Baidu (BIDU), the title of a poem written over 800 years ago whose meaning signifies a relentless “search for the ideal” was the inspiration for the naming of China’s largest search engine. Founded in 2002, Baidu’s services extend beyond the basic functions of a search engine; among other things, the site also functions as the largest Chinese-language query-based searchable online community platform, interactive knowledge-sharing platform, and encyclopedia. While Baidu’s total revenues at $7.906 billion for 2014 were only about 12%of Google’s, it still nearly doubled Yahoo’s total of $4.618 billion. Regardless, the site makes a lot of money, the majority of which comes from a growing customer base for its online marketing services.

Online Marketing Services Revenues

Of the $7.906 billion in revenues in 2014, $7.816 billion can be attributed to Baidu’s online marketing services while other revenues comprise only $89.8 million. That’s 98.9% of revenues coming from online marketing services. The way it makes money off of these online marketing services is through its pay for performance (P4P) platform that utilizes pay per click (PPC) technology.

P4P

Baidu’s P4P system is a web-based auction system that allows its customers to bid for priority placement of advertisement links given specific key word searches by Baidu’s users. Baidu uses a Comprehensive Rank Index (CRI) that gives priority placement to links based on customers’ bid prices and their links’ quality scores. The calculation of the CRI is as follows: CRI = Bidding Price * Quality Score.

To determine a link’s quality score the system begins by weighing the relevance of the link against a user’s search query. Relevance of a specific link is determined by previous search and click-through rates. The click-through rate is the number of times a sponsored link has been clicked. Given that the CRI is calculated as the bid price multiplied by the quality score, the higher the bid or quality score the higher the rank achieved for a specific link. A higher ranking results in better placement for a link at a lower cost.

PPC

The bidding price is not necessarily the actual price that will be charged for priority placement and, as a PPC system, a fee will only be applied when a link is clicked on. In other words, a customer only pays Baidu for the placement of their ad when it has been clicked on by Baidu’s search engine users. Total charges will be calculated as cost per click multiplied by the number of clicks. While having the potential to result in high charges due to fraudulent clicks, Baidu employs a safeguard that monitors click patterns and timestamps in order to detect such behavior and withhold related charges. Thus, only clicks from legitimate search engine users will be charged to a customers account.

While a majority of Baidu’s online marketing revenues come from the P4P system that utilizes PPC, customers may also be charged based on the number of telephone calls directed to them from Baidu, successful flights or hotel room bookings, the number of users registered on customers’ sites, or the duration of time that an advertisement appears on Baidu’s or Baidu Union members’ web properties.

Key Factors Affecting Online Marketing Revenues

As online marketing services are the primary source of Baidu’s revenues it is important to understand the key factors driving those revenues. These factors include the total quantity of both users and customers, total quantity of search-queries initiated on Baidu’s and its Union members’ web properties, the click-through rate on sponsored links, competitiveness of keyword bidding, customers’ online marketing budgets, the total number of displayed sponsored links and advertisements and the bidding price associated with each click through. Focusing on these factors could help Baidu to continue increasing its revenue stream.

The Bottom Line

Online marketing generated an increase in Baidu’s revenues of 52.5% from 2013 to 2014. The increase is primarily attributable to the increase in the number of active online marketing customers and the increase in the average revenue per customer. While their active online marketing customers grew approximately 8% from 2013 to 2014, average revenue per customer grew about 40.8% during the same period. This increase in the average revenue per customer is largely due to an increase in the number of paid clicks and the higher price per click as more customers participated in the P4P auction platform. Baidu’s popularity as a marketing platform is obviously growing and as this popularity grows so too does Baidu’s ability to make money, seeing as the primary source of its revenues comes from its online marketing services.

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