Microsoft has said that paying people to use its search engine when shopping for goods online will give it the best chance of unseating Google in the market for internet services.

Offering a cash rebate of about 10 per cent on the sale price of goods purchased over the internet would provide a significant incentive for people to switch search engines, the software giant said, adding that it would also keep trying to compete with Google in other areas, such as the overall quality of search results.

Kevin Johnson, the head of Microsoft's online services group, said that the company was increasingly focused on making money from search queries which had "commercial intent" - for example, those in which people were looking for products and services. Searches for products in industries like travel, property and financial services made up 30 per cent of queries but accounted for 80 per cent of all search-related revenue, he said.

"Clearly we're not where we want to be in search," he said, referring to recent figures from comScore which suggest that 87 per cent of all searches in the UK are conducted using Google. "When you have entrenched competition, you have to find new ways to innovate and disrupt, and we're now starting to differentiate ourselves in terms of our business model."

Mr Johnson also reiterated the view expressed by Microsoft last week that it had moved on from its bid for $47.5 billion bid for Yahoo! following the announcement of an advertising partnership between Yahoo! and Google.

Last month, Microsoft gave details of a new service called Cashback, which will allow customers to get an average rebate of 8-12 per cent on goods they buy online if they search for them using Microsoft's Windows Live Search. The cash will come from the revenue advertisers pay Microsoft to have their sites feature prominently alongside lists of search results.

In one of the strongest indications yet that the service, which to date is only offered in the US, will arrive in the UK, Mr Johnson told Times Online: "If you were buying a $300 camera in the UK, then you could expect about an 8-12 per cent rebate once you buy it."

The service - which is already supported by 13 of the top 40 online retailers in the US - will only work with participating advertisers. Those websites which have offered to pay customers who buy goods from them will have a small icon next to them when they appear in the list. Customers can expect to receive rebates once the total exceeds $5.

Reaction to the scheme has been mixed, but in one endorsement, the influential technology blog TechCrunch said Microsoft's approach was "brilliant" because it would hit Google at the core of its business - so-called paid clicks. The strategy was also "desperate", however, and had in part been conceived in part because Microsoft had "so little to lose" given its small share of the existing search market.

In a wide-ranging interview, Mr Johnson, who is at the helm of Microsoft's efforts to catch up with Google, said that the company was "well-positioned" to take advantage of the burgeoning popularity of online video - glossing over the fact that 38 per cent of all online video is now watched on YouTube, which is owned by Google.

He also said that Microsoft stood to gain from increased spending on so-called display adverts - the banners and boxes that appear around web pages. At present about 30-35 per cent of the online advertising spend - which is expected to double to $80 billion by 2010 - is connected with search, which Google dominates.

Microsoft has been seeking to increase the amount of money it makes from its online services division, which accounts for just 6 per cent of the company's overall revenues. Online revenues grew by 40 per cent to $843 million in the 12 months to March 31, but the division still posted a $228 million loss for the most recent quarter.

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