Microsoft launched a comparative shopping feature in its Live Search engine on Wednesday. The service offers consumers a rebate on purchases made through the site, a scheme that could lure shoppers from Google and Yahoo.

The idea for Microsoft’s “Live Search cashback” came from a Web site called Jellyfish.com, which Microsoft bought for an undisclosed amount last year.

Products found during a search eligible for a rebate are denoted with a gold coin icon with a U.S. dollar sign in the center. The rebate is based on a percentage of the purchase price and is determined by the advertiser.

For example, a search for a 4G-byte flash memory SD card from SanDisk showed a rebate of $2.12 offered by a retailer for a card priced at $52.99.

So far, the cashback option will only be available to U.S. citizens. Shoppers must set up a Microsoft cashback account, where the rebate money is held. When the amount reaches $5, Microsoft will either mail a check or transfer the money to a PayPal account or bank account. The rebate money is not released until 60 days after the purchase date in case the item is returned.

The cashback program offers an advantage for advertisers in that they only have to pay when they sell an item, known as a “pay-per-action” fee. It also avoids the problem of click fraud, where bogus clicks on an ad drive up marketing costs.

With the U.S. economy slowing, Microsoft’s cashback program may be more appealing to advertisers with smaller budgets who only want to pay for completed transactions rather than for click-throughs from Google ads, said Mike Davis, senior analyst for Ovum in London.

“The Microsoft bit will potentially be more attractive to people with less money to spend,” Davis said.

The cashback feature also thrusts Microsoft into an online retail market where it could potentially affect businesses such as eBay and Amazon.com, Davis said.

Persuading people to change search engines isn’t easy, since people tend to stick with the one they’re most comfortable with, said Alex Burmaster, an Internet analyst with Nielsen Online. For many people, that’s been Google.

But it’s a step in the right direction for Microsoft despite a consensus that Google will most likely dominate the search market for at least the next two years, Burmaster said.

“I think Microsoft should be applauded for doing this,” Burmaster said.

The cashback site is one way Microsoft is trying to draw interest in its Live Search engine, which ranks a distant third place compared to Google and Yahoo.

Google was used 58.4 percent of the time by Web surfers in December 2007, according to data released by Comscore, which tracks the search engine market. Yahoo held a 22.9 percent share, with Microsoft at 9.8 percent.

Last week, Comscore said the number of visitors to Google’s Web properties surpassed Yahoo for the first time in April, at 141 million. Yahoo’s sites came in a close second with 140.6 million visitors with Microsoft’s Web sites coming in third at 121.2 million visitors.

Microsoft’s desire to boost of the popularity of its search engine also seems to be at the heart of its contentious discussions to acquire Yahoo. As of late, Microsoft is reportedly interested in buying assets related to Yahoo’s search engine.

When it bought Jellyfish.com last October, Microsoft had indicated that it saw the site as a way to augment its e-commerce and search offerings.   

The Live Search rewards program is in line with those objectives.

“We think the technology has some interesting potential applications as we continue to invest heavily in shopping and commerce as a key component of Live Search,” Microsoft’s search engine blog had announced at the time of the purchase.

Advertisers choose the level of commission they will pay to Jellyfish.com for sales made, at least half of which Jellyfish.com says it will give back to purchasers as a rebate.

Jellyfish.com ranks products according to the price including that rebate.

While the discount the consumer will receive appears in the search results, Jellyfish.com doesn’t immediately apply the discount to the product. Instead, the money is kept in an account for 30 to 60 days to account for product returns, refunds and to guard against fraud. After the waiting period, a check can be mailed when the accumulated rebates exceed $10.

Jellyfish.com is not the only company to sell adverts based on “pay per action,” rather than pay per click.

Last June, Google Inc. had expanded its beta trial of a pay-per-action program, opening it to worldwide users of its AdWords service.

The pay-per-action ads can appear in Google’s regular contextual ads results that Web site publishers put on their page, or publishers can choose which pay-per-action ads go on their page based on content.

Jellyfish.com tells merchants that its cost-per-sale advertising model is risk-free and not subject to e-commerce problems such as click fraud, where advertisers overpay for fraudulent clicks on their ads. So far, Jellyfish.com says it lists at least five million products.

Jellyfish.com, started in mid-2005, is based in Madison, Wisconsin.

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