(FORTUNE Small Business) – In the realm of online marketing schemes, pay-for-performance search is a doozy. Forget banner ads, for which you have to (a) hope that someone visits the site where you've stuck your ad; (b) pray that the person even looks at your ad; and (c) hope and pray that once he looks, he clicks. Pay for performance cuts to the chase. Capitalizing on the fact that 28% of consumers find a product online by typing its name into a search engine (according to Jupiter Media Metrix), pay for performance can get you right to the top of the listings and thus right in a customer's face. It does so the old-fashioned way: It lets you buy your way there. Pick a search term--say, "herbal tea"; then bid what you're willing to pay whenever a potential customer performs that search and clicks on your link. Listings are ordered not by strict relevance, but by who's willing to pay the most money.

What's not to love? You're no longer lost in a sea of search results, and you pay only when a customer goes to your site. "There's little downside to doing it," says Marissa Gluck, a senior analyst at Jupiter Media Metrix. "There's almost perfect alignment between the needs of the consumer, the marketer, and the publisher."

Right now that's true, but ironically the burgeoning popularity of pay-for-performance search may hamper its continued usefulness as a lead-generation tool. Indeed, by April, more than 270 pay-for-performance search engines were up and running, according to the industry site PayPerClickSearchEngines.com. Most are small, of course, but major search sites such as Google and Ask Jeeves--wanting to cash in on one of the Net's few profitable business models--have launched programs, crowding the field for established leaders Overture and FindWhat.com. Competition is normally a good thing, but that may not be the case here. For as more users and competitors get in on the action, problematic issues now just below the surface may burst through, bringing some risk to an advertising model that has made its bones being risk-free. Legal issues loom as lesser-known businesses trade off of name-brand keywords to get traffic. And as more and bigger advertisers get wind of pay-for-performance search, not only may the bid amounts rise dramatically but so, too, will the time you'll need to spend making sure your listings stay at the top. All this may be a pothole and not a sinkhole, but you'll still want to watch your step.

Pay-for-performance search's most effective tool--playing off an established brand to pull yourself up out of the muck of search results--may be its most endangered. It's easy to see why trademark lawyers don't like it: Type in "Ford Mustang" on Overture's site, and the official Ford Motor site--the site that would lead the pack on most traditional search engines--appears way down at No. 47, preceded by 46 lesser-known car-quote services and online retailers that have paid for better positioning. "By using my trademark as a keyword, you can take advantage of my reputation, and that can be unfair competition," says Steven Weinberg, a partner in the law firm Greenberg Traurig. One trademark holder has already filed a lawsuit against the search engines, and others are expected.

No matter how the suits play out in the courts, not even the lawyers expect pay for performance to just vanish. Not every use of someone else's trademark is inappropriate: A fair-use exception lets companies use a trademarked term when offering comparative information about products, but with the first case just now being litigated, the courts have not created any hard and fast rules for deciding what's fair use in this context.

Fact is, there's too much money at stake for the search engines and for you to revert to using generic terms. Someone looking for a Ferrari will probably try "Ferrari" before "sporty car with big engine." That means the hottest bidding is for popular trademarks. Viagra, for example, has attracted 135 advertisers, which had driven the price of the top spot up to a staggering $6.32 per click when we checked.

But if trademark bidding continues, so too will the specter of lawsuits, and it may be you, not the search engine, on the hook. "The search sites may try to pass liability to the user, so read the user agreements," advises Jessica Stone Levy, of counsel at Seattle's Preston Gates Ellis. At the same time, don't expect the sites to warn you about potential trademark problems; after all, they make money when you play off a famous name. Overture, for example, doesn't even mention trademarks in its keyword guidelines. And while its editorial staff of more than 100 does review listings for fair use, with the law being unsettled, you might as well get legal advice from Ally McBeal. When pressed, Overture CEO Ted Meisel couldn't define how his employees decided fair use, other than to say, "It's like that Supreme Court decision, 'we know it when we see it.'" You don't have to be Johnnie Cochran to know you don't want to walk into court with that defense. Vet any keywords with your trademark lawyer first.

Lawsuits aren't your only worry. The two major services, Overture and FindWhat, derive the overwhelming majority of their traffic from partnerships with other sites, which carry the paid listings in return for a cut. But few of the partners are willing to run long lists of paid-for returns. Overture's biggest partners--AOL, MSN, and Yahoo--list only the top three bids, following them with traditional relevancy-ranked listings. The same partners account for more than half of Overture's traffic, so if you're not in the top three for your keyword, you can expect a significant drop in clickthroughs.

Keeping a high ranking requires constant vigilance. We checked the Viagra listings over the course of reporting this story (for research, mind you--and, yes, for researching this story), and each day the top bids varied as sites jockeyed for position. As the market fragments and major players like Google and perhaps Yahoo itself enter the fray, the work will only increase as businesses will have to bid--and manage that bid--on several services to maximize their reach. "You'd think you'd just sign up everywhere, but it's a real pain to manage all these accounts," says Danny Sullivan, editor of the industry site Search Engine Watch. "I'd want to go with the major one or two sites, then look at my traffic, see where I'm getting the best conversion, and put more money there. Or find another service."

Even if you can manage the work, how high are you willing to go? Paying a nickel or a dime for a qualified lead seems a no-brainer, but are you willing to spend $6 or more for just a click on a link? More businesses--particularly larger ones--are discovering pay-for-performance search, and major players like eBay and Dell are already bidding, helping to drive up prices on coveted keywords. Overture's revenue per clickthrough soared from 16 cents to 23 cents in 2001 as competition for keywords increased.

In the end, perhaps the real advantage of pay-for-performance marketing is accountability. If it's not effective, you'll know pretty quickly, before you've spent big bucks. Sure, it's a no-lose proposition. But you may find it a no-win one too.