Click fraud is currently a major topic in online advertising. Many argue that it presents a threat to stability and viability of pay-per-click (PPC) advertising, key revenue generator for both Google and Overture. In actuality, click fraud is not a significant issue at all.
Click fraud occurs when ads are clicked for reasons other than a genuine interest in learning more about product or service advertised. Click fraud occurs in two forms. In one instance, fraud arises from competitors trying to sabotage each other. One competitor clicks on ads of another just to drain budget of that company. The other instance occurs when webmasters (or people associated with webmaster) repeatedly click Google AdSense ads (which are syndications of others’ ads) on their own web pages in order to generate more revenue. While both Overture and Google have developed sophisticated technologies to detect click fraud, their systems are, and may never be, foolproof.
The real question is how much does click fraud actually damage PPC industry? Gross fraud, i.e., when one person or technology consistently and repeatedly clicks on an ad, aside, which Overture and Google can easily detect, we believe that click fraud has no real impact on industry. The following explains why.
Efficient market theory says that it is impossible to “beat a market” because prices already incorporate and reflect all relevant information. As PPC industry has matured, efficiency has begun to take root. That is, price of each keyword has been driven up to point where it reflects highest price an advertiser is willing to pay for a click.
For instance, a book retailer may pay $1.00 per click based on internal metrics. These metrics dictate, for example, that on average 30% of clickers purchase a book and average profit per sale is $4.00. So, for every 100 clicks ($100 cost), they make 30 sales ($120 revenue) and generate a $20.00 (20%) profit. Note that years ago, same retailer may have been able to pay only $0.50 per click, but as market matured and more retailers began advertising, competitive bidding forced price up to $1.00 where highest return most advertisers can make is 20%.