My Click Fraud Theory

With the astounding growth of auction-based pay-per-click (PPC) advertising led by Google and Yahoo over the past several years, there is a great deal of discussion about click fraud. I think most people are completely missing the point. Those who are complaining about the issue really have nothing to complain about. Bizarrely, those who are getting screwed haven’t even uttered a peep.

Click fraud takes place when someone clicks on a PPC ad with no real intent of actually following the link. The result, of course, is that an advertiser has to pay for a bogus click. Many advertisers are complaining about being charged for bogus clicks and are even demanding refunds. Somehow they managed to force Yahoo to settle a lawsuit for about $5 million and Google actually coughed up $90 million in a similar instance.

This baffles me because any reasonably sophisticated advertiser shouldn’t really care about click fraud. Why? Because if they’re using any of the dozens of off-the-shelf tools to measure their PPC ad conversion rates, they would be automatically lowering their PPC bids to maintain an acceptable ROI. An advertiser simply shouldn’t care if he pays $1 per click for 10 clicks that yield 10% conversion and a single customer or if he pays $0.50 per click for 20 clicks that yield 5% conversion and a single customer. In either case, the advertiser has paid $10 to land a new customer.

Given the real-time tracking capabilities inherent in auction-based PPC, click fraud gets priced into the equation automatically. In my example above, the bogus clicks drove conversion down by 50% (from 10% to 5%), and advertisers adjusted their bids from $1 to $0.50 per click. Yes, in theory the advertiser may suffer temporarily from fraudulent clicks before he has a chance to adjust his bid downward to compensate for the lower conversion rate, but today’s automated systems figure this out pretty quickly. Any real damage to the advertiser is inconsequential.

So why are advertisers complaining? I don’t get it. Perhaps they haven’t all figured out how easy it is to use tools from search engine marketing (SEM) experts such as Efficient Frontier, SearchRev, iCrossing, iProspect (or many, many others). These SEM experts offer reasonably cheap software to solve the problem through automated bidding.

Perhaps some advertisers believe only their ads are being clicked fraudulently. Click fraud targeting a specific advertiser, does, in fact, hurt that advertiser. He can reduce his bid to maintain his conversion rate and ROI, but now he will get a much lower number of clicks because his competitors can afford to bid higher if they aren't suffering from the same click fraud. Though I acknowledge that advertiser-targeted click fraud is possible, I believe most click fraudsters are just trying to make money for a certain publisher rather than trying to deplete the ad budget of a certain competitor. So, I'm at a loss to explain why advertisers seem to care so much about click fraud.

Even more confounding, however, is that the companies who are really getting screwed haven't started screaming about it. In fact, we haven't heard anything from them. The companies on the losing end of click fraud are high quality web site publishers. When an unscrupulous publisher engages in click fraud to increase revenues, the result is reduced conversion rates for advertisers, who, naturally, lower their bids. Because of the way most advertisers participate in Google and Yahoo PPC auctions, when they reduce their bids, the reduction applies to every publisher in the Google and Yahoo networks.

If publisher A is engaging in click fraud, which causes lower PPC bids from advertisers, publisher B gets screwed. Publisher B doesn't generate any additional clicks, but now he's getting less revenue for each click. In a sense, publisher A just stole money from publisher B. My theory is that the publisher getting screwed the most is probably AOL.

I suppose it's not too surprising that high quality publishers aren't complaining because it's virtually impossible to detect this phenomenon. This is especially true because Google provides publishers with such a minimal amount of information about their advertising performance. Perhaps one reason Google is holding on so tightly to the lack of transparency in its system relates to keeping click fraud off the agenda of high quality publishers.