Click Fraud Concerns Emphasize the Need for Pay-Per-Conversion

Today's Washington Post had a front-page article entitled "'Click Fraud' Threatens Foundation of Web Ads." It's a good overview of pay-per-click (PPC) advertising and the problems challenging the model. Some of the more interesting facts and stats mentioned in the article:
  • Google and Yahoo together handle more than 70% of all web searches in the U.S.
  • PPC ads generated $5 billion last year, which is about 40% of the Internet advertising market.
  • The PPC model is only about four years old.
  • The Yankee Group research firm estimates that 10% of clicks on text ads are fraudulent. Google claims it's less, while others estimate it to be as high as 30%.
  • Google employs "about three dozen" people who monitor click fraud, 20 of whom respond to click fraud complaints from advertisers.
  • 39% of Google's third quarter revenue ($1.04 billion) came from its affiliate network (text ads placed on other sites).
  • New York ad agency Carat Fusion says that "sixty percent of new customers come through Google."
  • This summer, Google, Yahoo, Microsoft Corp., and Ask.com executives agreed to form a click fraud working group to develop industry standards.
Clearly, click fraud has the potential to be an enormous problem as the number of bogus companies and networks grows (and becomes more sophisticated). To help maintain advertiser confidence in PPC, Google and Yahoo tout their dedication to combating click fraud with expert staff and innovative, secretive technology (which they conveniently can't say too much about since releasing details on exactly how they fight fraud will tip off the cheaters trying to stay one step ahead). The solution to all of this is mentioned indirectly in the article when John Slade, director of Yahoo's click-fraud protection efforts, says that "advertisers must help search engines thwart fraud by sharing more information about what visitors do on their sites after clicking on ads." This is where Google's 2005 acquisition of web analytics package Urchin (now dubbed Google Analytics) starts to make more sense. At the time, Google said their goal was, in part, to "help web site owners and marketers ... generate a higher return-on-investment from their advertising spending." Online advertising started with a nice enhancement to a basic offline model: pay-per-impression. Rather than the wide estimates of how many people might see your ad in a magazine, online, you could know exactly how many times your ad was displayed and, presumably, seen by a potential customer. Pay-per-click was a big step in the right direction when advertisers said "I don't care about people just seeing my ad, I want web traffic -- and I'll pay more for that." The next obvious step? Pay-per-conversion (Google called it cost-per-action or CPA when they announced testing the new program in June). Advertisers are now saying what's been obvious all along -- that they'll pay the most for an actual customer. It's not a new idea, nor is the technology all that advanced. Amazon's affiliate program (and others like Commission Junction, LinkShare, and DoubleClick) has paid affiliate marketers based on actual purchases for years. Part of the challenge, though, in combating fraud and implementing a pay-per-conversion solution is a technology one. Site owners need to be able to share data with Google about what their users do on their sites after arriving through a text ad. That becomes a lot easier when the site is using Google Analytics. Whatever the data sharing solution, it has to be a largely automated one. Google's text ad success is a classic long tail example, which falls apart if the pay-per-conversion solution only targets the most advanced site owners and advertisers. With massive amounts of money at stake, you can bet the problems around click fraud will be solved in the long run. Will it be by thwarting fraudulent clickers through automated technology or by advancing the advertising solution beyond paying for clicks at all? It may be too soon to tell.

Brian is Viget's co-founder and CEO. He does everything from advising our clients to building our conference tables with his bare hands in our Falls Church, VA, HQ.

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