Click Fraud isn`t Going Away

The press was all abuzz recently with a report released by California-based online research company Outsell. The report was based on a survey conducted in May. Its findings have some very painful implications for your search engine marketing budget.

One of the first important articles I wrote for SEO Chat covered click fraud. A year and a half later, two search engines (Google and Yahoo) settled click fraud class action lawsuits, but the problem is still with us, and shows no sign of going away. That’s just a small part of what Outsell is telling us with the results of its survey.

As I mentioned, the company conducted the survey in May. More than 400 online advertisers responded, with yearly advertising budgets ranging from several thousand dollars to more than $10 million. Together, these advertisers control about $1 billion per year of online advertising money.

That might seem like a drop in the bucket for more conventional advertising, but for Internet advertising, it’s a very significant fraction of a growing field. According to research firm eMarketer, this market was worth $10 billion in 2005 and will be worth more than $15 billion in 2006. Google and Yahoo together will capture nearly half of that market. So Outsell’s study examines the online marketing experiences, monetarily speaking, of about ten percent of the customers. Outsell describes those who responded to the survey as a representative cross section.

So what did Outsell find in its survey? According to some figures, it found a $1.3 billion problem with click fraud. While there have been percentage estimates of the problem before, few actually put a dollar amount on it. And how did Outsell come up with that figure? Apparently, all it did was apply simple math to the results of its survey.

The most shocking figure of the report, at least for me, was the percentage of respondents who believed they’d been victims of click fraud at least once. The number was 75 percent. That’s right; three out of every four online advertisers who responded to the survey believed they’d been defrauded. How often have they been defrauded? According to Outsell, advertisers believe a whopping 14.6 percent of all clicks are fraudulent.

As you might expect, these advertisers acted on that belief by cutting back their spending. More than a quarter of the respondents had cut back their keyword purchases; of that group, more than half had cut their spending by at least 20 percent. Here’s another surprising number: 16 percent of respondents have become so fed up with paid search advertising that they have completely stopped doing it. And the news for search engines gets worse; another 10 percent of advertisers said they plan to reduce their paid search spending in the future.

So where does the $1.3 billion figure quoted in the previous section come from? Well, $800 million comes from the amount of money the respondents estimate they lost on phony clicks. Outsell just expanded the numbers to incorporate the entire field. This works if you figure that the respondents accounted for more than 18 percent of the total money spent on pay-per-click advertising, and that the 14.6 percent figure for the number of fraudulent clicks is consistent throughout the field. (I could very well be wrong here; math is not my strong suit, but I checked my figures twice). You also have to figure that the respondents spent most of their online advertising budget on pay-per-click, which may or may not be reasonable (but there are probably other ways to make the figures work.

And where does the remaining $500 million come from? Again, that’s just a matter of the percentages. According to Chuck Richard, vice president and lead analyst for Outsell, “If we take the 37 percent of advertisers who have reduced or intend to reduce their PPC and apply the average 33 percent reduction rate, we see a 12 percent hit to total PPC ad spending.”

Could advertisers really have lost about $800 million from phony clicks? What about refunds? You would figure, with 75 percent of survey respondents believing that they had been defrauded, a lot of them would ask for refunds. Nothing could be further from the truth. Only 5.4 percent sought refunds from Google, 2.9 percent from Yahoo, and a tiny 1.5 percent of respondents sought refunds from MSN. Many of them did fairly well, though; the average refund came to $9,507.

The first point worth noting is that not everyone agrees with those numbers. Peter Hershberg, managing partner at Reprise Media, a search engine marketing firm, told Media Post that it doesn’t reflect what his company is seeing. If anything, clients are increasing rather than decreasing their spending. “It’s totally at odds with pretty much every client experience we’ve had,” he said when informed of the report’s findings.

If the click fraud situation really is between 14 and 15 percent, though, and is discouraging advertisers from spending money on PPC advertising, it’s worth asking why it is so bad. One problem is that there is no official definition of click fraud. In its settlement, Yahoo defined it as “clicks generated by persons that did not have a bona fide interest in viewing the content of a Yahoo ad.” That can cover a lot of ground.

It’s true that some of these clicks are done in bad faith, by online publishers trying to make some money from the ads posted on their web sites, or by competitors trying to drive a rival out of business. But some are honest mistakes. How would you classify a click from a consumer whose mouse slipped, so he clicked on an ad unintentionally? What about the situation of a publisher who just revamped his site, became interested in the new ads Google started serving on it, and clicked on a few out of curiosity – forgetting, for the moment, that it could be considered click fraud? Let’s not forget, too, that most advertisers assume a spike in clicks will be followed by a spike in conversions; that’s not always the case, and when it’s not, it could be click fraud, or something completely different going on.

Differences in opinion as to what constitutes click fraud might explain, at least in part, why we still see fluctuating numbers as to the size of the problem. Outsell places it at 14.6 percent. Click Forensics, a company that sells pay-per-click validation services and hosts the Click Fraud Index (which reports on data collected by a free ad tracking service), comes up with similar numbers – but provides some fine tuning. Industry wide, it reports the average click fraud rate to be 13.7 percent. But then it separates search engines into tier one, tier two, and tier three companies. In tier one, which includes Google and Yahoo, the click fraud rate is only 12.1 percent. But in tier two it rises to 21.3 percent, and advertisers with tier three search companies suffer under a click fraud rate of 29.8 percent.

And then there’s the matter of those low percentages on the refunds. You have to wonder why advertisers are making a bad situation worse by not putting in for the refunds they believe they deserve. Well, many of them have learned that complaining doesn’t help. Of the ones who requested refunds, 63 percent of those who tried to get refunds from Google were satisfied by the experience – but only 17 percent who sought refunds from Yahoo were satisfied. If it is going to be a hassle to claim a refund, advertisers put a dollar value on their time, too, and decide whether it’s worth it.

Chuck Richard thinks that there’s more to the problem that this, however. If he’s right, it might point the way to a solution.

According to Richard, “Google, Yahoo! and MSN are stonewalling on click fraud, to their own and others’ detriments.” In short, the companies need to admit what the respondents to the Outsell survey already know: click fraud is a problem, it’s a big problem, and, despite their protestations to the contrary, the search engines are not being effective enough in their efforts to fight it.

But that’s just the first step. “The industry must openly admit that there is a major problem, adopt independent audits and open itself to new approaches created through collaborative solutions with [Google, Yahoo, and MSN], publishers, advertisers and the hacker-geek community.” In other words, it’s not something each individual search engine can hope to successfully tackle by itself. Fortunately, recent news seems to indicate that the major search engines have at least become more open to collaborating with each other to take the first steps toward a solution.

Think about the spam problem, for example. We’ve been fighting that for much longer, and it still hasn’t gone away, perhaps for some of the same reasons. “The fraudster community is like the hacker community in that it always seems to stay one step ahead of the technological traps thrown in its path…As long as you can get paid for generating a click or harm your competitor with a click that has no value, the pay-per-click system will be gamed.”

That makes it all the more interesting that major search engines are looking at different models. Google, for instance, is testing a pay-per-action system, where publishers do not get paid unless the surfer who clicks through the ad on their site actually does something – leaves information, signs up for a newsletter, buys a product, what have you. There seemed to be relatively little interest in this model six months ago. Now, however, with two click fraud settlements made, I believe we will see more interest in pay-per-action as a way to deal with click fraud — maybe even once and for all.

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