July 5th, 2006

What Will Replace Pay-Per-Click Advertising?


I predicted months ago that click fraud would cause advertisers to lose faith in pay-per-click advertising, and so it is coming to pass, according to a new study by Outsell that estimates click fraud at $800 million (not so far from the middle of my back-of-the-envelope estimates):

The perception of pervasive fraud has prompted many advertisers to change their spending. Many are asking why they should fork over money – significant amounts, in some cases — for phantom shoppers.

The study found that 27 percent of advertisers reduced or stopped spending on click-based advertising. An additional 10 percent said they intend to curtail spending.

Among the predictable responses to this news was this fascinating analysis from Michael Rogers on the potential of cost-per-action to replace cost-per-click:

But CPA is a very slippery slope. The issue goes back to why online publishers traditionally resist cost-per-click pricing for display advertising: your revenue becomes dependent on the advertiser’s creative. A good ad is going to get more clicks than a poorly executed one. CPA action takes that dependency a step further: the search engine’s revenue depends on both a well-designed pitch after the click plus an enticing offer. If the advertiser fails on either of those points, you’re not going to get paid and your inventory isn’t generating revenue.

If I ran a search engine, I’d be spending a lot of time and energy trying to maintain the credibility of my cost-per-click business. If the market really does turn to cost-per-action, we may end up looking back on these as the Golden Days of search engine advertising, when the money just fell from the sky.

First, he’s right that the days of “easy money” from pay-per-click are numbered — it doesn’t matter (Danny) how big click fraud actually is — the system can’t escape the inexorable death spiral of negative advertiser perceptions. Google knows this, and that’s why they’ve been chasing offline media and experimenting with cost-per-action.

But what about Michael’s theory that cost-per-action might not work because of the publisher’s “dependency” on the advertiser having a “a well-designed pitch after the click plus an enticing offer”?

If you simply converted the current AdWords model to a cost-per-action payment, then I think you would have a big problem. Publishers would still be dependent on advertisers writing good ad copy and they’d be even more dependent on what happens when someone clicks off to the advertiser’s site.

But what if there were an approach to cost-per-action that could overcome these problems?

Sounds like an opportunity for someone to eat Google’s lunch.

  • I'm coming late to the discussion, but I would like to point out that there is reason to be skeptical of the numbers that have been published so far estimating the amount of click fraud as a percentage of all clicks. There are quite a number of ways that click fraud can go undetected, because it is easy to manufacture clicks that just look like any other traffic that does not convert. This can be automated via spyware, or manually generated by a click ring.

    My general opinion has always been that CPC is a poor business model. I am also surprised that Google did not realize that it would be so easy for fraudulent clicks to be generated, that they would be generated, that advertisers would become upset, and that lawsuits would be filed. It seems to me, as bright and talented as their engineering group is, they would have initially taken steps to at least provide advertisers both tools and options (such as CPA) to control their ad spend, thus reducing their exposure to fraud, or at least nonconverting clicks.

  • The fact that 63% of advertisers are dissatisfied with the response on click fraud complaints is a tough one as the only answer that would satisfy them is to get some form of reimbursement.

    It's the opposite -- 63 percent were satisfied with the Google response on click fraud complaints.

  • If after a couple of months you’ve got a flat tire, the rate of air escape isn’t really the issue. You know you’ve got a problem with your tires.

    Sure, unless you aren't losing air at all, or enough air to notice. Any business is likely to have some degree of fraud, theft and waste. No one wants it, but the degree is what has the impact. We still don't know the degree of the click fraud problem.

    Let me be clear. I'm not, absolutely am not, trying to downplay it as a serious issue. What I dislike, however, is being told there are some new industry stats that you can poke all types of holes in. This report gives me a figure that may be much lower than the real rate or much higher. Half the people not doing analysis but giving a click fraud rate is guesswork -- it's a stat based on guesswork. I want more than guesswork to quantify a problem. But that there is a problem, I don't disagree. We just don't know the degree.

    But how those ads function won’t remain PPC forever.

    I agree. In fact, I've written ages and ages ago about how at some point, you'll likely see flat rate purchases from those more after branding or those who don't want to play the bidding game. They'll be happy to write a big check just for the simplicity. PPC is not the only payment model, nor has it ever been (Google originally used CPM).

    This survey marks a point on a trend line — what’s your basis for concluding that the trend won’t continue in a negative direction? NOW, it means that things seem to be getting worse over time, so there is reason to expect that they will continue to get worse if the trend continues in the same direction.

    The point on the trend line is the percentage of advertisers who have said they actually have reduced spend. That also appears to be the first point, given this is the first time this survey has been done.

    For all we know, if you asked this question to this group a year ago, even more might have said they reduced spend.

    It is a concern, definitely, that so many people have said they reduced spend (though it would help to know more -- like was that spend on second tier engines? contextual ads?).

    SEMPO, in contrast, has a survey that gives you more than one data point. Here's the write-up from 2004. For 2005, you have to be a SEMPO member to have the stats. But here's the summary from the slide deck:

    +Nearly 2 out of 5 advertisers and nearly half of agencies have tracked fraud; 16% of advertisers say it's serious, nearly triple from 2004

    +Yet a quarter do not believe it's a problem

    +A third of advertisers and a third of agencies are concerned but not tracking fraud

    Now that's your death spiral argument, at least that from 2004 to 2005, the percentage of those who thought it was a serious issue rose. But that might also be because awareness of the issue rose.

    Stats also said that 40 percent of advertisers said they'd been a victim of click fraud (though note that a third of those surveyed said they weren't tracking at all). Stats also say that 80 percent have gotten some credit on complaints.

    Overall, it's serious problem, one that alarms and concerns advertisers and that the search engines need to do more on, both in terms of preventing and also educating and changing perceptions (when half your advertiser just flat out guess they have click fraud, that's not a good thing). But I still come away from the stats with a mixed feeling of whether things are getting worse or not, in terms of the actual fraud happening. I guess we'll see if it's a death spiral or not.

  • CT
    CT, you’re right that click fraud is a “spectrum disorder” to borrow a medial phrase. Maybe we need a scale from 1 to 10, with 1 being a pretty crappy click and a 10 being a totally fraudulent bot click.

    Here is the thing. The fraudulent bot clicks are largely if not completely fitlered out. In fact , if memory serves me correct, even a person clicking back and forth on the link repeatedly, does not cause additional billable clicks (on the old Overture anyway). Danny and Makrus are correct in stating that click fraud is largely a perception among advertisers.

    The fact that 63% of advertisers are dissatisfied with the response on click fraud complaints is a tough one as the only answer that would satisfy them is to get some form of reimbursement. Makrus is also right in saying that even if the perceived click fraud did not exist the advertisers would find something else to complain about - and that is ultimately what is happening here. Unfortuantely, this is one of the cases where you have to trust the "black box" behind Yahoo and Google - which I realize is difficult if you don't have insight into it.

  • Danny, what a surprise, so glad you could join us :)

    That’s like me wondering how much air escaped from a car’s tires over a month. I ask 400 people to give me their estimates. 200 of them don’t bother getting out the pressure gauge each month and actually checking. They just shout out whatever they think is right. And from that, you make some scientific conclusion on air loss?

    If after a couple of months you've got a flat tire, the rate of air escape isn't really the issue. You know you've got a problem with your tires.

    I’m not saying it can’t happen, but even despite click fraud (in whatever degree it is out there), search overall remains an extremely efficient advertising medium. That’s why people are spending with it and pulling away from other areas to fund it (other areas that never, ever come under near as much examination about true circulation, wasted impressions and so on, because compared to search, you can hardly measure them at all).

    It will happen because new models will come along (soon) that will exceed PPC in efficiency the same way that PPC exceeded the old models in effciency.

    I should make the distinction that you taught me, which is that "search" advertising is a seperate issue from PPC. I don't think annyone questions that a search results page a is a great place to deliver ads related to search terms. But how those ads function won't remain PPC forever.

    Finally, the report had 63 percent at Google extremely satisified or somewhat satisified with the response they got on click fraud complaints. That’s a pretty high figure. Google should make it 90 to 99 percent, of course. But that’s not a figure that underlines a death spiral to me. And the other key figure, the fact that practically no one follows up with the search engines on complaints is important. The perception of click fraud is clearly strong. The actions advertisers take, according to this survey, is to sit back and do little except maybe reduce spending. More proactive moves on the part of the search engines might reverse that.

    With all due respect, this really sounds like spin. Which is why I labeled your post predictable. This survey marks a point on a trend line -- what's your basis for concluding that the trend won't continue in a negative direction? "Death spiral" doesn't mean it's "dead" NOW, it means that things seem to be getting worse over time, so there is reason to expect that they will continue to get worse if the trend continues in the same direction.

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