How does Google Nasdaq: No less an authority than the company's CEO posed the question, hopefully rhetorically, in a recent letter to shareholders. Or as the company's annual report succinctly puts it, "We generate revenue primarily by delivering relevant, cost-effective online advertising. But within a couple years of its incorporation, Google went from a burgeoning upstart company to verb status - almost a genericized trademark.

How did this happen? In a word, AdWords. That's what separated a nascent earlys Google, known primarily as a search engine, from its competitors.

Google's founders realized that if people were going to visit the site and enter a term in the search box, they wouldn't be landing on the subsequent page by accident. Thus they'd be motivated to buy a product from any advertiser sharp enough to place an ad there.

How Google Profits Off You Say you run a small company - a bakery located in Topeka, Kansas, for instance. Buy an ad on a page that'd be visited only by people who are looking for a Topeka bakery, and you're targeting about as accurately as it's possible to target a potential clientele.

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From a Google customer's perspective defining a customer in the traditional sense, as someone who gives the company money in exchange for its service , this is a proposition with little risk. AdWords typically operates on a cost per click basis, meaning that an advertiser can place an ad with zero obligation. If no one clicks on the ad, the customer doesn't pay a dime. A Revolutionary Business Model The traditional advertising media - radio, television, newspapers et al. A static general-purpose ad can't tell who's actively in the market for whatever product it's selling, and who's just passively sitting there.

To accommodate the latter - people who aren't ready to buy, but who might otherwise keep your competitors top-of-mind - Google lets you pay per impression. That means that the moment a Google user accesses a page on which an ad appears, Google charges the company that placed the ad. Which also literally doesn't cost a dime, but that's a function of the small amounts involved. A typical such agreement allows several views of your ad for less than a penny. From the perspective of Google's shareholders, it gets even better.

This is all based via auction. Would-be buyers of AdWords bid for the right to use a particular ad, or phrase.

Overpay, and Google enjoys a high markup. Underbid, and you risk losing the auction to a more motivated seller.

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But Wait, There's More But AdWords is only one prong of Google's dual revenue strategy. A related and similarly named but different service is AdSense. Rather than having ads appear on search pages accessed upon visiting Google. Google's algorithms do all the work, too. Sign up for the network and your website devoted to Bikram yoga might end up running ads for mats, props, etc. Companies that pay Google to run those ads indirectly benefit site owners who use AdSense.

What makes Google's success so remarkable is that so much of this is accomplished without contracts. The company derives almost all of its revenue on at at-will basis. As Google's own annual report states, "Our advertisers can generally terminate their contracts with us at any time.

Again, quoting Google's annual report, "[Google] derive[s] most of [its] additional revenues from [its] enterprise products, as well as [its] display advertising management services to advertisers, ad agencies and publishers.

Google's largest purchase was its purchase of Motorola Mobility , maker of phones and holder of various valuable patents. Products Motorola Mobility manufactures include the Droid RAZR, Droid Z and various other phones and tablets. The Bottom Line Every other service Google offers - from Maps to Earth to Gmail to Docs to Drive - exists to further the primary business.

Those services were expensive to create and require great resources to maintain, but for the result - having users spend more time on Google and thus perpetuate reading and clicking on Google ads - it's money well spent.

At the time of writing, Greg McFarlane did not own any shares in any company mentioned in this article. Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education.

How Does Google Make Its Money? By Greg McFarlane November 22, — While best known for its search engine, Google's revenue mainly comes from advertising.

Here's how the firm uses its stature and technology to make money. A deep analysis of how Google's search engine and related services have made it one of the biggest companies on the planet.

An ongoing commitment to innovation and rapid iteration drives Google's ongoing success. Learn about the most profitable business lines from Google, and find out their impact on the company's bottom line and outlook in the near future. Read about the biggest risks facing search-engine conglomerate Google Inc. For Google investors, the past year wasn't so stellar when compared to recent history. So what happens next? Universal access to the internet through smartphones, tablets and computers has driven the success of numerous companies.

Most notably, Google and Facebook have witnessed staggering growth as Use the Porter five forces analysis method to review Google's position as the world's dominant search engine website and ad revenue generator. Learn about whether Google is becoming a monopoly. Monopolies are considered undesirable because they prevent competition and innovation. Learn the difference between Google's GOOG and GOOGL ticker symbols.

Splitting shares into classes prevents management from Explore Google's different revenue segments and its competitors in each segment, ranging from Microsoft and Yahoo to Moody's Learn the timeline of co-founder Larry Page's involvement with his company, Google Inc. Explore some of the most popular, technologically innovative and widely held companies that are prominent in the consumer See how much profitability of the Internet sector is concentrated, and where the most value from Internet-based services Learn about the importance of advertising revenue in the Internet industry.

Find out how much Internet firms rely on advertising No thanks, I prefer not making money. Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator.

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