Will this source of revenue produces such a huge amount for a large multi national company like google ??
What ever it is, the info is quite satisfactory, ty buddy
well logicly, which part of targeted advertising you guys didn’t understand? google make sponsor searches based on the datas each user request or searches on google, and it probably this same guy when searches mountain bike San Diego lets say he’s interested in mountain bikeing, posibly looking for some new bike, bcoz those guys surely don’t have just one bike in their biking career:DD
In my point of view, besides being a date-storing company, Google play a major part on advertisement such as Product Service providers, Internet network charges, Product sales links, sales new computer software materials – name a few and all kinds of commission-based advertisement as a whole.
Well, Let us see what GOOGLE has to say about it:
http://www.google.com/corporate/tenthings.html
Bulli
I’ve spent the last hour searching for a clear, concise, detailed description on how these web giants generate income. This is certainly the best description and explanation I have found yet. Thank you!!
Google makes 99% of their revenue through their advertising programs (AdSense and Adwords).
This is stated in their Form 10-Q of the US Securities and Exchange Commission.
See here : http://investor.google.com/earnings.html (click on earnings slides)
or
See page 19 of the following: http://sec.gov/Archives/edgar/data/1288776/000119312507238468/d10q.htm
Guys Guys, you have mentioned only about the Google search engines and how does Google make money from it.
But what about Google docs, picasaweb, google earth, and many more interesting google products. Don’t they earn from these.
Now you many say, users upgrade their storage limit in mail,picasaweb,docs etc etc .But how many users do so . Instead of paying google they will have one more account, even if they don’t very marginal people will upgrade their storage limit.
I don’t think sponsorship, Banner ads and upgrading storage is sufficient enough to prove the google’s earnings.
Google is the fastest growing company and they are impressed the world with their innovative products. But how do they earn so much. There may be some more ways which I don’t know. Can anyone let me know??
well i think this makes very sense, i heared it before but beside that i think there are other ways they earn money, for instance google has its own applications such that google earth,…
But nice description from the writer
Google also makes money from their booming shares
Hello everybody, I am answering deepak’s question in this post. I understand that it is hard to assimilate how a company a market capital of close to $80 Billion strictly out of advertising. Beleive it or not, advertising must account for at least 80% of their revenues. Do you ever think that any single search in a google is a potential sale, or click through we are talking about (Billions of clicks/month) trust me this a lucrative business, I just think that it is not widely understood and that’s why sometimes we wonder how else do they make money.
No business can successfully operate without advertising. A companies largest expense is it’s advertising budget. I understand how search engines like Google, Yahoo, etc make money by allowing companies to pay for prime positions in their search engine.
What I’d like to know is how can I earn money using Google Adwords and Adsense, etc.
I did not even have to read more than 4 paragraphs to get the idea no wonder why these Google guys are on the top 100 Forbes richest list.
Not only are they on the Forbes 400 and not only are they the 5th and 5th richest Americans of 2007, but Sergey Brin and Larry Page of Google are the second and third youngest members on the Forbes 400. Source
To help some of you still confused by this advertising paradox, consider the following: Google offers many products for free. I personally love free software/services etc. and download like no tomorrow. If most people are like me in that respect (which I’m mostly sure of) then almost everyone with a computer is using a Google product.
Now, if all these products have “Sponsored Links” attached, and Google receives revenue for every click upon them, Google’s generated revenues would be astronomical. This justifies advertising as being their primary means of income since their products do not directly yield profits. The attached advertising does!
hi
this is good informative article.but still i want to know how the Gtalk earn money and How the Gmail account earn money when 90% people make account free of cost.can anyone reply me.
Not a bad post, I decide to expand on this question a little more in-depth. I have used your article as a reference, without actually using your content. You can use the extra boost of PR
Even though you use external nofollow in your links, we have still provided a link to you
You explain keyword marketing well in this post, maybe you should expand a bit on that in a new post!
how much does the creator of google make??
sir
i make money how did —— i dont know any i idea to take mony
please guideline me i wait your answer
thangs
Dose anyone know anyother, new ways to make money over the web like Adsence,?
[...] services are services that help people to advertise. You have to pay at least $10000 per month. http://parand.com/say/index.php/2006/02/03/how-yahoo-and-google-make-money/ http://www.google.com/ads/overview.html [...]
Just illustration: If one click at 1 adv at adsense give google $0,05, and there are 100.000 advertisement with 1 click everyday. The number will be 0,05 x 100.000 = $5000 everyday. It will be $150.0000 everymonth.
But there are million ad on adsense, and also clustered in many counries and regions. Can you imagine how big it is. Also there are about dozen of service that google have just like adsense. Mmmm, I am 300% sure they are Rich.
Thanks for the original post
This is great info. If someone was looking to prove to investors that the ad revenue works, in simple terms, what is the best data source to provide them? I’m looking for hard numbers but numbers that are somewhat simple to put in a business plan? Something that is concise. Much thanks. Nice blog.
quite satisfactory.. but m just kinda curious, wen i searched google, this website is one of the leads.. does this mean you also paid google to show your site?
james, the regular search results (not the “sponsored” results) are ordered by Google’s internal algorithm for finding high quality pages and are supposed to be completely independent of the advertising (ie. pay) system. I’m not paying for this page to appear in Google results.
I have been hearing over and over how people are claiming how they make a bunch of money on google. Can anyone tell me where to look on line to find out exactly how this is done. Step by step?
Thanks
informative but up to the mark.
but at first how they started the business???????…
how many people will feed the info everyday?????
this same question was in my head since the days of Yahoo (and now Google) … still hard for me to imagine those two giants earn from advertising only … is it possible that they earn from selling statistical data (marketing data) to companies that needs such kind of data ?
apart from advertising how do google make there money,gmial,flicker,yahoo.
how whole network works? means, billions of data, storing, analysing data,earning, dealing with the globe’s businessmen for advertising or whatever, still how can anyone bit google???? i am not intended with only search engine but whatever i know nothing is 100% perfect eventhough they would show their confidence. think what is lacking. who gonna bit? how?
i am constantly thinking.
Google doesn’t make much money off their other products, such as Gmail, GTalk, Google Docs, nor even Nexus One phone. You can see those as advertising for Google itself. The more you are tied to Google’s products, the more likely that you will use their search.
And it’s true that Google makes the majority of their income through the advertising on their searches.